Here are the main factors driving the ASX this week according to our head of equities Crispin Murray. Reported by portfolio specialist Chris Adams

WE SEE constructive signs emerging in recent market action after a period of consolidation.

Concerns over inflation and China remain heightened and persistent. Inflation, in particular, is likely to remain a key issue for markets for some time. But there are indications of small improvements at the margin for sentiment on these issues.

Further indication that concerns on these issues have peaked — combined with continued economic recovery and a period of seasonal strength in markets — could set up equities well into the year’s end.

It is far too early to declare victory in this regard. But equities moving higher despite ostensibly bad news, as we saw last week, can be a strong positive signal. The S&P/ASX 300 was up 0.65% and the S&P 500 1.84%.

Whether or not this continues in coming weeks is likely to rely heavily on US earnings season and Chinese data and policy signals.

Economics, policy and markets

The market has 3 broad concerns at the moment;

1. Inflation and its implications for policy tightening: The risk is that we start to see stagflation, where price rises choke off demand and economic growth, or that we see the Fed forced to tighten earlier, also weighing on growth.
2. Chinese growth: People are concerned that a slowing property market and power constraints will drive a sharper-than-expected slowdown in growth.
3. US debt ceiling: The fear is that political discord disrupts the government’s ability to function.

At this point there are signs that each of these issues may have reached a near-term crescendo, which is helping markets rally. 

In the US, Congress and the Biden administration have been able to delay the debt ceiling issue to December. It hasn’t disappeared, but they’ve bought time.

Outlook on China

There are signs that China is addressing power shortages. Beijing is looking to source coal and gas from all available sources – including Australia, despite previous embargoes.

This will not flow through immediately, but the signal is that China is looking to solve the problem and not stubbornly stick to old policies.

Property remains more complex in China. The Evergrande issue has seen credit spreads blow out in the property sector. So far this looks contained within that sector and has not spread to other parts of the market.

There are indications in the data that monetary policy is too tight in China. There are various committee meetings this week which may result in some indication of easing.

Outlook on inflation

Inflation is the greatest long-term threat to markets.

In the past few weeks there has been a shift in expectations including a realisation that inflation is likely to be higher and more durable than previously thought.

At his Jackson Hole speech on 27 August, Fed Chair Powell was able to calm inflation concerns with the idea that it was transitory. His key reasons were:

1. It is not broad based
2. The largest surges are already receding
3. No threat yet from wages
4. Inflation expectations are anchored
5. Globally, pressure on inflation is downward

Since then inflationary pressures have strengthened, due to:

1. Expanding supply chain bottlenecks: Lockdowns in some countries and Chinese power issues have constrained production.
2. Labour availability: This continues to disappoint in the US, where it’s increasingly apparent there has been a reduction in supply, driving real wage increases and rising friction between employees and employers.
3. Commodity prices: Key inputs such as gasoline and power prices have continued to rise.
4. House prices: Continue to rise and are flowing through into rents.
5. Strong demand: Bolstered by re-opening and reducing delta concerns.

What was “transitory” is now being described as “transitory for longer”.

This is because the “transitory” argument is now falling foul of its own rationale outlined in the Jackson Hole speech:

1. It is not broad based: Inflation is showing up in a broader range of sectors as new supply chain problems occur and fuel prices rise. Last week’s CPI data shows prices in longer-duration areas are rising. Rents, for example, are increasing at their highest monthly rate since the housing bubble in 2006.
2. The biggest surges are already receding: This is true in some categories. In others, such as timber and autos, there have been recent rebounds. New auto prices were up 1.3% in the month.
3. No threat yet from wages: Average hourly earnings have not surged, but are steadily picking up.
   – We are also seeing greater friction in labour markets. For example workers at machinery maker Deere and Co knocked back a front-loaded 11-12% wage increase over six years and called a strike for the first time in 35 years. This kind of action reflects the recognition that supply chains need to be shortened and the threat of off-shoring has diminished.
   – There are further indications that early retirements and career changes are having a negative impact on labour supply.
4. Inflation expectations are anchored: This is still the case, but they are rising. The risk is this starts bringing forward consumption and drives higher wage demands.
5. Globally, pressure on inflation is downward: It’s true that inflation is less of an issue outside the US. But rising fuel prices are having an impact. The move in global bond yields indicates some concern on inflation.

