Here are the main factors driving the ASX this week, according to Pendal’s head of equities CRISPIN MURRAY. Reported by portfolio specialist Chris Adams

• Find out about Pendal Focus Australian Share fund

THE market anticipated the US Federal Reserve’s 25-basis-point (bp) interest rate cut last week.

However, the announcement’s tone was mildly dovish compared to expectations, with Chair Jerome Powell signalling employment was weaker and he was comfortable with inflation trends.

The Fed’s “dot plot” outlook for rates suggested only one more cut, but the market is pricing in two more.

The shift in balance sheet management was perhaps more important, with the announcement of a more aggressive purchase program of US shorter-term instruments, which helped underpin the US 2-year bond.

The US 10-year yield did rise marginally. This reflects the market’s concern about the Fed over-easing and is a feature of this easing cycle given the political pressure on the Fed.

This has the potential to mute the effects of rate cuts, as they do not translate to lower mortgage rates – and therefore support for the housing market.

The S&P 500 gained 0.5% and the S&P/ASX 300 moved up 0.7%.

US equities saw continued significant rotation away from tech – particularly some of the AI-sensitive names – towards small caps and industrials on the prospect of an improving domestic economy.

The tech sell-off is also occurring in Australia, but we are not seeing the same move to domestic cyclicals and small caps given the prospect of potential rate rises.

Resources remain the lead sector domestically, with gold still the strongest component.

US macro & policy

Fed rate cuts

The Fed cut rates 25bp to 3.50-3.75%, as expected.

It was hawkish in the sense that Chair Powell flagged a pause and the need to see data weaker than expected for further cuts.

However, ultimately the meeting was seen as more dovish than expected due to the following observations.

• Powell talked of policy being well-positioned.  While he talked of a pause – given rates are plausibly around neutral and noting this was a unique period in his tenure given risks to both sides of their mandate – he also noted the Fed’s view that payroll growth is overstated by 60,000 per month. This means the average reported rise of 40,000 from May to September equates to a decline of 20,000. In addition, he commented that adjusting for tariffs, the underlying inflation rates is in the low 2% range and that services inflation was coming down. The inference is the Fed sees the labour market as being soft and inflation not as imminent a threat to the upside, so there is less constraint to further easing.

• There were only 2 hawkish dissenters (and one dovish dissent). There were fewer members calling for a pause in rate cuts than the market expected, given the tone of recent comments. The “dot plots” indicated a median of only one more cut, although there were more dots projecting two cuts next year than there are indicating none.

• An aggressive shift from QT to natural growth purchases. The Fed will purchase US$40 billion a month of T-Bills, which reflects the underlying US$20-25 billion to cover maturities plus a catch-up component. These purchases started on 12^th December. This will allow the US Treasury to continue to stack debt issuance at the short end of the yield curve, which comprises about 84% of issuance in 2025 to date. This helps protect the 10-yr bond yield, although that rate has continued to rise gradually in recent months to 4.19%.

• The Fed has embraced a more positive view on growth and productivity. Powell noted that productivity improvements had shifted the Fed’s long-term projection for US GDP growth from about 1.8% per annum (pa) to about 2.0% pa – and that is before factoring in any major gains from AI. The Fed’s forward median economic projections have seen an increase in growth with only a marginal effect on the unemployment rate and inflation expectations slightly lower.

The conclusion is that this was a market friendly outcome, with risk skewed to the downside on rates, and the degree of dissent was less than expected.

The Fed have now cut 75bp in 2025, following on from the 100bp in 2024.

The Fed Funds rate is now broadly in line with the 2-year T-bill rate, which suggests the market sees rates as being close to where they should be.

Market expectations have a 57% chance of a cut in March and 80% by April and is pricing a 90% chance of a second cut by September. flat in 2026.

Fed Chair

We note Powell’s last meeting as Chair is in April – and the battle for the next Chair has livened up.

The odds on US President Donald Trump nominating Kevin Hassett – currently Director of the National Economic Council – have shortened from north of 75% in late November to around 50% now, according to predictive market platform Kalshi.

This was coincident to Trump’s reference to former Fed member Kevin Warsh being a “great” candidate as well. Warsh’s odd surged from the mid-teens to about 40%.

The potential issue for Hassett is his perceived lack of support from the market, which may lead to bond yields rising further if appointed.

The fundamental issue is the same for whomever is appointed; bridging the gap between the President’s expectations to drive rates far lower (Trump cited below 1% to the Wall Street Journal), while maintaining credibility with the bond market.

The Fed Board also unanimously re-appointed all regional Fed Presidents, save in Atlanta, where Raphael Bostic had already announced his retirement.

These are five-year terms and dispels the speculation that the President would intervene and try to stack the board with new, more dovish, members.

The unanimous decision indicates that Trump appointee Stephen Miran was on board.

Economic data

The data on jobs was mixed, but there were no additional signs of weakness.

US job openings were better than expected for October, increasing 7.67 million versus 7.12 million forecast. This is however inconsistent with other jobs data.

The 1.8% quits rate was the lowest outside Covid since 2014, which would signal limited wage pressures in the US economy.

The overall outlook for the US economy looks constructive. It appears that tariff-related headwinds are already beginning to be offset by fiscal stimulus in terms of contributions to GDP. This steps up in Q1 and Q2 2026 as the tax refunds kick in from the budget bill.

Looser overall financial conditions are also likely to help offset the impact of tariffs, which are expected to remain a drag on growth through to Q3 2026.

Consensus expects 2% GDP growth in 2026, but the likelihood of policy support suggests that the risks lie to the upside. Goldman Sachs, for example, is forecasting 2.5%.

Australia macro & policy

The RBA left rates flat at 3.6% as expected, however the tone of the press conference was clearly hawkish.

Governor Michele Bullock effectively called time on the easing cycle, saying the RBA did not consider a cut ‘at all’ and she “didn’t think there are… cuts in the horizon for the foreseeable future”.

