What investors may be missing in mid-caps | Takeover activity is picking up for ASX small caps | How active investing helps guide responsible data-centre growth

Rising bond yields have weighed on markets globally, but emerging markets have been more resilient than expected, argues Pendal’s emerging markets team

Key points:

• Emerging market currencies supported by strong real rates
• Environment remains supportive for selected emerging market equities
• Learn more about Pendal Global Emerging Markets Opportunities Fund

EMERGING markets have held up better than expected during the 2026 bond sell-off because their fundamentals are stronger this cycle: high real interest rates, improved government budget management and a weaker US dollar have lifted emerging market currencies and returns — leaving them less exposed to the fiscal fears hitting developed markets.

Higher interest rates, better government budget management and a weaker US dollar have lifted currencies and returns in emerging markets in recent times.

That’s been particularly the case in higher-yielding countries such as Brazil, Mexico and South Africa.

But how will the current global bond sell-off affect emerging market investors? Where are the opportunities and risks?

As most investors know, emerging market equities are highly influenced by global financial and economic conditions, including moves in global bond and currency markets.

Weaker bond markets and higher yields in developed markets – especially the US – can be a drag on the emerging market world due to higher global funding costs.

Meanwhile a stronger US dollar can tighten domestic liquidity, weaken currencies and force central banks to maintain higher interest rates.

But the current global bond sell-off may be developing differently.

Long-term yields have risen sharply across developed markets, with US Treasury yields close to three-year highs.

Japanese and UK yields have reached levels not seen for decades, as a combination of higher energy prices and inflationary pressures meet structural pressures from ageing populations and voters’ choices.

Different emerging markets, different outlook

Importantly, the pressure has not been transmitted uniformly across emerging markets.

Long-term yields in emerging markets have risen less than in developed markets and have shown a degree of resilience that exceeds what historical sensitivity to higher US yields would typically imply.

This is largely the legacy of more orthodox fiscal and monetary policy in emerging markets. The median emerging market now has a better medium-term fiscal outlook than the median developed economy.

Currency markets provide further evidence of this divergence.

US dollar-funded emerging market carry trades have generated positive returns for seven consecutive quarters, their longest run since 2008.

Returns have been strong from classic emerging markets carry trades such as Brazil, Mexico and South Africa, while US dollar weakness has more recently spread into Asian currencies, and the MSCI emerging market currency index is at a record high level.

Consequently, we are not convinced that higher global interest rates will mean tighter financial conditions in emerging markets.

With higher developed market yields reflecting fiscal risk, rising capital demand and increased term premia, we see a growing likelihood of weaker developed market currencies and capital outflows from developed markets into emerging ones.

Dollar matters more than rates for emerging markets

We continue to believe the direction of the US dollar matters more than the direction of US bond yields for emerging markets.

The Pendal Global Emerging Markets Opportunities Fund maintains significant exposure to Brazil, Mexico and South Africa, where high real interest rates and attractive carry have supported currencies and financial markets.

We also have meaningful exposure to liquidity-sensitive sectors across emerging markets, including investment real estate, investment banks, brokers and exchanges, alongside positions in gold miners within the materials sector.

Since the US dollar’s recent peak in January 2025, the MSCI Emerging Markets Index has substantially outperformed the developed market MSCI World Index, the S&P 500 Index and the NASDAQ Composite Index.

In our view, investors may want to consider remaining bullish on emerging markets, with a focus on carry trade economies and liquidity plays.

Frequently asked questions

Why have emerging markets held up better during the 2026 bond-sell off?

Emerging markets have been more resilient than expected because their fundamentals are stronger this cycle. High real interest rates, better government budget management and a weaker US dollar have supported currencies and returns — leaving emerging markets less exposed to the debt and deficit fears driving developed-market yields higher.

How do rising bond yields affect emerging markets?

Rising bond yields usually raise borrowing costs and pull capital toward developed markets. But strong real rates, better budget management and a weaker US dollar have helped emerging markets stay resilient through the 2026 sell-off.

Why do emerging markets perform well when the US dollar weakens?  

A weaker US dollar is one of the biggest tailwinds for emerging markets. Local currencies rise, equities lift, and US dollar-denominated debt becomes cheaper to repay. It also lowers import costs, helping to keep inflation and interest rates lower.

What is the outlook for emerging markets in 2026 and beyond?

The outlook for emerging markets is supported by China’s manufacturing strength and a weaker US dollar over the next few years. The main note of caution is around stretched valuations in AI chip stocks in markets such as Korea and Taiwan.

About Pendal Global Emerging Markets Opportunities Fund

James Syme, Paul Wimborne, Ada Chan and Roshni Bolton 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

Australian mid-caps may sit between the market’s giants and emerging small companies — but BRENTON SAUNDERS argues that is exactly where some of the most interesting opportunities can appear

In this video podcast, Brenton Saunders, portfolio manager of Pendal MidCap Fund, explains how the mid-cap universe differs from the broader Australian share market, with fewer dominant stocks and a broader spread of sector exposures.