The market realises the Fed is in something of a bind. It wants to promote growth while being mindful of the need to keep inflation expectations anchored.

The balance in recent weeks has been a shift in expectations to the Fed having to move sooner on tapering and rate hikes.

As a result we saw a “bear flattening” in bond markets, with two-year yields rising while 10-year yields remain flat. Despite this, equities and commodities made gains.

One factor could be that supply chain fears have perhaps reached their nadir. Freight rates from China to the US east and west coasts have rolled over recently.

Surveys suggest the proportion of US firms reporting inventories as “too low” has also rolled over.

The Biden administration has recognised the importance of this issue. It’s been working with stakeholders to keep the Port of Los Angeles open 24/7.

This alone won’t solve the problem. But combined with factories re-opening in Asia and private companies adapting their sourcing, it can help calm fears on the issue.

We see inflation as a key issue for markets going forward. But signs of alleviation in supply chain pressure, coupled with marginally better news on China and the US debt ceiling — plus expectations of good US corporate earnings — may continue to support markets in the near term.

US economic outlook

While the big risk issues are marginally improving, the outlook for US growth is also encouraging.

US retail sales were better than expected at +0.7% m/m, with positive revisions for the previous month. This means it’s holding up despite a surge in the past year. There is strength in discretionary spending (clothing, sporting, e-commerce) which was up 13.9% year-on-year (and 15.6% ex-autos).

Fiscal stimulus has played an important role in this. It also goes some way to explaining some of the supply chain issues we are seeing.

Consumer spending is expected to shift from retail to the service sector as restrictions are rolled back. It remains supported by $US2 trillion in excess savings as a result of stimulus. Income growth also remains greater than expenditure.

Markets

We are seeing some important and positive signs, such as:

1. Commodity prices appear to be breaking higher, having consolidated for six months. This reinforces the notion that concerns over supply chain issues may be peaking.
2. The sectors most affected by supply chain issues are beginning to perform. This suggests the market is looking through near-term issues and expecting a strong catch-up in demand next year.
3. Chinese bond yields have begun to move higher. They had previously been falling since the start of the year and were a decent signal on the impending Chinese slowdown.
4. The Australian dollar is rallying against the Yen — another positive cyclical indicator.
5. There are signs the equity market is broadening, with the small cap index stabilising versus the overall market.

In conclusion the market signals are more positive than the media headlines. This is often the right signal to watch for.

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About Crispin Murray and 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 an independent, 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 here.  

Contact a Pendal key account manager here.

What are the major factors driving global equities investments in this volatile period? And which plays should investors be considering right now? Pendal’s head of global equities, Ashley Pittard, explains in this fast podcast

Listen to the podcast above or read the transcript below

Interviewer Sean Aylmer: Ashley, there’s incredible volatility in Wall Street at the moment, particularly among the tech stocks. What is going on?

Ashley Pittard, Pendal’s head of global equities: It really comes down to a couple of key points. The key points are:

• Inflation: Is a transitory or is it frustratingly structural?
• In addition to that, you have the Federal Reserve tapering
• You have long-term interest rates increasing
• You have a debt ceiling negotiations in the US that are dragging on
• In addition to that, you have China’s increasing regulatory risk. China also has real estate issues with regards to their largest developer.

All of that together creates uncertainty and that uncertainty is creating volatility in companies that have re-rated over the last five years to valuation levels that are very, very high.

Interviewer: Inflation – is it transitory or is it structural?

Ashley Pittard: I get back to what Fed chair Powell said. He originally thought inflation was transitory, but it’s now becoming frustrating.

When you step back, you look at wage growth in the US which is compounding at 3-4%. You’ve got higher energy prices. We’re actually near an oil price of $80. And you’ve got massive higher transportation costs — an example is the UK’s with their fuel and transport issues.

All of those issues, in addition to commodity prices that are at near-term highs, are all contributing to inflation that I believe will be more longer-term in nature then transitory.

So it’s interesting now that we’re starting to see the Federal Reserve think that way.

Interviewer: How big a worry is China — be it the regulatory risk or real estate issues particularly around Evergrande?

Ashley Pittard: There’s no doubt China is a massive risk. The reason it’s a massive risk is because they’re trying to redistribute wealth. And whenever you try and redistribute wealth, people that have the wealth usually lose out.