She emphasised the upside risk to inflation and didn’t dispute the market pricing of around 40bp of tightening in CY26.

November employment data was weaker than expected at -21,000 (versus the market at +20,000), driven by a 57,000 fall in full time employment.

This took the 3-month employment average to 10,000 per month, compared to 21,000 for the prior 12-months.

The year-on-year growth rate is 1.3% – the slowest since 2021.

Hours worked were flat with the year-on-year rate at 1.2%, down from 2.1% in October.

The weaker job growth signal was offset by a lower unemployment rate, which fell to 4.3%, versus 4.4% expected.

The employment-to-population ratio is 64.0% which is in line with the median level since 2022, so arguably the labour market remains tight. The number of people experiencing job loss is near to record lows.

Given this – and with inflation at 3.8% and GDP growth above trend – the market continues to raise the odds of a rate hike.

February is around a 25% chance, and a full hike is priced in by June. The cash rate is now around 50bp below the 2-year bond yield.

Markets

US and Australian markets continue to see rotation away from tech/AI. In the US this is towards more industrial and financial names, while in Australia it is to resources and, to some extent, financials.

Oracle’s result compounded the negative sentiment shift. It fell 14% post result and is now 42% below the peak it reached following last quarter’s result, when it announced the surge in its order book.

• Despite future bookings rising 15% to US$523 billion, revenue came in at the bottom of the company’s guidance (cloud revenue +33%) and margins were well below expectations.
• Cash flow was weak at -US$10 billion, with capex of US$12 billion in the quarter (versus US$8.4 billion expected) and up 200% year-on-year.
• Capex is forecast to rise in FY26 to $50 billion, versus $15 billion under its prior plan.

Oracle indicated it is working on alternate financing mechanisms, including vendor financing, chip leasing and customers bringing their own chips. None of this inspires much market confidence.

The overall US market remains in good technical shape, hitting a new high last Thursday before selling off Friday.

Sentiment is bullish which makes the market vulnerable to negative news. For example, this time last year we were at similar levels and when the tariff issue emerged it led to a sharp drawdown.

However, for the time being the combination of falling rates, the Fed not being too hawkish, coming fiscal stimulus, a re-accelerating US economy, subdued oil prices and the US dollar holding at lower levels all supports the market, despite the strong sentiment.

Valuations in the US remain high by historical standards, however earnings growth is accelerating and can support current levels.

We note an expected surge in earnings at the small cap end of the US market, which is the catalyst for the move in small cap names there.

We are seeing more breadth in the US market, with small caps and industrials breaking out to new highs.

In Australia, the rotation to resources continues. The Metals & Mining subsector has outperformed the S&P/ASX 300 by 32% calendar year-to-date and by 14% this quarter.

Much of this has been driven by gold stocks, which continued to lead the market last week as the commodity moved back to its October highs.

Rare earths were the exception to the resource rally, falling as further funding of new supply was announced.

Beyond that Financials (+1.7%) were better, helped by the global lead and by the perception of them being beneficiaries of gradually rising rates.

Tech (-4.4%) continued to sell-off, with the move exacerbated by speculation of redemptions from some growth-orientated funds, with the risk it leads to further forced selling.

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About Crispin Murray and the Pendal Focus Australian Share Fund

Crispin Murray is Pendal’s Head of Equities. He has more than 27 years of investment experience and leads one of the largest equities teams in Australia. Crispin’s Pendal Focus Australian Share Fund has beaten the benchmark in 12 years of its 16-year history (after fees), across a range of market conditions.

Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management. 

Find out more about Pendal Focus Australian Share Fund  

Contact a Pendal key account manager

As 2025 wraps up, Pendal portfolio managers outline the trends set to shape 2026 – including AI, resources and a wave of corporate deals. Here’s what to watch as the new year dawns

• AI and resources dominate 2026 outlook
• Tight property pipeline prompts increased M&A
• Find out more about Pendal’s investment strategies

AI

AI CAPEX is an incredibly strong theme right now, according to Paul Wimborne, senior fund manager for Pendal’s Global Emerging Markets Opportunities Fund.

“The biggest thing we’ve seen in emerging markets this year – which will also be very important next year – is similar to what we’ve seen in other developed markets: the current strength of the AI capex trade,” says Wimborne.

“There’s a lot of money that has been spent on building out globally hyperscale data centres, and it’s taking up a lot of capacity from these chip manufacturers. They’re doing incredibly well.

“They run monopolistic or oligopolistic positions, and they’re generating huge amounts of free cash flow and returns.”

Pendal’s London-based EM team is invested in Taiwan Semiconductor, Korea’s SK Hynix and Samsung Electronics.

Some of the best-performing stocks in emerging markets have been the memory chip manufacturers, says Wimborne.

ASX small caps and midcaps

When it comes to small caps, the resources sector has done the heavy lifting, says Lewis Edgley, portfolio manager of Pendal’s Smaller Companies Fund.

“The strength has really been in resources and very much driven by gold – that’s has been a very strong theme in the last 12 months,” says Edgley.

Despite a prolonged run in the gold price, he still sees opportunities in the space.

“At around nine times price-to-earnings (PE) you could argue they are continuing to look attractive.

“The small ordinaries average PE is north of 20 times, so they’re less than half the valuation of the average small ordinary stock,” says Edgley.

“But they should be cheap. These are highly cyclical businesses with key drivers that are not in the control of the management teams that run these businesses.

“So our opportunity is to make sure we understand the drivers, we understand what’s in control of the management teams, we understand the thematics that are creating value here, but we don’t get too far over our skis in how we’re positioned for that.”

While it’s good to have adequate exposure to a popular thematic like gold, Brenton Saunders, portfolio manager of Pendal’s MidCap Fund, cautions that avoiding the bad stocks is just as important as picking the right stocks.

“Almost half of the active attribution for the Pendal MidCap Fund in the past year has been not being in stocks that haven’t done well – so avoiding bad stocks as well as choosing really good stocks,” explains Saunders.  