He also discusses the major shifts reshaping the benchmark, from gold and lithium to infrastructure, AI-driven data centre demand and the rise of private superannuation platforms.

While opportunity is broadening, portfolio balance and disciplined stock selection remain critical.

Here is an excerpt from the video podcast:

“There’s a bunch of first order and then second order kind of ways you can do that. In the first order ways are most obviously the companies that are being asked to deploy this capital, namely contractors.

“We’re well represented in the contractor space in midcaps, generally always have been, but if you think about companies like Ventia, Downer, Worley Parsons are in the space, but we’ve had some great new additions more recently.

“Some of the second order ways of doing it is just upstream of that in some of the basic materials, again, that are being used to populate a lot of this infrastructure, and I guess I’m referring more specifically to the data centres.

“Copper plays a big role in that. Lithium will play a big role in storage for those kind of things. So there’s a bunch of first and second order ways to play that.”

Watch the video interview

Listen to the audio version

Here are the main factors driving the ASX this week according to Pendal investment analyst GRAEME PETRONI. Reported by portfolio specialist Chris Adams

• Find out about Pendal Focus Australian Share fund

RISING oil and bond yields gathered pace last week.

Brent crude rose 9%, bond yields increased 20-25 basis points (bps) and equities responded, falling 1-2% across most markets.

The key economic focus was the US consumer price index (CPI) where core inflation surprised to the upside and bond markets responded by increasing the odds of a rate hike at this week’s Federal Open Market Committee (FOMC) meeting.

But offshore equity markets reacted more positively on Friday night (Australian time) because the CPI detail left room for debate on whether it will be a prolonged hiking cycle.

The Australian market (S&P/ASX 300 -2.8%) underperformed the S&P 500 (-0.8%) and most other major European and Asian markets.

Domestically, RBA speakers focused attention on the need for local rate rises to contain inflation.

This brings renewed risk for a household sector already struggling with weak sentiment post-budget.

Oil

There is renewed concern at the prospect of persistently higher oil prices. Key issues are:

• Flows through the strait have improved but remain constrained.
• Renewed conflict brings risk, with news of an attack on the Saudi East West Crude Oil pipeline.
• China is back in the market buying crude.
• There is continued focus on falling reserves.

Looking first at flows through the strait, US Energy Secretary Chris Wright made comments suggesting a return to 17 million barrels per day (mb/d), which is on par with pre-conflict levels.

The US has been providing safe passage, clearing mines, and widening sea lanes – all of which is improving flows, but not back to pre-conflict levels. Market estimates are in the range of 7-10 mb/d, based on satellite analysis of ship-to-ship transfers.

In the near term, there is a risk that progress slows.

There have been press reports suggesting the US is now asking tankers to restrict passage to two time slots per day, which will vary by day, saying safety was no longer assured during nighttime passage.

The latest hope for easing tensions has shifted to a deal between Iran and Oman, who will meet members of the Gulf Cooperation Council to try and build support. The key issue is that the US has said it will not tolerate tolls.

There were also some negative developments outside the strait late last week.

First, Saudi Arabia officially confirmed temporary closure of its East-West pipeline, which typically facilitates the transit of ~5 mb/d, following a drone attack.

The extent of damage remains unclear, with Saudi Arabia not confirming fires that have been reportedly detected by satellite and instead describing the shutdown as precautionary.

It is therefore unclear whether the shutdown will last days, weeks or longer.

Second, Houthis have also seized control of the port city of Mocha and three islands in the Red Sea, giving them control over the Bab al-Mandeb, with a military spokesperson claiming the strait was safe for everyone except Saudi ships.

Even before tensions resurfaced in the Middle East, the oil price was rising with renewed purchases by China.

A sharp decline in its crude imports has been a key factor in helping contain the oil price response to the conflict-related disruption.

However, since June its crude imports have lifted from 7 mb/d to 9 mb/d in August, with the market watching whether this returns to pre-conflict levels of 10-12 mb/d.

Reserves have also been cited as a contributing factor for oil price moves, although they do not appear to be an imminent risk.

Over the past six months, US strategic petroleum reserves (SPR) have reduced from 413 million to 285 million barrels, which is a drawdown of 21 million barrels per month.

If that continued, there would only be 1.5 months before reaching the congressional minimum of 252 million barrels.

However, on a weekly basis the drawdown has started to slow significantly, from 7 million to 3 million barrels, with the latest read just 1.2 million.

While the SPR is in focus, it doesn’t appear likely to be a hard stop.

While oil prices dominate headlines, the move in refined products is equally stark with US diesel spreads (the difference between the price of a barrel of crude oil and that of an equivalent barrel of diesel) at all-time highs – from a range of US$30-40 for 2024-25, to over US$100 today.

During the week, there were comments from the CEO of Vitol (the world’s largest independent energy and commodity trading company) that only 1 mb/d of shipments through the strait relate to refined products.