So where is the majority of wealth situated in China? It is in the large property businesses. And more importantly, these large technology companies. As we’ve seen over time, restrictions being put in place which means the market will start giving a significantly lower valuation to these businesses on the tech side.

With regards to the real estate side, in addition to lowering house prices, these development companies have significant amounts of debt. And if you have debt, you can start getting into a situation that is very reminiscent of what we saw in the US housing market probably a decade ago now.

So the risk in China is very, very high because you’re redistrubuting wealth, the P/Es have to come down because of the increasing risk. And then you also have this debt burden associated with a reduction or slowing in property development, which is very reminiscent of what we saw a decade ago in the US.

Interviewer: So bringing that all to portfolio construction, what does it mean in terms of investing in global markets at the moment?

Ashley Pittard: We think that you want to be different. What do I mean by that? You want to be contrarian. If you look over the last five years, the best sectors to be in globally have been technology and pharmaceuticals. They are at all-time highs as a per cent of the index — and also their stock prices.

We believe, as inflation becomes more structural, that you want to be concentrated in a portfolio of financial and energy plus aerospace exposure.

So effectively we believe you want to be in re-opening plays and contrarion plays as inflation becomes frustratingly higher for longer and not transitory – just like Chairman Powell said.

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About Ashley Pittard and Pendal Concentrated Global Share Fund

Ashley Pittard leads Pendal’s Global Equities investment boutique. He is responsible for setting the strategy, processes and risk management for the boutique and its funds including Pendal Concentrated Global Share (COGS) Fund.

Ashley has more than 24 years of finance experience, including roles in petroleum economics, global energy investment analysis and 20 years as a global equities fund manager.

Pendal COGS Fund is an actively managed, concentrated portfolio of global shares diversified across a broad range of global sharemarkets.

Find out more about Pendal Concentrated Global Share Fund

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

Contact a Pendal key account manager here.

BT Wholesale Monthly Income Plus Fund (APIR code BTA0318AU, ARSN 137 707 996)

Notice of changes to the asset classes and asset allocation ranges of the BT Wholesale Monthly Income Plus Fund (Fund)

From 14 July 2015, we are removing the alternative investments asset class and asset allocation ranges and changing the fixed interest asset allocation ranges as shown in the table below.

Asset Class	Current Asset Allocation Ranges	New Asset Allocation Ranges
Cash	0-50%	0-50%
Fixed Interest	0-100%	20-100%
Shares	0-30%	0-30%
Alternative Investments	0-20%	N/A – removed

Why are the asset classes and asset allocation ranges changing?

The Fund has not invested in alternative investments since March 2011 and we no longer intend to invest in this asset class. The changes to the asset classes and asset allocation ranges will more accurately reflect how we intend to invest the Fund in the future.

More information?

If you have any questions, please contact the BT Customer Relations on 1800 813 886 between 8.00am and 5.30pm (Sydney time), Monday to Friday.

Investors concerned about the banking crisis and recession fears in the US may be missing out on finding investment opportunities in other parts of the world, says Pendal’s CLIVE BEAGLES

• US banking crisis creating opportunities elsewhere
• UK banks trade at steep discounts
• Browse Pendal’s global equities funds

MARKETS are watching the US closely as its banking system reels from the impact of higher interest rates on regional bank bond portfolios.

Three US banks have been shuttered during the rolling crisis and regional bank shares have been volatile as markets weigh up the prospect of further failures.

But the crisis has also swept up banks and markets outside the US, which may offer opportunities for investors who can keep calm amid the noise.

Last week Pendal’s Samir Mehta argued that the US regional bank turmoil shouldn’t discourage investors from considering Asian bank stocks.

Clive Beagles, a senior fund manager at Pendal’s UK-based asset manager affiliate J O Hambro, has similar things to say about British bank stocks.

“Many of the UK banks are posting returns on equity of close to 20 per cent in the first quarter,” says Beagles.

“But they all trade at a discount to book value — some of them at 0.4 or 0.5. That includes big names like Natwest and Lloyds.

“Discounts to book value for that kind of return on equity just look silly.”

Beagles says the US market is acting like a “rotating firing squad” that seems to be picking a different name every other day to sell off.

But he believes the banks that are failing in the US are smaller players which are not globally significant.

“The differential between how the US has been regulating their banks and how the UK and Europe are regulating banks is becoming ever clearer — which is frustrating because they have been dragged down a bit by the noise.

Is everyone else still catching cold when America sneezes?