“That comes back to research and identifying the stocks that we shouldn’t be in as opposed to just identifying stocks that we should be in.

“I think as active fund managers we have a very strong responsibility for both of those areas when representing these portfolios for clients.”

Gold, lithium and rare earths stay topical

While gold is expected to continue in favour in 2026, lithium is coming out of a three-year downtrend and rare earths will also likely remain topical, according to Saunders.

“I think gold still has relevance from here in the right stocks. The gold price is high and that’s enabling good companies to continue to add value,” notes Saunders.

“Rare earths has had quite a big tailwind for some time and stocks in that space have done really well, but that’s another thematic that I think will continue to be very topical over the course of the next 12 months.

“Lithium hopefully should, if not rocket exponentially like it has done a couple of times historically, be a more constructive backdrop for lithium companies.

“Most of them are still on their knees and slowly getting off their knees in terms of profitability and cash flows.”

A rise in corporate action is driving interest in asset-rich companies, as has been seen with the recent bids for National Storage (NSR) and Qube Holdings (QUB).

Macquarie tabled an $11.6 billion bid for logistics operator Qube, while a consortium comprising Brookfield and Singapore’s sovereign wealth fund, GIC, offered $4 billion to acquire National Storage.

“These are all private transactions or private buyers coming into the market to buy these companies. So that’s something we’re paying more attention to than we have for a while now,” says Saunders.

Listed property and REITs

Julia Forrest, co-portfolio manager of Pendal Property Securities Fund, says rising construction costs in Australia have contributed to a tighter pipeline of new property assets and is a key contributor of increased M&A activity.

“Construction costs from 2019 to 2024 are up 40 per cent, so it’s uneconomic to build new assets,” she explains.

“We all know how undersupplied the housing market is in Australia, but it’s the same with commercial real estate.

“It’s very difficult to make a new development stack up. So that puts the sector in a good light in terms of rental growth going forward, because you don’t have a big supply pipeline.”

Property prices shot up dramatically post-Covid as inflation came down and the RBA started cutting rates.

But this year has seen a stabilisation in property values, with a big uptick in inflation and a normalisation of rates, according to Forrest.

“The outlook for earnings growth is actually pretty strong. Prospectively, earnings growth is somewhere between 4 and 6 per cent in the next year, which is around the same as the All Industrials,” says Forrest.

“Given that real estate is locked in through long-term leases, you don’t have the same risk in terms of that earnings growth profile.

“So we are expecting a good return for 2026 – values have dropped, rental growth looks intact, and the supply pipeline continues to be very muted.”

Pendal’s REIT portfolio comprises established assets as well as development assets, including shopping centres, office, industrial, residential development, petrol stations, pubs and storage.

Year-to-date the sector has gained 6-7 per cent following a strong mid-year performance, according to Forrest.  

“We’ve had quite a number of deals this year.

“If the market doesn’t recognise the value and it continues to trade below replacement cost or below net tangible assets, you will see groups coming in and buying these portfolios of assets because they’re impossible to replicate,” she says.

“Most listed REITs have very good quality assets, so if equity investors continue to ignore the sector, then you’ll have other investors that will buy it.”

Lithium is finally starting to emerge from a prolonged downturn. Pendal’s MidCap Fund portfolio manager BRENTON SAUNDERS details the catalysts driving this recovery.

• Rapid rise of energy storage systems (ESS) is driving lithium demand
• Market could move into supply deficit in 2026
• Find out more about the Pendal MidCap fund

The lithium sector has struggled over the past three years as a flood of supply entered the market and drove prices down, but Saunders says following this extended downturn it looks like 2026 could see supply level out and potentially even move into a deficit.

One factor that is contributing to this recovery is the ramp-up in the roll out of energy storage systems (ESS), which historically have only been a small part of lithium demand.

“It was always expected that ESS would be a big part of the market, but it really took a long time to gather a head of steam, whereas electric vehicles got underway really quickly and then were growing pretty consistently from fairly early on,” says Saunders.

“The ESS space has been quite nascent for a long time and now is growing fast off a reasonably big base,” says Brenton.

In a short period of time, ESS rollouts have accelerated and are up 70-80 per cent in the past year.

“Whilst the range of forecasts for next year is very wide, it looks like it’ll be up quite substantially in excess of what the electric vehicle growth rate has been,” explains Saunders.

“The growth rate for demand of lithium in electric vehicles has been in the mid-20 per cent range. Estimates for ESS demand growth are between 30 per cent and 90 per cent year on year.”

Another contributing factor includes the curtailment of some lithium production capacity, which although not the biggest driver of the recovery, the amount shelved has not been immaterial, according to Saunders.

There has also been a dearth of new projects funded, built and commissioned in the past two to three years, and China has initiated a review of lithium mining permits which has resulted in the cancellation of permits that have not complied with proper permitting processes, further impacting mine supply.

“That has definitely created quite a big gap in supply over the last three to five months which has helped the lithium price stabilise,” says Saunders.

This has prompted brokers and consultants to shift from predictions of intractably large surpluses through to 2030 to a balanced market and maybe even a small deficit by 2026.

Lithium stocks on the move 

Saunders says these factors flow into investor perceptions about the prospects for lithium stocks with the rising price.

Two lithium-exposed stocks in the Pendal MidCap Fund are Pilbara Minerals (PLS) and Mineral Resources (MIN), but Saunders also sees potential in IGO (IGO) and Liontown Resources (LTR) – two stocks not currently in the fund.

Diversified producer IGO has a 49% stake in a lithium joint venture with China’s Tianqi Lithium Corporation, which has a majority stake in the Greenbushes lithium operation in Western Australia.

Liontown, meanwhile, is producing lithium spodumene from its Kathleen Valley operation in Western Australia and investigating the potential to upgrade the spodumene to higher value lithium products.

The rising lithium price means the midcap producers will become more profitable and those with debt on the balance sheet will be able to pay it down more quickly, according to Saunders.