He suggested the market was missing 2 mb/d day from each of the Middle East and Russia and highlighted that refined stockpiles were “pretty much at the bottom”.

Pressure on oil and refined product spreads is showing up in inflation prints. There has been little flow through to other prices. But further pressure will add to central bank concerns.

Bond yields

The oil price was fuel to the fire in bond markets, adding to concerns over persistent inflation, fiscal sustainability and AI investment.

The US Treasury tried to lean against what it viewed as liquidity issues at the long end, with a buyback program of US$5.19 billion during the week, up from an initially flagged US$2 billion.

But this wasn’t the shock and awe US$10 billion program that some had expected, and ultimately fundamentals dominated.

US two-year yields rose 26bps and 10-year yields were up by 19bps, to 4.97%.

US economic data

Kevin Warsh made some hawkish comments a couple of weeks ago at Jackson Hole.

He said he wasn’t worried about the labour market; inflation was the bigger concern, the personal consumption expenditures deflator (PCE) remained the preferred measure and underlying inflation needed to move towards 2% at sufficient speed.

However subsequent Fed speakers have been more cautious, so the data was always going to be crucial.

The producer price index (PPI) came out first showing the impact of energy prices with headline inflation 0.4% month/month versus consensus at 0.3%.

Core PPI ex food, energy and trade was in-line with expectations at 0.3%, although there was pressure in components relevant to the PCE like airfares and hospital services.

This placed some small upward pressure on PCE forecasts.

CPI was more relevant as it accounts for a larger proportion of PCE components.

Heading in, the market view was that a core CPI (ex food and energy) of 0.3% month/month would force the Fed to hike – and core did indeed print stronger at 0.29% month/month (versus consensus at 0.2%) and 2.45% year/year.

This prompted the market to lift the odds of a September hike to 85-90%, after dipping as low as 51% following Fed Governor Christopher Waller’s comments a week earlier.

However, the equity market responded positively, perhaps because the detail left room for debate on whether it will be a prolonged hiking cycle, as is currently priced into bond markets.

One category – communication services – added ~0.1% to core CPI, with a one-off boost from AT&T repricing legacy plans. If not for that, CPI would have been 0.2%.

Core goods inflation was contained at 0.1%, which is important as it suggests no flow-through of higher oil prices.

Having said that, if energy prices are elevated, there will be renewed pressure on headline inflation.

EU economic data

The ECB delivered an expected 25bp hike to 2.50%. This is the upper end of the neutral range but revised economic forecasts suggest more work is required.

Inflation is expected to remain elevated through 2027 and 2028, even under the ECB’s baseline scenario which had been based on inputs in mid-August – current energy markets are closer to the “adverse” scenario.

The result was an increased likelihood of a further hike, with the market now pricing a 50% chance of a hike in October and 90% by December.

China economic data

China CPI and PPI data was released.

CPI picked up modestly to 0.8% year/year reflecting higher energy prices.

The 3.8% year/year lift in PPI was more notable, affected by energy and semiconductor prices.

The contrast between CPI and PPI highlights China’s K-shaped economy with weak domestic demand and continued strength in exports.

Trade data released during the week remained strong, with August exports +25% year/year, supported by AI and green technology (including EVs/hybrids, batteries, solar).

Australian economic data

Westpac’s consumer sentiment survey dropped 5% to 84.4, versus a long-term average of 100.

This unwound gains from a month earlier, reflecting the renewed outlook for rate rises.

The survey highlighted weakness in family finances versus a year ago, with more negative responses from homeowners, particularly those with a mortgage.

The latest house price data from Cotality has Sydney house prices down 7.5% from the peak six months ago.

The deterioration in NAB’s business survey was even more stark, with conditions down 5 points to a reading of -1, the lowest level since August 2020.

The survey had previously remained relatively robust despite higher oil prices and interest rates, but there are now more signs of margin being squeezed by input costs.

Conditions deteriorated for six of eight industries and for almost all states, with trends most negative for retail, manufacturing and Victoria.

Despite weak surveys, RBA speakers quickly returned the focus to inflation and suggested further tightening might be needed.

Chief Economist Sarah Hunter gave a fireside chat at a property conference and Deputy Governor Andrew Hauser appeared on the 7:30 Report.

Both talked about inflationary pressure from the Middle East and about demand running above a supply constrained economy, with Hauser also referencing pressure from the AI build out.

Hauser was particularly vocal when talking about people across the country being furious about persistent inflation and said the Board was alive to the risk of inflation taking too long to return to target.

Declining house prices were referenced by both but viewed as a partial offset to inflationary pressures.

The market is now pricing a 76% chance of rate rise in September and a 77% chance of a further rise over the next six months.

Australian markets

Macro dominated market moves. Energy (+2.3%) was strong on oil prices, while insurers were strong on higher bond yields.

Gold and lithium stocks came under commodity pressure plus some stock specifics, while software and platforms came under pressure following OpenAI’s launch of GPT-6 Astra.