Beagles says the underlying concern many investors have is of a global recession triggered by a downturn in the US.

“There’s an old assumption that when the US sneezes everyone else catches a cold. But I do slightly wonder if it’s going be different this time.

“If this is a crisis, it’s the first one we’ve had where the US dollar is going down rather than up.

“Normally, you head to the dollar for safe haven status.”

Beagles believes the US dollar weakness indicates something different is going on from the usual global contagion. It could point to a period where the US is one of the slower-growing economies in the developed world rather than its traditional role as one of the fastest.

“The banks are just a microcosm of that — they will need more capital and need to be more tightly regulated in a slower US.”

Beagles also cautions against comparisons to previous banking crises.

“In 2008, UK banks had tier-one capital ratios of 4 per cent. Today they have tier-one ratios of 14 per cent.”

Tier-one capital refers to bank’s most reliable and highest-quality capital. A higher tier-one capital ratio generally suggests a bank is better equipped to absorb losses and maintain its financial stability.

“In 2008, there were something like £400 billion more loans than there were deposits — today it’s the other way around.

“The UK as an economy is under-geared rather than over-geared.”

About Clive Beagles

Clive Beagles is a senior fund manager with Pendal Group’s UK-based asset manager, J O Hambro Capital Management. Clive is one of the UK’s most highly respected equity income managers. He has 32 years of industry experience and co-manages the JOHCM UK Equity Income Fund.

About Pendal Group

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

Find out about Pendal’s investment strategies

Contact a Pendal key account manager

A rotation from growth to value will take years to play out for a generation of investors that has only known low interest rates, says senior fund manager CLIVE BEAGLES

• Rotation from growth to value underway
• Corporate activity could be next trigger
• Investors slow to embrace change

A STOCKMARKET rotation from growth to value could take years to fully play out, with corporate action likely to be the next catalyst for investors, says senior fund manager Clive Beagles.

Many investors sold down high-growth stocks like big US tech firms over the past year as higher interest rates reduced the future value of their earnings.

But despite a dramatic selldown that shaved trillions from market values, investors are only at the start of a reorientation in markets that could last up to three years, believes Beagles, an UK equity income manager with our London-based sister company J O Hambro.

“There’s a generation of fund managers who have only ever lived in a world of zero interest rates and very low discount rates and it’s taking them a long time to recognise that this is a regime shift,” he says.

The gap between average valuations of US and UK-based companies is evidence of how far the changeover has left to go, he says.

UK shares are trading at an average price earnings ratio roughly half their US counterparts as the war in Ukraine overshadows a robust local economy and better-than-expected company reporting season.

“The UK has the greatest exposure to the value factor of any developed market,” he says.

Value gap may trigger corporate activity

This relative value is starting to trigger corporate activity, says Beagles.

The UAE’s First Abu Dhabi Bank is reported to have been considering an all-cash bid for banking icon Standard Chartered.

Anglo-Dutch energy giant Shell has been mulling a move to the US.

Cement and concrete producer CRH unveiled plans to move its main listing from London to New York, sending its shares up 7 per cent on the day of the announcement.

“This could be the sort of thing that jolts investors into realising quite how ridiculous this valuation gap between the UK market and other parts of the world has become,” says Beagles.

“Standard Chartered is an interesting example. As far back as 50 years ago, it was one of jewels in the crown of the UK market — listed in London but exposed to high growth markets in Asia with a very interesting geographical footprint.

“It has been struggling for years and is now trading on about half its book value. First Abu Dhabi trades at two times book value — so you can see what they are trying to do.”

Reports of Shell considering a move to the US markets also indicate that corporate activity can be the catalyst to realise investment opportunities.

“In terms of the geographical footprint, there’s not much to choose between Britain’s BP and Shell and their US peers Exxon and Chevron.

“But the US peers trade on anywhere between 50 to 75 per cent premiums. There’s no logic to it.”

Trend to value has years to play out

Beagle says this indicates the trend towards value stocks has some years to play out.

“It is taking investors a while — the UK has been deemed to be this sort of Jurassic Park market where companies go to die for some time.

“This is why I come back to: does it need one of our banks to get bid for? Does it need one our big oil companies to get bid for?

“If you have two or three come along in quite short order that might be the thing — investors have been very slow to embrace the change.”

Beagles says the recent corporate earnings season in the UK saw a mix of solid results and muted outlook statements.