China’s shift to a large current-account surplus has significant implications for investors. Pendal’s Global Emerging Markets Opportunities team explains the challenges and opportunities

• China’s move to current account surplus largest global shift since COVID
• E-commerce and online companies provide opportunities
• Find out more about Pendal’s Global Emerging Markets Opportunities Fund

HERE in Pendal’s emerging markets team we place high analytical importance on the structural current account balances that different countries run.

The decision to follow a domestic demand-led, current account deficit model versus an export-led, surplus model has significant implications for the economy and equity market of a country.

A country’s current account is a key part of its balance of payments. It measures the flow of goods, services, income and transfers between a country and the rest of the world.

A sustained current account surplus shows an economy that consumes less than it produces.

The causes of such a surplus are complicated and much-discussed.

But it can be thought of as a combination of precautionary saving by the people (often where welfare provision is thin) and by the country (theoretically to have sufficient foreign exchange reserves to manage economic volatility).

For equity investors, this tends to mean opportunities in domestically oriented companies will be fewer, with weaker growth in domestic demand, less gearing of consumption to GDP (as GDP growth is led by exporters), and lower valuations for consumer companies.

Case studies include Korea, Taiwan – and interestingly Thailand and Malaysia which both moved from structural current account deficits to surpluses in the 2000s.

China moves to surplus

Added to that list now is China.

One of the biggest shifts in the world economy since the pandemic has been China’s move to enormous and enduring surpluses.

Just this week China’s trade surplus topped $US1 trillion for the first time as its manufacturers shipped more to non-US markets to avoid President Donald Trump’s tariffs.

China’s total surplus in manufactured goods, according to customs data, now exceeds US$2 trillion, which is around 10.5 per cent of GDP.

The surplus in all goods is US$1.2 trillion – around 6 per cent of China’s GDP – having increased by about US$800 billion since 2020.

A lot of attention has been paid to the trade and geopolitical implications of this change –although still less than should be, partly because China reports an improbably low current account surplus of only 2.2 per cent of GDP.

What it means for emerging markets investors

This also has significant implications for those investing in China.

A US$2 trillion surplus in manufactured goods is US$1400 per capita, which can be thought of as the Chinese people’s under-consumption relative to what they produce.

That, in the light of the ultra-competitive nature of many Chinese industries, makes for a very difficult environment for many of China’s consumer companies.

Where companies have defensive business models – for example, through technology, network effects or brand – China offers great opportunities.

We remain very positive on some of the e-commerce and online companies held in the Pendal Emerging Markets Opportunities Fund portfolio.

For other Chinese companies though, the lack of fiscal stimulus means the economic downturn is expected to continue.

And a policy preference for export-led growth and large external surpluses is likely to cause that downturn to be felt hardest in Chinese domestic demand.

Since the global environment is now very positive for many other emerging markets – and with strong opportunities in Chinese financials and e-commerce winners – we have substantially reduced our portfolio exposure to Chinese consumer stocks.

Our investment process is highly selective, both at the country level and within our preferred countries, and our focus on liquidity allows us to sell holdings where the top-down is no longer supportive.

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About Pendal Global Emerging Markets Opportunities Fund

James Syme, Paul Wimborne and Ada Chan are co-managers of Pendal’s Global Emerging Markets Opportunities Fund.

The fund aims to add value through a combination of country allocation and individual stock selection.

The country allocation process is based on analysis of a country’s economic growth, monetary policy, market liquidity, currency, governance/politics and equity market valuation.

The stock selection process focuses on buying quality growth stocks at attractive valuations.

Find out more about Pendal Global Emerging Markets Opportunities Fund here
 
Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management.

Contact a Pendal key account manager here

Here are the main factors driving Australian equities this week, according to investment analyst JACK GABB. Reported by head investment specialist Chris Adams

• Find out about Pendal Focus Australian Share Fund

AFTER moving largely in tandem for the past five years, yields on 10-year US and Australian government bonds have now diverged.

The former have slipped 1 basis point for the quarter while the latter have risen 38 basis points (bps). They are at -43bps and +32bps for the calendar year-to-date, respectively. The delta between the two has not been at these levels since mid-2022.

This saw the Australian dollar gain 1.4% versus the greenback.

Diverging fortunes were also on display in other asset classes. For example, Australian financial equities have started to underperform their US peers, after also tracking closely since mid-2022.

This shift is linked to diverging outlooks for inflation. Markets are now pricing in somewhere between flat rates and one hike in Australia in 2026, versus three to four cuts in the US.

At central bank meetings this week, expectations for a 25bps cut in the US stand at 96%. No change is expected in Australia.

US stocks are back close to all-time highs, after the S&P 500 rose 0.4% and the Nasdaq 0.9% last week.

Tech and energy stocks drove US indices higher, while health care and utilities led declines.

Australian equities remain more muted, with the S&P/ASX 300 up 0.2%, although the Resources sector maintained recent strength, up 3.2%.

US macro and policy

Inflation remains benign

It was relatively quiet in terms of economic data post the government shutdown, but core personal consumption expenditures (PCE), ADP Employment and the University of Michigan Inflation

Expectations data all added weight to calls for another 25bps cut on Wednesday.

• September core PCE came in at +0.2% month-on-month (MoM) and +2.8% year-on-year (YoY), in-line with consensus expectations and viewed as benign.
• ADP Employment pointed to a weaker labour market, although Initial Jobless Claims also fell to their lowest level in three years. For the ADP data, November came in at negative 32,000 versus +42,000 prior and +10,000 expected. Most of the weakness was in small business – in particular tech, manufacturing, construction and business services.
• Michigan Inflation expectations also showed a drop. One-year expectations fell to 4.1% from 4.5% (and 4.5% expected). Five-to-10-year expectations fell to 3.2% from 3.4% prior and 3.4% expected.

November’s ISM Manufacturing data was also weaker at 48.2, versus 48.7 prior and 49.0 expected.

Taken together, the data appears to lock in the likelihood of a 25bps cut this week.

QT is dead. Long live QE?