Merger and acquisition activity is returning to the smaller end of the Australian share market, as buyers look through short-term uncertainty and focus on mispriced assets. Pendal’s LEWIS EDGLEY explains

• Small-cap M&A is accelerating amid mispricing
• Buyers see value in quality industrials
• Find out about the Pendal Smaller Companies Fund

AFTER several years in which small caps have lagged their larger peers, valuation gaps have become hard to ignore — and strategic buyers and private equity appear increasingly willing to act.

Lewis Edgley, co-portfolio manager of Pendal’s MicroCap Opportunities and Smaller Companies funds, says the recent pickup has been striking.

“We observed around 15 small cap bids or approaches in the eight weeks to the end of August,” he says. “This was a huge pickup compared to this level of M&A activity we’ve seen in the preceding year.”

The activity has been broad but not evenly spread.

Edgley notes that 10 of the 15 approaches were for industrial companies, the remainder were in resources.

That split reflects where buyers are finding value: in quality industrial businesses that have been de-rated, and in resource names benefitting from stronger commodity momentum.

Where bidders see hidden value

Among the industrial names attracting interest, FleetPartners has been one of the clearest examples, according to Edgley.

The fleet leasing business received an initial proposal at $3.60 a share, representing a 27 per cent premium to its last traded price, before the situation developed into what Edgley describes as “a four-party bidding war with subsequent bids as high as $4”.

While the stock is trading around $4.20, above the initial bids, he says the small caps team sees meaningful further upside from here.

“Our view of value sits in excess of the current share price, but the ultimate price will be a function of where the current bidders see value. We expect this to become evident in coming weeks.”

Other companies that have caught buyer interest include Peet, which received a cash-and-scrip proposal from Ingenia; Austal, where an offer for its US business highlighted significant value in the remaining Australian operations; and SkyCity, which disclosed approaches it considered too low and opportunistic.

Edgley also points to AUB Group and Iress as businesses where potential M&A optionality remains, while stressing that the investment case for both does not rely on a takeover.

“We think that M&A is not over, there’ll be continued activity,” he says.

“When we look at our own fund, we think about where we are likely to see bids come from. We think both Iress and AUB Group for us are obvious candidates for future M&A.”

Both businesses have been approached previously, but a takeover didn’t progress for one reason or another.

However, Edgley says the potential for another takeover approach is strong given the strategic nature of the assets as well as a “significant amount of valuation upside”.  

“AUB is now the sole listed insurance broking business on the ASX. There were three, but over the last two years Steadfast and PSC Insurance have been taken out.

“It is important to note, our thesis on both AUB and Iress does not rely on M&A and a takeover – we just see this as upside optionality.”

Pendal holds investments in FleetPartners, Austal, SkyCity, AUB Group and Iress.

Why small caps look ripe for re-rating

The backdrop is a market where small caps have materially underperformed large caps.

“We’ve seen small caps underperform significantly for the last couple of years versus large caps,” Edgley says. “The valuation divergence has become even more significant.”

He adds that small caps are trading close to one standard deviation cheap relative to their long-term average, and a full standard deviation below large caps on a relative basis.

“When there is mispricing of stocks in public markets, eventually there’s always another buyer out there that will look to take advantage of that,” Edgley says.

Here are the main factors driving the ASX this week, according to portfolio manager RAJINDER SINGH. Reported by investment specialist Chris Adams

• Find out about Crispin Murray’s Pendal Focus Australian Share Fund

EQUITY markets are holding up despite higher bond yields and a resurgence in the US-Iran conflict, which pushed up energy prices (Brent crude +7.8%).

Last week was relatively quiet for US data after a very strong earnings season.

Strong manufacturing and jobs numbers, along with broad growth in corporate profits, indicates that the US economic growth continues to be robust despite numerous headwinds.

The S&P 500 was largely flat for the week (+0.1%).

In Australia, the release of credit and quarterly GDP figures showed that while the economy has been travelling okay, there are signs of slowing in areas such as housing.

Weak productivity growth means the economy is operating close to its speed limit and presents the RBA with a dilemma in deciding whether to raise rates again.

The S&P/ASX 300 fell 0.4%, however we saw dispersion in the performance of various market components.

Large caps held up (S&P/ASX 20 -0.2%) while midcaps and small caps were weaker (S&P/ASX Midcap and S&P/ASX Small Ordinaries both -0.9%).

At the sector level Materials (-3.6%) and Technology (-5.1%) were weak while there was rotation into other sectors such as Financials (+2.0%) and Consumer Staples (+2.1%).

Macro and policy US

Statements from Federal Open Market Committee (FOMC) members John Williams and Christopher Waller were scrutinised to give an indication of the central bank’s next move.

Williams stated that there is evidence inflation continues to ease as the tariff impact fades, with higher energy prices not spreading into other services, while Waller said he would support holding rates steady if price pressures keep easing.

The Fed’s decision is likely to be heavily influenced by August inflation data which is due on Friday this week.