But he says better-than-expected dividends indicate that corporate Britain is in good health.

“That’s the ultimate manifestation of business confidence, isn’t it? It reflects strong balance sheets and demonstrates what companies really think about the world.

“Consumer confidence in the UK is almost at a one year high, so despite all the misery they read in the newspapers, people are just getting on with their lives.

“Retail spending has generally come in better than people would have expected, and we’ve still got this massive cushion of £270 billion in savings.

“There’s a little bit of noise about currency, with sterling rallying off its lows, and there’s a little bit of noise around interest costs for companies that are heavily levered – but overall things are looking pretty good.”

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About Clive Beagles

Clive Beagles is a senior fund manager with UK-based asset manager, J O Hambro Capital Management. Clive is one of the UK’s most highly respected equity income managers. He has 32 years of industry experience and co-manages the JOHCM UK Equity Income Fund.

About Pendal Group

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

Find out about Pendal’s investment strategies

Contact a Pendal key account manager

The British share market shows why it’s important to look past the headlines and see the world objectively, says Pendal’s Clive Beagles.

IT’S easy to forget that newspaper headlines are designed to do only one thing: sell newspapers.

If long-term investors needed a reminder of the importance of looking past the headlines, consider the UK, says Pendal’s Clive Beagles.

Recent commentary on the UK has focused on political instability, energy market disruption and the prospect of a real GDP recession in 2023.

Yet UK shares are the best-performing developed market in the world this year — and still offer strong value, healthy dividends and the prospect of growth, says Beagles, a senior fund manager at Pendal’s UK-based asset manager J O Hambro.

Consider this: the FTSE All-Share Index — a measure of the biggest 600 companies on the London Stock Exchange — trades at about the same market cap as Apple.

“It’s crackers,” says Beagles. “One is a two product company — the other is an extraordinarily diverse index in all sorts of industries.

“And yet which one have investors got more money in?”

It’s a reminder of the importance of looking through the noise in investment markets and trying to see the world objectively, he says.

UK issues milder than they appear

Many of the perceived problems facing the UK are milder than they appear, says Beagles.

The recent chaos in political leadership is likely to settle down to an era of more predictable politics, with the extremes of both sides reined in by the shambles of three Prime Ministers in two months.

“In any case, we have left the EU so we might as well try and make the best of it — many of the government’s policies about accelerating deregulation were exactly what we need to do.”

The energy crisis triggered by the Russia Ukraine war is dissipating as European governments co-operate to find alternative gas suppliers and build stockpiles.

“And obviously we can’t rely on the weather, but it’s 19° here this weekend in the middle of November. Each week that goes by like that means accumulated gas reserves are being built up for the winter.”

Look to nominal GDP

Even the prospect of recession in 2023 is not as simple as it appears, says Beagles.

“There’s far too much focus on real GDP as opposed to nominal GDP.

“Yes, we are likely to have a real GDP recession, but it could easily be in a situation where nominal GDP is still growing by 4 or 5 per cent.

“Real GDP is an artificial construct. It doesn’t exist in the real world. Companies don’t operate in a real GDP world – their revenues and profits are denominated in nominal terms.

“Many analysts are looking at previous recessions and assuming some sort of 20 to 30 per cent earnings fall for the more cyclical parts of the market.

“But in nominal terms, revenues may well be flat or rising.

“Ultimately, equities should give you an inflation hedge.”

Misery ‘slightly overdone’

Beagles says many of the key indicators of Britain’s economic health have also settled down.

Bond yields in the UK are now lower than they were before the political instability. Sterling is trading at a similar price versus the euro to what it was five years ago.

Households have some £230 billion of accumulated savings, which will offset the effect of interest rate rises and cost of living issues.

Shares also look good value, even with the FTSE100 outperforming other developed markets and trading relatively unchanged year to date.

“The dividend yield in our fund for this year is 6 per cent. It’s only ever been higher than that very briefly during the financial crisis,” says Beagles.

“Dividend cover is the highest it’s ever been and many of the stocks in our fund are on free cash flow yields in the mid-teens or above which means there’s quite a buffer against earnings disappointments.

“It feels a bit like the misery is slightly overdone.”

About Clive Beagles

Clive Beagles is a senior fund manager with Pendal Group’s UK-based asset manager, J O Hambro Capital Management. Clive is one of the UK’s most highly respected equity income managers. He has 32 years of industry experience and co-manages the JOHCM UK Equity Income Fund.