As flagged by the Fed, quantitative tightening (QT) – the shrinking of the Fed’s balance sheet – ended on 1 December.

In over three and half years of operation, the Fed shed US$2.43 trillion in assets, which is 27% of its total asset base, or less-than 50% of what it had added via quantitative easing (QE) between 2020-2022.

While the end of QT does not equal the start of QE, it is nevertheless seen as driving improved liquidity, which is positive for both fixed income and equities.

In addition, we are perhaps not too far away from a return to QE given a new Fed Chair next year.

Several FOMC members have also already called for a rapid return to an expansionary stance, which would be bullish for risk assets and, potentially, good news for the Treasury were it to coincide with a decision by the Supreme Court to refund all or part of tariff duties.

M2 money supply is already expanding

While QT has only just ended, the data on M2 money supply (i.e. physical money, bank accounts, retail money market mutual funds and other near-money assets) shows that it continues to expand.

Over time, this drives up asset values, which is good for asset owners – but not for those without.

Hence recent commentary on a two-tier, or “k-shaped,” economy.

Higher-income households are powering spending while lower-income households struggle. Consumer confidence is weak, but spending is rising. Data centre construction is soaring, but factories are laying off workers.

Ultimately, if inflation returns or becomes persistent, asset classes that inflate faster – commodities, equities and real estate, for example – are likely to outperform.

So where to from here?

One way to think about the outlook is in terms of changing expectations for GDP growth and inflation.

While somewhat simplistic, it allows the market’s division into four distinct quadrants, as used by investment research firm Hedgeye, depending on whether GDP growth is accelerating or slowing and inflation is accelerating or decelerating. Each segment has its own performance characteristics,

Typically, equities do better when growth is accelerating, regardless of whether inflation is accelerating or decelerating. Similarly, these phases favour credit and commodities.

Phases of slowing growth favour more defensive exposures such as fixed income and gold.

From an equity perspective, Tech, Consumer Discretionary, Industrials and Materials do better when growth is accelerating, with the reverse being true when growth is slowing.

The hit ratio of this simplistic approach has been good.

In Q1 next year, most economic forecasts for the US are that growth will accelerate, while inflation falls.

That implies a bullish outlook for equities, particularly Tech, Consumer Discretionary, Materials and Industrials. It is more bearish for Utilities, Real Estate, Consumer Staples and Financials.

Australia macro and policy

Australian 10-year yields rose to their highest level since 2023, with stronger spending and wage data spurring expectations of a potential rate hike next year to rein in inflation.

While implied probabilities for this week’s RBA meeting remain firmly at “Hold”, one hike is now priced in next year, versus half a cut priced in pre-last month’s CPI print.

Making the U-turn more pronounced is the bifurcation relative to the US, which is still pricing in three to four additional Fed cuts.

All else being equal, that suggests the Australian dollar will continue to strengthen, although much also depends on whether China can offset recent weakness in its economic data.

Overall, data last week demonstrated the domestic economy continues to recover, underpinned by growing household wealth.

2026 growth expectations also ticked higher, now standing at 2.2-2.3%, versus the RBA at 1.9%, potentially adding to inflationary pressure.

Household spending for October came it at +5.6% YoY and +1.3% MoM, well ahead of expectations for +4.6% and +0.6% respectively.

The household saving to income ratio also rose to 6.4%, from 6.0% in the June quarter.

Q3 GDP was a touch softer at 2.1% YoY versus 2.2% expected, but still the highest since Q3 2023.

According to the Australian Bureau of Statistics, growth was driven by domestic final demand led by private investment and household consumption.

GDP per capita was flat (0.0%) in Q3, but increased 0.4% since September 2024.

Private investment growth contributed 0.5%, driven by machinery and equipment (+7.6%) mostly reflecting ongoing expansions of datacentres.

Unit labour costs rose 4.9% YoY, seemingly inconsistent with a 2-3% inflation target.

Building approvals fell 6.4% MoM in October, versus -4.5% expected. The total value of Australian residential property rose by $316.8 billion, to $11,928.2 billion.

RBA commentary

Governor Michele Bullock spoke Wednesday at a Parliamentary hearing, saying that the central bank is closely monitoring inflation pressures and is ready to act in the event its shows signs of regaining strength.

If inflation “proves more persistent, and we’ll get more information on this in the next couple of months, then that’s suggesting to us that the demand pressures are persisting and that might have implications for the future path of monetary policy”, she said.

Positively, she added that “projections still see inflation coming back down”.

In addition, the bar to hike is high. As such, a prolonged run of holds is arguably more likely at this point.

China macro and policy

Later this month, the Central Economic Work Conference (CEWC) is due to outline the policy tone for 2026, although key targets (GDP etc) will not be released until the National People’s Congress meeting in March.

Last year, the outcomes were focused on expanding fiscal spending and implementing targeted measures to reinvigorate private sector investment and household consumption.

While this led to the economy expanding at >5% in 1H 2025, performance since then has been weaker as stimulus measures faded.

As a case in point, China’s infrastructure fixed asset investment (FAI) fell 7.4% in July-October, its sharpest drop since the pandemic period despite record fiscal support.

Infrastructure represents approximately one-quarter of total FAI.

Property is also likely to be a major focus, with property sales in the thirty largest cities down 33% YoY in November, versus -27% YoY in October.

Data is also becoming more scarce – last week a private reporting agency was reportedly told to suspend publicising home sales data.

China Vanke, a key property developer, also sought to delay a second bond repayment as its liquidity challenges continue.

While more support seems likely, achieving a meaningful turnaround appears optimistic given the failure of past efforts.

Markets

Copper was the main story of the week in commodities, rising 3.8% following lower production guidance by a handful of companies and a further squeeze on stocks outside of the US.

While overall inventories suggest no imminent deficit, tightness outside of the US – coupled with a lower rate outlook and forecast demand increases – is continuing to drive bullish sentiment.

Australian equities were fairly muted, however, there were big gains for mining stocks. On the negative side, Tech and Healthcare led declines.

