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.
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“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.
About Pendal Group
Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management.
In a world increasingly focused on Environmental, Social and Governance issues, many investment opportunities can be found among “sin stocks” working on an ESG transition. CLIVE BEAGLES explains
- Improving climate credentials provides investor opportunity
- ESG stocks alone provide a narrow universe
- Market is more nuanced in how to consider ESG
IT’S common these days for investors to look for companies that tick all the ESG boxes.
But many of the best ESG investment opportunities can be found among so-called “sin stocks” working on catching up.
ESG-related upgrades from ratings agencies are happening more often at mining and oil companies, than other sectors, observes Clive Beagles, a senior fund manager who focuses on UK equities at Pendal’s London-based asset manager J O Hambro Capital Management
“We measure the upgrades to downgrades of companies based on ESG factor. Our fund has a ratio of about four to one upgrades to downgrades. And about half of those companies being upgraded were either oil or mining companies,” Beagles says.
“You might not like the pace some of the oil and gas companies are changing, but you can’t question the fact they’re trying to change.”
When companies are changing, there’s investment opportunities.
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“When you invest you are always looking for change,” Beagles says. “You look for change in return on capital. You look for change in operating margins. You should also look for change in ESG credentials.
“If a company is improving its ESG credentials, its cost of capital is likely to go down and its ESG rating will go up,” Beagles says.
Twelve months ago investors, and in some cases management themselves, were categorising businesses around whether they met ESG benchmarks or not.
But it is much more nuanced now, Beagles says.
“I think peak ESG was about last November in terms of not investing in older style, non-ESG companies, and looking for pure play opportunities,” he says.
“ESG and climate change are real but the investment world has become a little more balanced about it. Many companies are trying to move in the ESG direction. But now it is more about trajectory of change, rather than absolute scoring.”
Beagles says there is a place for pure plays in the ESG world, and for impact funds.
“But not everyone can do that and it’s a very narrow cohort of stocks,” he says.
“A much broader approach which can be just as useful and relevant is to encourage companies to change faster. And that’s very much what we are doing.”
Beagles says the shift among investors has been quite marked.
“A year ago, clients might look a bit blankly about investing in an older style company and say ‘they still have coal’. Now they are starting to understand the transition much better.
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.
What can we learn as UK stocks outperform their global peers? We asked Pendal Group’s CLIVE BEAGLES
- Post-Covid — and five years after Brexit vote — UK market is outperforming
- British economy is growing fast as economy re-opens
- Australia’s re-opening is three-to-six months behind
FEDERAL treasurer Josh Frydenberg told Sydney radio this week that the United Kingdom’s approach to re-opening was “really instructive” for Australia.
Despite a high infection rate, the British economy is growing fast and its stockmarket is out-performing its global peers.
“They’re still getting 30,000-plus cases each day, but their rate of hospitalisation has fallen by 83 per cent since the peak at the start of the year,” Frydenberg told 2GB.
“As you know, they’re not turning back — they’re living with the virus and so should we here in Australia.”
UK data supports his view.
Last week the UK’s Office for National Statistics upgraded economic growth for the June quarter from 4.8 per cent to 5.5 per cent. The International Monetary Fund and the OECD expect the UK economy to expand at a 7 per cent clip this year, and around 5 per cent next year.
The FTSE100 gained around 1 per cent over the past month while other major indices in the United States, Japan, Germany and Australia were lower.
Five years after Britain voted to leave the European Union, the threat of a post-Brexit slowdown now appears to have well and truly passed.
“Whatever the reason, the conditions are right for the UK market to outperform,” says Clive Beagles, a senior fund manager at Pendal Group’s UK-based asset manager J O Hambro Capital Management.
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What can Australian investors learn from the UK?
If Frydenberg is right, what can Australian investors glean from the UK’s re-opening experience?
“The fact that the UK is fully opened up now shows where Australia will go in three to six months,” says Sydney-based Pendal portfolio manager Tim Hext.
We’ll face similar issues such as demand outstripping supply and tighter labour — and we have similar stockmarket themes such as higher exposure to commodities and lower exposure to technology.
In the UK, “employment is the main driver of growth at the moment … the labour market is incredibly tight”, Beagles says.
Labour supply issues supply should be a shorter-term issue in Australia as borders re-open, says Hext. The UK faces a more structural challenge on that front, reckons Hext.