About Pendal Group

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

Find out about Pendal’s investment strategies

Contact a Pendal key account manager

Inflationary periods can be a good time to identify mis-priced stocks if you know what to look for, says Pendal’s CLIVE BEAGLES

• Inflation triggers mis-pricing of stocks
• Important to decipher inflation and volume in revenue growth
• Cyclical stocks oversold in UK market

HOW can equity investors identify mis-pricing in an inflationary environment — and therefore identify opportunities?

Pay attention to the difference between real growth and nominal growth rates of a company, says Clive Beagles, senior fund manager at Pendal’s UK-based asset manager J O Hambro. 

Real growth measures growth adjusted for inflation. Nominal growth doesn’t adjust for price changes.

“Inflation has meant real growth forecasts have come down somewhat. But companies operate in a nominal growth rate world, and they’re still going to be high,” says Beagles.

“In the UK nominal growth could be 10 per cent — and that hasn’t happened since the 1980s.

“It’s a very different environment and people haven’t been focusing on it. Earnings could prove to be much better than people think because they are in nominal terms.”

In all markets it’s important to look at individual companies and decipher the split of revenue growth between inflation and volume, says Beagles.

“Some companies are very helpful at providing it and some aren’t.

“If you can understand the split, you can identify companies that can pass through price rises, and those that might end up with strong revenue growth but no volume growth,” he says.

Rotation away from cyclicals and financials ‘overdone’

In the UK, the rotation away from financials and cyclicals towards defensive stocks is overdone,  argues Beagles.

Extreme risk aversion in the market means the valuation between defensives and cyclicals is now at the same low level as after 9/11 and during the Lehman collapse in the global financial crisis.

“That’s pretty staggering. We are in this phony period where everyone is anticipating that life slows down quite dramatically but companies haven’t seen it yet.”

The cost-of-living crisis particularly around energy prices in the UK has gotten a huge amount of attention.

“But the stock of savings is elevated and at an aggregate level that will provide a bit of a cushion.” (Though the savings aren’t distributed evenly across society, he adds.)

“The investment community has been whipped up into very bearish sentiment, but the UK is different to Europe. It hasn’t been hit as hard by higher energy prices. It is much more service, consumer-spending oriented. It hasn’t got a big manufacturing sector.

“Share prices are assuming much worse than what we’ve seen so far.

“As risk tolerance normalises, cyclicals and financials should outperform.” 

About Clive Beagles

Clive Beagles is a senior fund manager with Pendal Group’s UK-based asset manager, J O Hambro Capital Management. Clive is one of the UK’s most highly respected equity income managers. He has 32 years of industry experience and co-manages the JOHCM UK Equity Income Fund.

About Pendal Group

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

Find out about Pendal’s investment strategies

Contact a Pendal key account manager

Despite recent volatility the fundamentals of investment in European equities haven’t changed much says Pendal Group’s Clive Beagles

• Investors in Europe must not panic.
• Long term fundamentals remain sound.
• Pricing of some stocks, due to the conflict, is irrational.

Clive Beagles has a message for investors in Europe: don’t panic.

The war in Ukraine is a human tragedy and has immediate implications for many commodities, says the senior fund manager from Pendal’s UK-based J O Hambro asset manager.

But considered long-term investment strategies remain sound.

It’s a particularly pertinent message given the rotation that had been going on since the middle of last year from large, tech-focused growth companies (often on Wall Street) to value stocks.

“For many years people wanted to invest in mega caps and growth stocks and not much else,” Beagles says. “And then late last year and into this year investors got the point of thinking about something else.”

European and UK markets, particularly banks, become attractive to what Beagles describes as “slightly lower conviction” investors. They were prepared to buy into European equities, but not with gusto.

Then came Russia’s unprovoked invasion of Ukraine and those slightly-lower-conviction investors pulled back on European and UK stocks.

Broadly, the more a stock is invested in Europe — or relies on energy, or is a bank or a consumer staple relying on customers that feel the effect of higher gas prices — the more the share prices fall have been, Beagles says.

And the reaction to perceived bad news has triggered big declines.

“Interest rates are still going up and the fundamentals of the story haven’t really changed much. Investors need to remember that,” Beagles says.