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About Jack Gabb and Pendal Focus Australian Share Fund

Jack is an investment analyst with Pendal’s Australian equities team. He has more than 14 years of industry experience across European, Canadian and Australian markets.

Prior to joining Pendal, Jack worked at Bank of America Merrill Lynch where he co-led the firm’s research coverage of Australian mining companies.

Pendal’s Focus Australian Share Fund has an 18-year track record across varying market conditions. It features our highest conviction ideas and drives alpha from stock insight over style or thematic exposures.

The fund is led by Pendal’s head of equities, Crispin Murray. Crispin has more than 27 years of investment experience and leads one of the largest equities teams in Australia.

Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management.

Find out more about Pendal Focus Australian Share Fund  

Contact a Pendal key account manager here

US dollar weakness and domestic demand may drive an uptick in emerging markets. Pendal senior fund manager PAUL WIMBORNE dispels some of the myths and highlights the opportunities

 

• 2026 may see continuing weakness in the US dollar
• Tailwinds favour countries like Brazil, Mexico and South Africa
• Find out more about Pendal’s Global Emerging Markets Opportunities Fund

PENDAL’s Global Emerging Markets Opportunities team sees reasons why US dollar weakness may continue in 2026, which is expected to provide further tailwinds for countries like Brazil, Mexico and South Africa.

A common belief is that investment in emerging markets should be based on structural considerations such as increased development driven by demographics and urbanisation.

But most countries are more cyclical in nature than structural and one of the key drivers of this is the US dollar, according to senior fund manager Paul Wimborne.

“What happens to the dollar tends to determine which direction the asset class goes and whether we’re out- or under-performing developed market countries,” explains Wimborne.

“The economies, and also the equity markets, tend to perform much better in a weak dollar environment than a strong dollar environment.

“It’s typically those countries that borrow lots of money that are relying on global liquidity that tend to have more of the dollar cyclicality.”

The strong dollar environment that has persisted over the past 10 to 12 years, and resulted in economic headwinds for many emerging countries, is now shifting.

One country that Pendal’s Global Emerging Markets Opportunities team sees promise in is South Africa – a country that over the past two decades has faced difficulties over its political decisions and governance.

But last year’s election saw the previously ruling African National Congress lose the parliamentary majority it had held since 1994.

Wimborne says the move to a coalition government seems to have culminated in better decision-making and is helping drive economic growth.

“So, improving governance from a very low level but moving in the right direction –reducing things like electricity shortages and keeping the lights on,” he says.

“Lots of low hanging fruit, which has helped drive economic growth over this year and we think will continue next year.

“It’s one of those countries that has a lot of dollar cyclicality involved in its economy and its equity market.”

With the evolution of the government, South Africa’s debt dynamics are starting to stabilise, and fiscal credibility is gaining momentum as a reduction in spending leads the country to a fiscal surplus.  

A continuation of the weaker US dollar is anticipated to drive further economic growth alongside improved earnings growth.

South Africa is a commodity export focused country and the strong performance of the gold and platinum prices in the past year has been a contributing factor in the improving outlook.

The weaker US dollar and lower inflation is also playing a big role in interest rate cuts.

If interest rates come down further, it will help drive the domestic side of the economy, says Wimborne.

“So, things like domestic demand and interest rate cyclicals, like banks, should be well placed to perform next year as well,” he says.

Pendal’s Global Emerging Markets Opportunities team employs a top-down approach because emerging markets include a diverse range of countries, with different economic drivers. As a result a given economic environment will benefit some more than others.

In emerging markets, country effects typically have a much larger impact on returns than in developed markets.  

A top-down assessment takes into consideration things like GDP, growth rates, inflation and interest rates.

Wimborne points to Brazil’s interest rate hike from 2 per cent to 15 per cent over the past five years as an example of a factor that affects the perceived valuation of a business.

“We think those macroeconomic factors are very important drivers of what happens to company valuations in emerging markets,” he says.

“So for us, starting with the country drivers is of critical importance, and making sure we’re focused in on the right countries that have supportive macroeconomic conditions. Then we find the companies within them that are benefiting from those trends.”

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About Pendal Global Emerging Markets Opportunities Fund

James Syme, Paul Wimborne and Ada Chan are co-managers of Pendal’s Global Emerging Markets Opportunities Fund.

The fund aims to add value through a combination of country allocation and individual stock selection.

The country allocation process is based on analysis of a country’s economic growth, monetary policy, market liquidity, currency, governance/politics and equity market valuation.

The stock selection process focuses on buying quality growth stocks at attractive valuations.

Find out more about Pendal Global Emerging Markets Opportunities Fund here
 
Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management.

Contact a Pendal key account manager here

Here are the main factors driving the ASX this week, according to Pendal’s head of equities CRISPIN MURRAY. Reported by portfolio specialist Chris Adams

• Find out about Pendal Focus Australian Share fund

RISING expectations of a December Fed rate cut have seen a bounce-back in equity markets.

The S&P 500 rose 3.7% last week, led by tech and small caps, and got back to flat for the month.

The S&P/ASX 300 (+2.5%) followed the US back up, despite rising bond yields as higher-than-expected inflation data led the market to give up on domestic rate cuts. It finished 2.6% lower for the month.

Given the Thanksgiving holiday weekend in the US and thin volumes, the rally may be more tied to positioning rather than signalling a resumption of the bull market. However breadth was good, and this is seasonally a positive time of year.

This week will be more telling about the health of the overall market.

At a domestic stock level, we saw takeover bids for National Storage REIT (NSR) and Qube (QUB), highlighting the positive liquidity and risk environment.

BHP also announced it had been in talks again with Anglo American — but could not agree terms and walked away, leaving Anglo to proceed with its merger with Teck Resources.

Australia policy and macro

The domestic economy looks to be in good shape, with business investment and credit growth remaining firm.

However, all this is also driving persistent inflation, which has seen the market remove any expectations for rate cuts.