Beagles says “the UK is more openly talking about raising interest rates … and bond yields have gone from 75 basis points to 120.
“While there’s a short-term focus on the cost-of-living crisis because of energy prices, there’s also this huge pool of savings ready to be unleashed.”
Stockmarket themes
The UK’s economic pick-up underpins the stronger outlook for the FTSE. But several other factors that have worked against the UK market in recent years are now supporting shares.
The FTSE 100 has a heavy weighting to oil and gas and energy companies, including BP, Glencore, Anglo American and Royal Dutch Shell.
These have been less loved as support for environmental, social and governance (ESG) issues has grown. But as energy prices soar, hitting multi-year records, UK investors are again shifting into the oil and gas and coal companies, Beagles says.
The FTSE 100 gets around two-thirds of its earnings from outside the UK market, so it also depends on the global economy. But when the local economy gains momentum, sentiment for the bourse improves.
“The UK market also has a bias towards value stocks (there are relatively few technology stocks) and financials,” Beagles says.
“These can benefit from higher rates. And there’s a weighting towards commodities. Mining and oil companies tend to do well when rates are rising as inflation hedge.”
Combined it means UK equities are an attractive place to invest, he says.
“The day in the sun for the UK market might finally be coming after five years in the doghouse since the Brexit referendum.”
Australian investors will be hoping for similar as we re-open and learn to live with the virus.
About Pendal Group
Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management.
Daniel Campbell was appointed to his current role of Investment Director in April 2018. His responsibilities include investment oversight of all our Investment strategies and processes, Product Strategy and Development and our team of Investment Specialists. He works closely with the investment teams in the development and execution of their business, product and distribution strategies. In addition, he has P&L and people responsibility for the Income & Fixed Interest team.
Daniel joined the business in late 2010 and has been a member of the Pendal Executive Committee since 2013.
Prior to joining the company, Daniel spent ten years at Perpetual Investments, where he held various roles including Senior Investment Analyst and General Manager, Analytics & Research.
There’ll be a lot of talk at this month’s climate change conference in Glasgow. Pendal’s MURRAY ACKMAN explains what Australian investors should pay attention to
IN TWO WEEKS world leaders — maybe even our ScoMo — will fly to Glasgow for the 26th UN Climate Change Conference of the Parties (or “COP26”).
There will be a lot of talk — but Australian investors should watch a few things closely, says Pendal Credit ESG analyst Murray Ackman.
“This is not your typical gab-fest,” says Ackman.
“The pressure on countries to act is very real as we’ve seen recently with the Morrison government’s turnaround on a 2050 emissions target.”
Murray says Aussie investors should pay attention to three things:
1. End to coal power
Coal accounts for about half of energy-related CO2 emissions and will have to be phased out to reach net zero emissions by 2050. Many are pushing for this COP to include a commitment on ending coal power.
Increasing uptake of renewables in Australia is coinciding with reduced coal use — but we still export a lot of coal.
Businesses that produce coal (eg Whitehaven), transport it (eg Aurizon) or ship it (eg Port of Newcastle) would be severely impacted by a global decision to phase out coal, Murray says.
2. Australia as a pariah
New national targets to cut greenhouse emissions by 2030 will be announced at Glasgow — as required under the Paris Agreement.
Many developed countries have already flagged stronger targets.
But Australia has been without a substantial climate policy for nearly a decade — which could start to cause problems for us, says Ackman.
“The carbon intensity of an economy may be a differentiator for future investments.
“We’ve already seen some investors avoid businesses and government bonds due to a perceived weakness in climate policy.
“They’re now known as ‘brown markets’ as opposed to ‘green markets’.
“If Australia’s national targets are not regarded as ambitious enough, this divestment trend may continue.”
3. Investment opportunities
A faster shift away from fossil fuels presents obvious challenges for Australia, since they relate to a quarter of our exports.
But change can also lead to significant opportunities.
“There is a very clear path to reduce Australia’s domestic emissions which will require substantial infrastructure investment,” says Murray.
“There will be a lot of spending on the electricity supply of the future with transmission lines, interconnectors and energy storage.
“There are also opportunities for export, whether that’s green hydrogen (produced by renewables), minerals required for electric vehicle batteries and even copper.”
About Murray Ackman and Regnan
Murray is a Senior ESG and Impact Analyst with sustainable investing leader Regnan.