“Going back a month, the UK and Europe were much cheaper than their US counterparts in comparable sectors. And that has been accentuated in the past few weeks.

“What’s happening is a human tragedy. In economic terms, outside some commodities like wheat and wool and coal, the main impact is on business confidence. And, of course, there’s more short-term uncertainty.

“While it’s right to think that economic growth across Europe might be 100 basis points lower, the region is still expanding.”

The pricing of some equities in Europe and the UK is now verging on the absurd, Beagles says.

He uses the example of British free-to-air television network ITV. It recently reported 24 per cent growth in revenue to a record level, a 40 per cent jump in earnings per share, and said the current year has started strongly.

It’s share price dropped 27 per cent on the day of the announcement, with investors focused on the costs associated with the acceleration of ITV’s digital transformation strategy.

“Obviously investors are concerned that future economic growth and business confidence may be materially impacted by events in Ukraine. But going through the numbers the share price drop is absurd,” Beagles says.

If you look at the UK specifically the market has a relatively high weighting to oil and mining, and commodity prices are up, Beagles points out.

“Assuming we get a couple of rate rises, many companies in Europe and the UK will get back to getting a return on equity of about 10 per cent. You’d normally expect them to be trading at least at book value, and many, such as UK banks, are not. Absurd.”

About Clive Beagles

Clive Beagles is a senior fund manager with Pendal Group’s UK-based asset manager, J O Hambro Capital Management. Clive is one of the UK’s most highly respected equity income managers. He has 32 years of industry experience and co-manages the JOHCM UK Equity Income Fund.

About Pendal Group

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

Find out about Pendal’s investment strategies

Contact a Pendal key account manager

Greater employee power and digitalisation are two pandemic trends that will endure to shape the investment landscape in 2022. CLIVE BEAGLES explains

• Covid has forced many companies to catch up with digitalisation
• The best have adapted and created new opportunities
• Wage pressures will eat into some earnings in 2022

THE pandemic has breathed new life into some sectors of the economy that otherwise would have been swamped by technological change — and that could open opportunities for investors.

The pandemic forced some old-world industries to ramp up their digitalisation – the use of technology to provide new revenue and value-producing opportunities.

These enhancements will have long lasting benefits says Clive Beagles, a senior fund manager who focuses on equity income at Pendal Group’s UK-based asset manager JO Hambro Capital Management.

“There were some sectors that pre-Covid were structurally compromised, and their outlooks weren’t positive, Beagles says. “But that’s transformed during the pandemic and emerged as part of the vanguard of the recovery.

“Everyone talks about Covid accelerating ten years of change — and that’s helped some of these industries.”

Some old-economy industries will emerge from the pandemic in much stronger shape than where they started.

“They haven’t exactly reinvented themselves, but they have reacted in a meaningful and agile way.

“Yet some of them are still being valued as if they’ll have declining profits and at some point will become terminal.”

Beagles nominates recruitment and advertising-reliant industries as sectors that will emerge from the pandemic in 2022 in better shape than when Covid hit.

Two examples in the United Kingdom are broadcaster ITV and recruiter Michael Page.

“In the case of media and particularly broadcast TV, the ability to provide much greater data on audiences and who is being reached provides the medium with a whole new selling point,” Beagles says.

“In the case of recruiters, they’ve used the pandemic time to go digital, and there’s strong demand for labour.”  

Greater employee power

Another big change for firms and earnings in 2022, Beagles says, is the emergence of employee power. Because of the strong demand for labour, workers can demand more.

“It’s still some way out but it could eventually be one of the biggest changes in the past 20 years, because for the last two decades all the power has been with employers,” Beagles says.

“There will be sectors where the employees will become much more strategic. We know about medical staff but also areas which weren’t considered strategic before like HGV (heavy goods vehicles) drivers.”

Labour pressures – there’s 1.4 million people unemployed in the United Kingdom currently and 1.2 million job vacancies – will put pressure on prices, and that will eat into earnings in some sectors.

“Twenty-twenty-two is only about the second or third innings, to use a baseball analogy, of a longer change period. It has a way to go and the rotation in markets in 2022 should be quite powerful.”

About Clive Beagles

Clive Beagles is a senior fund manager with Pendal Group’s UK-based asset manager, J O Hambro Capital Management. Clive is one of the UK’s most highly respected equity income managers. He has 32 years of industry experience and co-manages the JOHCM UK Equity Income Fund.

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