CPI inflation

The monthly consumer price index (CPI) has been restructured. It now uses 87% of the basket used to measure quarterly CPI, up from 50% previously, which improves its quality as an indicator.

The first release of this updated measure – plus 19 months of back data – showed October headline CPI was higher than expected at 3.8% year-on-year (YoY), up from 3.6% in September.

The roll off of government subsidies for electricity has led to a 37% rise YoY, however these were down 8.2% month-on-month (MoM).

Services inflation rose 0.7% MoM and went from 3.6% to 3.9% YoY. Rents rose 0.4% MoM and 4.2% YoY.

Underlying, trimmed mean inflation was also higher than expected at 0.3% MoM and 3.3% YoY, which is the fourth consecutive month of elevated reading. It is running at 3.6% annualised for the period from August to October, so is getting directionally worse.

The RBA’s challenge is that the stickier components of inflation are getting higher.

• Rents, which have been decelerating, may re-accelerate as advertised rents are above those in the CPI calculation.
• Market services – those provided in competitive environments rather than government regulated areas like education and health – is picking up as a category from 2.7% to 3.3% YoY.
• Meals out and takeaways rose 3.6% YoY, driven by labour and food costs.

This indicates that inflation is set to be above RBA target.

The key question is whether they feel holding rates is sufficient to address this issue, or if rate hikes will be necessary.

The market is currently pricing rates to remain flat in 2026.

Credit growth

Private credit growth remains strong at 7.3% YoY and +7.4% on a 3-month annualised basis in October.

Within it, housing accelerated to 7.6% YoY, business credit to 9.3% YoY and personal lending +4.4% YoY.

Housing investor credit rose to 10.2% on a 3-month annualised basis. This is the strongest since June 2015 and suggests monetary policy is far from being tight. Owner-occupier credit growth rose to 6.4%.

Housing

APRA announced new macroprudential policy starting in February 2026 that limits high debt to income (DTI) loans (of 6x income or more) at 20% share of flow for any lender, applied separately to investor and owner-occupier segments.

This is not expected to act as a constraint to lending but may check some of the more aggressive players at the fringe.

This signal, in combination with no more rate cuts expected, may have a sentimental impact on housing – and there has been an observable decline in auction clearance rates in the last two weeks.

Other data and GDP

Elsewhere, household wealth has grown 7.7% YoY, equivalent to $1.3 trillion, which can help support consumption.

Investment spending also remains firm with private capital expenditure up 6.4% quarter-on-quarter (QoQ) – well above the 0.5% expected.

Within this, investment in non-mining machinery and equipment rose 11.5% QoQ, which was tied to data centre investment.

The Melbourne Institute’s GDP Nowcast is indicating 0.6% QoQ GDP Q3 growth for this week’s upcoming GDP release, implying the annual growth is improving into the 2% range.

So despite the shift in rate expectations, nominal GDP growth could be heading for 6%, which is supportive for company earnings.

US macro and policy

Thanksgiving week was quiet on the data front.

With no attempt to walk back the dovish comments from Vice Chair John Williams, the odds of a cut in December firmed from 71% to 86%.

What data there was came in softer at the margin, with retail sales up 0.2% MoM, and the Conference Board consumer confidence index a bit weaker.

However early indications from credit card companies suggest Black Friday retail sales were good. Mastercard reported +4.1% YoY with e-comm +10.4% and in-store sales +1.7%. Apparel was good at +5.7% YoY.

UK macro and policy

The combination of more optimistic growth forecasts and the prospect of a shift to T-Bill issuance of up to 20% of funding needs means the requirement on the longer end of the bond curve is diminished and has seen yields on the long end of the UK sovereign bond curve fall.

However, the underlying situation services as a reminder of the challenges that can face an economy when it gets into the spiral of a worsening fiscal position, which requires higher taxes, leading to lower growth, which again requires more tax hikes.

The UK government has announced the extension of the existing freeze of income tax thresholds until FY31. This defers some of the impact but ultimately sees more taxpayers dragged into higher thresholds over time.

The UK government has announced the extension of the existing freeze of income tax thresholds until FY31. This defers some of the impact but ultimately sees more taxpayers dragged into higher thresholds over time.

This approach seems set to drive tax as a share of GDP back up to levels not seen since 1948.

Markets

We did see markets begin to bounce back in a quiet week, but it is hard to read too much into this given it may reflect a reduction in position sizes going into an illiquid long weekend in the US.

There were some constructive moves, with better breadth in the US equities.

Also, despite all the focus on rising credit default swap spreads for some AI-linked borrowers such as Oracle, the overall credit spread environment is still benign.

Australia

The S&P/ASX 300 ended November with a decent counter-trend rally, despite rising bond yields on stronger inflation data.

It ended down 2.8% for the month, led down by tech (-10.8%) and banks (-7.0%).

Metals and mining (+1.6%), healthcare (+1.7%) and consumer staples (+1.4%) were the best performers in November.

There remains a high level of volatility driven by single stock events, while index-level volatility remains muted.

Technology’s decline in November reflected a combination of poor reaction to results and updates from Xero (XRO, -16.0%), Life360 (360, -18.8%) and Technology One (TNE, -18.4%), coupled with continued concerns over the impact of AI on software and platform companies and questions around whether AI is a bubble set to burst. It was exacerbated as growth managers were forced to cut risk given the high correlation of performance.

It is unusual for such a de-rate in technology at a time when the economic outlook looks benign and rates and bond yields are stable to down. This suggests it is the unknown structural factors, combined with positioning, which has driven pricing.

Banks performed reasonably well post results, however they began to underperform post the Commonwealth Bank (CBA, -11.2%) quarterly release highlighting competitive concerns.

November’s best performing stocks tended to be under-owned names which have previously struggled e.g. Light & Wonder (LNW, +39.8%), HMC Capital (HMC, +24.8%), Nufarm (NUF, +20.2%), Domino’s Pizza (DMP, +16.7%), Myer (MYR, +16.5%), and Viva Energy (VEA, +15.5%) in addition to the lithium and gold stocks.