It is worth noting that despite the rise in two-year yields, the spread of this to the Fed Funds rate has moved higher – but is not significantly more than previous periods.

This can be seen with the market now only pricing one hike this year and another by early 2027.

In other US releases, the August ISM Manufacturing PMI slipped to 54.6 from 55.6 (consensus 55.2), however this comes after the recent reading in July which was the highest index level since May 2022.

As activity continues to expand, these numbers suggest that the manufacturing sector in the US is running quite strong.

The BLS employment report was also strong, with nonfarm payrolls up 162,000 month/month in August and upward revisions of +55,000 to prior months.

Job gains were broad-based with healthcare continuing to be a key contributor to US job growth but there were also increases in the construction, manufacturing, and leisure and hospitality sectors.

US payrolls have clearly moved past the trough of late 2025 and led to a decreasing unemployment rate this year

Macro and policy Australia

The Private Sector Credit statistics from APRA unsurprisingly reflected a slowdown in credit growth, given recent changes to the housing sector.

Overall credit still grew a healthy 0.4% in July (+8.4% year/year) with continued strong business growth of 0.6% (+10.0% year/year) offsetting slowing housing growth of 0.2% (+6.7% year/year).

Within housing, Investor mortgages slowed down to only +0.1% in July, while Owner Occupier grew 0.3%.

Major bank economists are now forecasting mortgage growth to slow to between 2.5% and 5.0% per annum, with recent updates shifting towards the lower end of the range as the housing downturn continues.

Elsewhere, the National Accounts from the ABS showed real GDP grew a modest 0.4% in the June quarter, which was a touch above consensus.

Annual growth was a solid 2.1% which was notably above both consensus and RBA expectations (+1.8% and +1.9% respectively).

However, there was evidence that the economy is slowing with the last two quarters annualising to just over a 1% growth rate.

Despite the negativity around the Middle East conflict, houses and inflation, households did not curb consumption – including discretionary spending which rose 1.4% in the June quarter. A key component of this household expenditure growth was a lift in vehicle purchases by 10.3%.

Private business investment continues to be strong, and this component alone added 1.2% – or just over half – of overall annual growth. This is being driven largely by data centres and related energy investment.

A more concerning aspect was that while income for wage and salaries is solid +6.2% (and so supporting the previously mentioned household consumption), productivity continues to be weak. This actually was negative for the quarter, continuing its anaemic pattern of previous periods.

Overall, commentators saw this as evidence that the economy is operating near its potential speed limit and this, with the weak productivity outcome, supports the case that the economy needs to slow for CPI to return to the RBA’s target.

The upshot is that the market is now pricing roughly a 60% chance of a rate hike at the September meeting and a rate hike is fully priced in by November.

Speeches from the RBA’s Deputy Chair Andrew Hauser and Chief Economist Sarah Hunter next week could provide an indication of the RBA’s thinking.

Elsewhere, it was interesting to note the VFACTS report on new car sales for August 2026.

New vehicle sales grew 4.9% year/year in August 2026, with Chinese and Electric cars strong as light commercial vehicle/four wheels drive sales remained weak.

The headline grabber was that EVs outsold petrol cars for the first time with more than 27,000 EVs sold over the month compared to 25,000 petrol cars.

The record 24.9% for EV share of sales is up from around 8% in 2025 and just 1.9% in 2022.

Government subsidies, a sustained rise in fuel prices and a lift in cheap Chinese imports continue to transform the country’s car market.

Macro and policy global

Last week China’s official manufacturing PMI rose 0.6 to 49.8, above consensus expectations at 49.5.

Meanwhile, the non-manufacturing PMI was steady at 49.0.

Overall, this led to a slight increase in the composite PMI to a neutral 49.5.

In comparison, Japan’s July monthly data was largely encouraging with both industrial production and retail sales exceeding expectations. Industrial production rose 4.1% year/year, supporting a robust pick-up in the economy.

Markets

It is worth recognising the remarkable results of the recently concluded US reporting season.

Over 86% of S&P 500 companies beat earnings expectations, with strength broad-based across sectors, though tech and energy led.

The overall quarterly EPS surprise was 24% in aggregate – a result not seen since the recovery from the Covid-induced recession. 

Earnings expectations are typically revised downwards through the year – however expectations for both 2026 and 2027 continue to inflect upward.

When looking at the underlying components of earnings, estimates for the median stock have risen across top-line revenue growth, bottom-line earnings, as well as for free cash flow, highlighting the underlying strength of earnings growth.

September is typically seen as a weak month seasonally for US stock returns. However, whenever there has been a strong eight-month YTD performance in August (and the market is +13% thus far in 2026), the final four months tend to finish quite strong.

The US market continues to be quite rotational in terms of the best performing sectors.

In particular, we have seen the most recent relative highs coming in the healthcare and resource sectors.