He also provides fundamental credit analysis on Environmental, Social and Governance factors for Pendal’s Income and Fixed Interest team.
Murray has worked as a consultant measuring ESG for family offices and private equity firms and was a Research Fellow at the Institute for Economics and Peace where he led research on the United Nations Sustainable Development Goals.
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Anthony joined Pendal Group as Distribution Director in October 2018 and is a member of the Australian Executive team. Anthony is responsible for leading the Distribution, Marketing and Client Service functions, drawing upon his extensive experience in retail and institutional funds management.
Anthony joined Pendal following his tenure of fifteen years in senior leadership roles at Morningstar. Most recently Anthony was Managing Director, Research Strategy Australasia where he was responsible for the development of research and commentary on investment themes and trends within the Asia-Pacific region, in addition to representing Morningstar’s manager, equity and credit research capabilities. Anthony’s remit also extended to the development of retirement research, public policy initiatives, and engagement with regulatory authorities. Prior to this role, Anthony was also CEO, Australia and New Zealand from 2010-2014 and Managing Director of Morningstar Investment Management from 2009-2010. Anthony’s prior experience includes senior appointments ASSIRT Research and AMP Consulting.
Anthony is a director and immediate past president of the CFA Society of Sydney and a member of the National Advocacy Council. He is a Graduate Member of the Australian Institute of Company Directors, a CFA charterholder, holds a graduate diploma in Applied Finance and Investments from FINSIA, and a bachelor’s degree in Business from the University of Technology, Sydney.
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The RBA’s Melbourne Cup day meeting will be closely watched after Wednesday’s inflation numbers. TIM HEXT explains why.
IN AUSTRALIA we only get inflation data quarterly, so the number is keenly anticipated.
For the inflation hawks Wednesday didn’t disappoint. For the RBA it looks like a decade of over-estimating inflation has now moved to a new decade of under-estimating.
The headline inflation number was on forecast at 0.8% for the quarter and 3% annually. However it was the underlying number that shows a more concerning picture.
Underlying inflation strips out the top and bottom 15% of moves, usually including fuel and food. Here the number was 0.7% for the quarter. This is the highest since 2014.
While that is only 2.1% annually, markets will usually annualise the latest quarter to get a more current read.
Of course 0.7% means 2.8% — above the RBA target.
Looking under the hood a number of factors were at play.
Fuel prices were up 7%. We knew that already but they have gone up further in October.
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New dwelling purchase prices, or building costs, are losing the dampening effect of Homebuilder subsidies. These costs had risen around 5% over the last year but until now this was offset by the subsidy.
Property rates were also up 3%. Household items, usually flat or down, were up 3 to 4%. Maybe its transitory but time will tell.
The RBA next meets on Melbourne Cup day. What could have been a “nothing to see here” pre-race statement will be keenly watched.
Three days later the Statement on Monetary Policy comes out which will provide their updated forecasts.
No doubt the RBA will play down the impact of one number but inflation is already above their forecast for 2022.
Some upgrades will be required. The confidence in their “no rate rise till 2024” outlook will either be toned down or removed. It will be a step too far for now for 2022 to be in play for rate rises but surely 2023 should be.
In terms of their current policy actions there will be no changes for now. However Quantitative Easing is reviewed in February, before which we will have the Q4 CPI print.
Also, whether they keep the April 2024 bond at Yield Curve Control at 0.1% is debateable. They can change that any time and given they actually have to put their money where their mouth is with that policy, it may be reviewed sooner.
Overall we continue to hold inflation bonds in portfolios where we can and will continue to do so until the market prices in 2.5% inflation.
After these numbers that day is getting closer.
About Tim Hext and Pendal’s Income & Fixed Interest boutique
Tim Hext is a Pendal portfolio manager and head of government bond strategies in our Income and Fixed Interest team.
Tim has extensive experience in banking, financial markets and funding including senior positions with NSW Treasury Corporation (TCorp), Westpac Treasury, Commonwealth Bank of Australia, Deutsche Bank, Bain & Co and Swiss Bank Corporation.
Pendal’s Income and Fixed Interest boutique is one of the most experienced and well-regarded fixed income teams in Australia.
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Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management.
In 2023, Pendal became part of Perpetual Limited (ASX:PPT), bringing together two of Australia’s most respected active asset management brands to create a global leader in multi-boutique asset management with autonomous, world-class investment capabilities and a growing leadership position in ESG.