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About Crispin Murray and the Pendal Focus Australian Share Fund

Crispin Murray is Pendal’s Head of Equities. He has more than 27 years of investment experience and leads one of the largest equities teams in Australia. Crispin’s Pendal Focus Australian Share Fund has beaten the benchmark in 12 years of its 16-year history (after fees), across a range of market conditions.

Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management. 

Find out more about Pendal Focus Australian Share Fund  

Contact a Pendal key account manager

Pendal Sustainable Conservative Fund (APIR: RFA0811AU)

(the Fund)

The Fund applies exclusionary screens to its investments in the Australian and International shares, Australian and International fixed interest and part of its Alternative investments asset classes.

Effective 28 November 2025, some of the exclusionary screens applied by the Fund to its International fixed interest asset class will be changing, as outlined below:

• a new exclusionary screen will be added so that the Fund’s International fixed interest asset class will not invest in issuers directly involved in the supply of goods or services specifically related to controversial weapons; and

• the current screen for issuers that mine uranium for the purposes of weapons manufacturing within the Fund’s International fixed interest asset class will be removed.

Issuers who mine uranium for the purposes of weapons manufacturing will now be captured under the new screen for the supply of goods or services specifically related to controversial weapons.

In our view, these changes ensure that the Fund remains true to label and is more closely aligned with investor expectations in relation to responsible investment funds. 

Fund’s exclusionary screens – International fixed interest

Effective 28 November 2025, the Fund’s International Fixed Interest asset class will apply the following exclusionary screens:

The Fund’s International fixed interest asset class will not invest in issuers which directly:

• Produce tobacco (including e-cigarettes and inhalers);
• Manufacture controversial weapons (including biological weapons, blinding laser weapons, chemical weapons, cluster munitions, depleted uranium weapons, incendiary weapons, landmines, non-detectable fragments and nuclear weapons); or
• Supply goods or services specifically related to controversial weapons.

The Fund’s International fixed interest asset class will also not invest in issuers which derive 10% or more of their gross revenue directly from:

• The extraction of thermal coal and oil sands production;
• The production of alcoholic beverages;
• The manufacture or provision of gambling facilities;
• The manufacture of non-controversial weapons or armaments; or
• The manufacture or distribution of pornography.

Updated Product Disclosure Statement (PDS)

An updated PDS issued on 28 November 2025 is now available on www.pendalgroup.com.

Pendal Sustainable Balanced Fund – Class R (APIR: BTA0122AU) 

Pendal Sustainable Balanced Fund – Class Z (APIR: PDL0478AU) 

(the Fund)

The Fund applies exclusionary screens to its investments in the Australian and International shares, Australian and International fixed interest and part of its Alternative investments asset classes.

Effective 28 November 2025, some of the exclusionary screens applied by the Fund to its International fixed interest asset class will be changing, as outlined below:

• a new exclusionary screen will be added so that the Fund’s International fixed interest asset class will not invest in issuers directly involved in the supply of goods or services specifically related to controversial weapons; and

• the current screen for issuers that mine uranium for the purposes of weapons manufacturing within the Fund’s International fixed interest asset class will be removed.

Issuers who mine uranium for the purposes of weapons manufacturing will now be captured under the new screen for the supply of goods or services specifically related to controversial weapons.

In our view, these changes ensure that the Fund remains true to label and is more closely aligned with investor expectations in relation to responsible investment funds. 

Fund’s exclusionary screens – International fixed interest

Effective 28 November 2025, the Fund’s International Fixed Interest asset class will apply the following exclusionary screens:

The Fund’s International fixed interest asset class will not invest in issuers which directly:

• Produce tobacco (including e-cigarettes and inhalers);
• Manufacture controversial weapons (including biological weapons, blinding laser weapons, chemical weapons, cluster munitions, depleted uranium weapons, incendiary weapons, landmines, non-detectable fragments and nuclear weapons); or
• Supply goods or services specifically related to controversial weapons.

The Fund’s International fixed interest asset class will also not invest in issuers which derive 10% or more of their gross revenue directly from:

• The extraction of thermal coal and oil sands production;
• The production of alcoholic beverages;
• The manufacture or provision of gambling facilities;
• The manufacture of non-controversial weapons or armaments; or
• The manufacture or distribution of pornography.

Updated Product Disclosure Statement (PDS)

An updated PDS issued on 28 November 2025 is now available on www.pendalgroup.com.

We have updated and reissued the Product Disclosure Statement (PDS) effective on and from 28 November 2025 for the:

Pendal Sustainable Conservative Fund (the Fund).

The following is a summary of the key changes reflected in the PDS for the Fund.

Labour, environmental, social and ethical (collectively, ESG) considerations

Alongside the PDS and the Additional Information to the PDS, we have now issued the Guide to Our Sustainable Investment Process(Guide).

The Guide includes further information on our sustainability assessment framework and the Fund’s exclusionary screens which was previously contained in the Additional Information to the PDS.

The way the Fund is managed has not changed.

The Guide forms part of the PDS and contains important information. You should read the Guide together with the PDS and the Additional Information to the PDS before making a decision to invest in the Fund.

You can access the Guide to our Sustainable Investment Process on our website at pendalgroup.com/PendalSustainableConservativeFund-SIPG.

Exclusionary Screens – International fixed interest

We have changed some of the exclusionary screens that apply to the Fund’s International fixed interest asset class as follows:

• a new exclusionary screen has been added so that the Fund’s International fixed interest asset class will not invest in issuers directly involved in the supply of goods or services specifically related to controversial weapons; and
• the current screen for issuers who mine uranium for the purposes of weapons manufacturing within the Fund’s International fixed interest asset class has been removed.

Issuers who mine uranium for the purposes of weapons manufacturing will now be captured under the new screen for the supply of goods or services specifically related to controversial weapons.

Updates to ongoing annual fees and costs disclosure

The estimated ongoing annual fees and costs for the Fund have been updated to reflect financial year 2025 fees and costs. These include changes to estimated transaction costs.