Fixed income

Despite concerns the funding requirements for AI are driving up global interest rate costs, there has been very little move in the more sensitive corporate spreads – for example BofA BB US High Yield Spread

In terms of the fear that the world is reluctant to finance the US deficits, it is worth noting that foreign holdings of US treasuries have actually continued to increase, with sharp increases from 2020 onwards from places such as the UK, Belgium and Canada.

However, the mix has changed; there has been a shift from public holders to the private sector, as well as the reduction in Chinese holdings being offset by an increase in European holdings. 

Australian equities

July monthly activity for the banks showed the start of a slowdown in mortgage credit – particularly investor loans, which dropped from 10% to 6% on a one-month annualised basis.

However, July is seasonally weak. The bigger test will come in August, given the two-to-three-month lag between lower applications post-budget and borrower drawdowns.

Through reporting season, major banks highlighted a 15-20% reduction in mortgage applications. NAB suggested this would translate into mortgage credit growth of 2.5%.

CBA was more hopeful of ~5% but its economics team has since downgraded the outlook for house prices and is due to update its mortgage growth forecast.

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About Rajinder Singh and Pendal’s responsible investing strategies

Rajinder is a portfolio manager with Pendal’s Australian equities team and has more than 18 years of experience. Rajinder manages Pendal’s sustainable and ethical funds, including Pendal Sustainable Australian Share Fund.

Pendal offers a range of other responsible investing strategies, including:

• Pendal Sustainable Australian Share Fund
• Crispin Murray’s Pendal Horizon Sustainable Australian Share Fund
• Pendal Sustainable Australian Fixed Interest Fund
• Pendal Sustainable Balanced Fund
• Regnan Credit Impact Trust

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

How active investing helps guide responsible data-centre growth | How to build defensive income portfolios | Where fixed income can make an impact

Australia’s latest national accounts paint a mixed picture of the economy. Pendal head of government bond strategies TIM HEXT highlights the five key takeaways — and what they could mean for markets and interest rates

• Mining states are outperforming, consumer spending is holding up and private investment should recover
• The data reinforces the case for a near-term RBA rate hike
• Find out about Pendal Government Bond Fund
• Browse Pendal’s fixed interest funds

1. Mining states are doing well, non-mining states are not.

Queensland (+1.1%) and Western Australia (+1%) continue to benefit from healthy commodity prices.

NSW (flat) and Victoria (-0.3%) remained weighed down by cautious consumers and falling public investment as governments look to tighten their belts.

Source: Australian Bureau of Statistics

2. Consumers are doing OK overall (led by buying of EVs).

Final consumption expenditure grew 0.5% overall (government 0.6% and private 0.4%).

Record growth in EV sales was half of the private consumption growth. A mild winter held back energy spending and Middle East worries meant fewer overseas trips.

3. Private investment was flat after a massive Q1, but will pick up ahead.

The theme of massive data centre investment remains in place but took a breather in these accounts.

We expect it to pick up again in the second half of the year although dwelling investment will remain under downward pressure, especially if the RBA hikes rates.

Source: Australian Bureau of Statistics

4. Income growth remains too high for RBA comfort.

Compensation of employees, a wider measure than the Wage Price Index (WPI), grew by 1.5% in the quarter. Private sector growth was 1.4% and Public 1.8%. Health led the way as large-scale pay rises hit in NSW, Victoria and Queensland.

Unit Labour costs, stripping out the extra hours worked, increased by 1.2% and 3.6% annually, higher than the WPI suggests.

5. Trade was a positive contribution for the first time in two years but will continue to drag going forward.

GDP measures net trade, or volume of exports minus imports. Less overseas trips (an import) and reduced imports of AI related products meant a positive contribution this quarter.

Unless things worsen in the Middle East these should prove temporary.

In fact, Australia has regressed back to business as usual as the current account deficit is again 3% of GDP. Our net foreign debt position means higher interest servicing costs as rates rise globally.

The brief COVID induced (2020 to 2023) balance of payments surpluses are receding into the sands of time.

Even our balance of trade is now in deficit for the first time in a decade (this is revenue based, not volume based as per GDP so is impacted by terms of trade).

What the National Accounts mean for markets

While only slightly higher than RBA expectations, today’s national accounts will do nothing to stop the likely rate hike from a recent uptick in inflation.

The RBA narrative of tight supply means that 2% annual GDP, a modest number historically, is now seen as a stronger not weaker number.

Markets will remain buffeted by oil price moves but the Q3 trimmed mean CPI number in late October, likely to be 1% versus 0.8% RBA expectations a month ago, is likely to bring a November RBA rate hike, which is now fully priced.

Even September is now above 50/50 expectations, and the debate at the September RBA meeting should be very robust.

If you’d like to hear more about how Pendal’s Income & Fixed Interest team is positioning for this environment, please contact us through our accounts team

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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.

Find out more about Pendal’s fixed interest strategies here

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About Pendal

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.

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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

US FEDERAL Reserve Chair Kevin Warsh used his Jackson Hole speech to re-establish his inflation credentials, signalling a clear focus on the 2% target – as measured by the current favoured personal consumption expenditures (PCE) deflator.

He also noted that inflation needs to come down at sufficient speed and implied this was not yet the case.

The odds of a September rate rise rose as a result, driving up two-year Treasury yields.

The great bond debate continued, with Treasury Secretary Scott Bessent highlighting more mechanisms to hold yields down.

The bond market responded via high-profile investor Stanley Druckenmiller who, in a Wall Street Journal op-ed, pointed out that suppressing yields doesn’t solve the problem of unsustainable spending, which is a political issue.

The 10-year yield ended flat for the week.

Equity markets were relatively flat, with good corporate news (e.g. Nvidia and Salesforce in US) and lower oil prices (Brent crude -5.4%) being offset by rising bond yields. The S&P 500 finished +0.5%, the NASDAQ +0.9% and the S&P/ASX 300 +0.5%.

Australian reporting season reached its peak. Overall, we saw decent results in an economy that is slowing gradually.

The large supermarkets had decent performance and resource stocks continued to rally (although a tougher Warsh on Friday night may see this reverse).

Poor domestic consumer price index (CPI) data raised the likelihood of rate increases here and affected rate-sensitives like the REITs.

Macro and policy US

Kevin Warsh used his Jackson Hole speech to stop digging a hole on policy direction and restore confidence that he was committed to achieving the Fed’s inflation target.

He clarified two points, which had caused confusion in his last press conference. He noted:

1. The inflation target is 2% on the PCE deflator, i.e. he is not currently moving the goal posts, saying it was the “fixed, firm target”.
2. The active instrument of policy is the Fed Funds rate (“the predominant tool”), i.e. he won’t just let the bond market do the work of tightening policy if that is what is necessary.

He also set a moderately hawkish message on near-term rates, saying:

• The FOMC “must be confident that underlying inflation is moving to our objective, clearly at sufficient speed”.
• Underlying data trends over the summer, while better, did not indicate that inflation trajectory had meaningfully improved. He noted 54% of items in the PCE basket had price rises above 3%, which compares to an average 32% in the 20 years pre-pandemic. The inference is that more good news on inflation is needed to avoid a rate hike.
• He noted that the economy was proving resilient.
• He said that it would be hard to make a case financial conditions were restrictive.

His timeline is unclear, but the market conclusion is that the September meeting is ‘live’ and the market has priced a 57% chance of a hike, up from 40% last week.

He also provided more colour on his philosophy, notable points being:

• Avoid communication distorting the pricing signals from the market, which he views as being important inputs as to what is happening in the economy.
• More focus on trends in underlying inflation so policy can be more forward-looking.
• The need to understand supply-side factors to assess the consequences of demand.
• A view the Philips curve does not exist, i.e. there is no trade-off between employment and inflation.
• Money supply can provide a perspective on the inflation outlook.

Elsewhere, headline PCE inflation was a bit higher than expected at +0.2% month/month and 3.7% year/year, while core was in line +0.2% month/month and 3.3% year/year.

This didn’t budge from a level which is considered too high, so was no help for Warsh; but equally it was not any worse, so there was no incremental impact on policy.

Personal income and spending data showed a slowing in spending in July, with the savings rate bouncing to 3.0% from 2.7% but still well below the 4.5% in August 2025.

It appears consumers used savings to buffer the initial impact of the Iran conflict and were now using income growth to rebuild savings rate.

Bond market

We previously noted Secretary Bessent’s jawboning of the bond market, where he talked about how the Treasury can increase the level of buybacks at the long end on the yield curve.

The goal was to provide a cap on yields, however the one-day drop in yields was quickly reversed, leading him to escalate his commitment last week by pointing to their ability to draw upon the firepower of the Treasury General Account (TGA).

This is potentially material. The buyback is around US$15-20 billion per quarter, against US$400 billion+ of 20+ year annual gross issuance. It also compares to the QE run rate of $240 billion per quarter.

However, the TGA is currently US$967 billion compared to a Janet Yellen-era level of US$550-600 billion and policy floor of US$150 billion.

So they could credibly use up to US$200 billion i.e. US$50 billion/quarter.

There was what some saw as a rebuke of Bessent from Stan Druckenmiller in his WSJ op-ed, noting that intervening in the bond market was not resolving the fundamental problem that the US deficit is too large and unsustainable.

Given an apparently close relationship between Bessent and Druckenmiller (and Warsh, for that matter), the better reading of this was a message that the onus on solving this problem was on the political system, not the Treasury secretary, and may be an indirect signal Bessent wanted to give on that issue.

There are other tools available to Bessent, the most relevant being a shift in the issuance mix which currently has 24% slated to 10+ year maturities (11.6% being 20 and 30 year), which is US$924 billion gross issuance in the next 12 months.

Historical precedent suggests the 20- and 30-year issuance could be cut to 8%, which would reduce supply US$136 billion per annum i.e. US$34 billion/quarter.

So, on paper he has tools that could equate to reducing supply US$100 billion/quarter – which is significant.

We believe the goal is not to meaningfully drive yields lower, but to hold the line at 4.70% and flush the shorts out of the market, taking away a left tail ‘bond crisis’ risk to the economy and the Presidency.

Our view is that they are likely to achieve this and bond yields won’t derail equities.

Macro and policy Australia

July monthly CPI data was worse than expected with headline +1.02% month/month and 3.5% year/year (versus 3.3% expected) and trimmed mean +0.49% month/month and 3.6% year/year (versus 3.5% expected).

The monthly trimmed mean number was the highest since July 2025 and puts pressure back on the RBA to raise rates.

Anecdotally through reporting season companies have said they are subject to cost pressures, be it wages (4.75% set by Fair Wage Commission), regulatory and/or construction costs and are looking to pass these on to consumers.

Markets

The US market was focused on the Nvidia result, which was well received, although the stock only ended up 1.3% for the week, with semis overall down 2%.

The key news was:

1. Revenue growth was strong. The July quarter was 5% more than expected, growing 18% quarter/quarter and 106% year/year. It was the third quarter of acceleration in the year/year number.
2. The company provided revenue guidance for its FY28 (February 2027 to January 2028) at +70%, which was at the optimistic end of market expectations. It says this is supply constrained and understates true demand.
3. Nvidia clarified gross margin outlook for FY28 of 72-73%. This had been a concern for the market given input cost inflation and was down on current year (75% in Q2), but the certainty it provided alleviated downside concerns.
4. The company provided more detail on the breakdown within its data centre business between Hyperscalers and AI clouds/industrial & enterprise (ACIE). The former is slowing and more vulnerable to substitution, the latter is growing faster driven by neoclouds and is more reliant on NVDA.
5. There was more clarity on financial arrangements to address the circular financing concerns. Nvidia disclosed investments of US$50 billion in frontier AI labs. Also, it has now provided US$366 billion of financial commitments for customers, the clear largest proportion is US$279 billion for supply commitments (mainly memory) up from US$119 billion in Q1. There is also US$29 billion for cloud service agreements, US$25 billion for DC leases, US$25 billion for equity investments and US$5 billion for capex. There is an additional US$108 billion for other guarantees. The company is forecast to make pre-tax profit of US$269 billion in the current FY and US$456 billion next year.

The relevant inconsistency coming out of this result is the gap between Nvidia’s revenue growth expectation of 70% in CY27 and the market’s forecast hyperscale AI capex spend growth of 36%.

Bears will say that the customers will not have the cashflow to fund the 70% forecasts of Nvidia. The bulls say the acceleration in revenue and profitability we saw in Q2 suggests that they are getting the pay-back and will spend the money.

Looking at the rest of the US market, we continue to see the recovery in healthcare, which is transmitting across to our market, with the sector leading the ASX +18% for August.

We are also seeing a continued move in software (+6% for the week), with a catalyst from the Salesforce (+22%) result, at which the company launched its Claudeforce product with Anthropic. This sees Claude become the reasoning layer inside Salesforce products.

The message is that by embracing the models Salesforce preserves its franchise, as enterprise (large, complex businesses) finds it too difficult to build the tools over Claude to get the insights that Salesforce provides.

Many will see this as a potential stay of execution; however it highlights that the most extreme concerns for software have not materialised.

The iShares Software ETF (IGV) has almost recaptured its November 2025 highs, while Salesforce is 70% off its June lows and within 3% of its level on 1^st January 2026.

We have not seen the same recovery in Australian software names. Xero (XRO) is still -25% calendar year-to-date, while Wisetech (WTC) is -40%.

Part of this is stock specific issues at WTC, but for XRO the concern is the type of business. XRO focuses on small companies rather than enterprise, suggesting there is less complexity to shift software vendors.

However, we believe a similar benefit exists in utilising AI through the software vendor – particularly the one acting as your system of record and understanding your workflow processes.

Australia

The market ground out a small rise (S&P/ASX 300 +0.5%) over the busiest week of reporting season, which was a good outcome given the shift in the outlook for interest rates.

Resources (+2.2%) and Consumer staples (+1.5%) led the market, with REITS (-1.8%) underperforming, mainly on the increased probability of a rate rise.

Themes from results last week were:

1. Supermarkets had solid performance, managing costs and see reasonable sales momentum.
2. Strong dividends out of the resource sector and fuel refining/distribution stocks, highlighting good capital discipline.
3. Some industrials are managing a tough environment on higher input costs relatively well; Ansell (ANN) beat expectations, Qantas (QAN) and Virgin (VGN) are containing the fallout from higher fuel, while Nine Entertainment (NEC) is dealing with subdued advertising.
4. Some companies are struggling to adapt to structural challenges and revenue headwinds (e.g. Endeavour (EDV) and Sonic Healthcare (SHL).

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 flagship Pendal Focus Australian Share Fund is a high-conviction equity fund with a two-decade track record 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

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