What property investors should know about the CGT reset | Data centres spark small cap opportunities | The ASX midcaps tipped to benefit from retirement shake-up

The Federal Budget’s proposed changes would reduce the after-tax appeal of investing in established residential property, argues Pendal’s JULIA FORREST.

• CGT discount replaced; indexation plus 30 per cent floor
• Negative gearing removed for new existing-home investors
• Find out more about the Pendal Property Securities Fund

THE Federal Budget’s 2026 package targets two of the biggest tax settings underpinning residential property investment – negative gearing and the capital gains tax (CGT) discount – in a bid to shift investor demand away from established dwellings and toward new housing supply.

The negative gearing change is proposed to apply to purchases of existing residential property where the contract is entered into after 7:30pm on 12 May 2026. The CGT changes are proposed to apply from 1 July 2027, giving the market a lead time that could influence investor behaviour well before the start date.

What’s changing

Under the proposal, negative gearing concessions would be withdrawn for investors buying existing residential property from 7:30pm on 12 May 2026. Existing negatively geared investments in residential property are expected to be grandfathered until disposal.

From 1 July 2027, the long‑running 50 per cent CGT discount would be replaced with an inflation indexation approach, so tax is levied on real gains, with a minimum 30 per cent tax rate payable.

Residential property investments held at 1 July 2027 and sold after that time will have the gain that accrued up to 1 July 2027 treated under the 50 per cent CGT discount method and the gain that accrued after that time to the date of sale will be treated under the indexation method.

The 30 per cent minimum tax would apply to the indexed gain.

For investments in new residential properties from 1 July 2027, investors will be able to choose either the 50 per cent CGT discount, or the indexation method with the minimum tax 30 per cent tax rate.

How it may hit investor returns – and prices

By reducing the after‑tax value of losses and capital gains, the Budget proposals lowers what an investor will rationally pay for established stock.

“As an incoming purchaser will not benefit from the preferential tax treatment it is possible this will be reflected in a lower price paid,” says Julia Forrest, co-portfolio manager of Pendal Property Securities Fund.

“Treasury estimates house price growth to be 2 per cent lower as a result.”

A likely behavioural response, according to Forrest, is a tilt toward longer holding periods, particularly where investors aim to spread transaction costs and the new CGT settings across a longer timeframe.

Winners and losers: New supply in focus

While the negative gearing changes only apply to existing residential property and won’t impact other asset classes, the CGT changes apply to all investments.

Forrest says the minimum 30 per cent CGT tax rate on indexed capital gains may work in favour of dividend stocks over growth stocks.

Meanwhile, the favourable tax treatment benefit for new residential property that genuinely adds to supply should support residential property developers.

“The new rules redirect investor capital away from established property. We note that only 5 per cent of new investor lending finances new builds so this may change the flow of credit,” explains Forrest.

“The changes genuinely seek to increase the supply of housing which ultimately is a positive outcome.

“However, slower house price growth may impact discretionary spending, with the lower wealth effect.”

Forrest says the Pendal Property Security Fund is weighted towards residential developers of affordable dwellings, land lease developers and non-discretionary retail and malls.

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Australia’s AI moment is arriving – and the data centre build-out is the tell. Pendal Smaller Companies Fund portfolio manager PATRICK TEODOROWSKI outlines what is driving the surge and where the opportunities are emerging

• Data centre builds surge in Australia
• Small caps, copper and uranium stand out
• Find out about the Pendal Smaller Companies Fund

THE boost in growth and investment from the large hyperscalers in the US has been evident for some time, but in just the past couple of weeks, two data centre providers alone have announced 50 per cent growth in Australian data centre capacity.

NextDC (ASX:NXT) announced a 250-megawatt contract, with a planned capex spend of $4 billion in 2027, and CDC Data Centres secured Australia’s largest ever data centre contract – a 555-megawatt deal, also with a planned $4 billion capex spend in 2027.

Morgan Stanley estimates around $8-10 billion in data centre capex will be spent out to the end of the decade, but Pendal Smaller Companies Fund portfolio manager Patrick Teodorowski believes that the actual amount could be materially higher.

“We think they’ve massively underestimated the amount of spend that’s happening,” Teodorowski says.

Pendal research estimates that up to $100 billion in data centre capex will be rolled out between 2026 and 2030.

“If you average that out, it’s $25 billion per annum that needs to be spent for them to meet those targets,” explains Teodorowski. 

The Australian data centre market is tipped to reach 3,700 megawatts by 2030.

“The surge in growth and investment from the large hyperscalers out of the US is going to go from about a quarter of a trillion dollars a year to over a trillion dollars, and it feels like finally Australia is going to join the party,” says Teodorowski.

“This is something you have to pay attention to. This is going to throw up a lot of investment opportunity.”

The biggest components of a data centre build are the electrical and cooling.

“Sixty to 80 per cent of the site capital expenditure is actually on electrification and cooling, and we think we’ve found some interesting opportunities that will benefit from that,” says Teodorowski.

Where small caps can plug into the build-out

One of those opportunities is commercial construction company Shape (ASX:SHA), which provides fit-outs, remedials and new build solutions.

Historically Shape had a large presence in the office space, but the company has now won a number of data centre fit-out contracts.

For one of the company’s builds, Shape subcontracted Southern Cross Electrical (ASX:SXE).

“Southern Cross Electrical does about $150 million of revenue per annum. The company is seeing an immediate opportunity pipeline of up to a billion dollars,” notes Teodorowski.

“So today it’s about 15 to 20 per cent of their business, but we can see that growing significantly and being the primary driver for their growth over the next three years.”

Another small cap catching the tailwinds of the AI capex explosion is NRW Holdings (ASX:NWH) thanks to its acquisition of electrical and mechanical contractor Fredon about a year ago.

“About a third of their business is within data centres, and they’ve recently made some announcements. They’re building data centres for the Australian Defence Force at a number of sites across Australia, and they also build for the private sector as well,” says Teodorowski.

Pendal Smaller Companies Fund holds a position in SHA, SXE and NWH.  

Copper and uranium in focus

The rapid rise of data centres will, in turn, also significantly increase power demand.

Some analysts estimate power demand across the US will double from 6 per cent to 12 per cent over the next five years.

Teodorowski sees similar growth in Australia. Alongside that is the necessary network to support that surge in power demand. That’s where copper becomes a big part of the story.

Copper demand is forecast to grow more than 50 per cent over the next 10 to 15 years at the same time production is heading in the opposite direction.

“Growing copper production has been something that’s been very troublesome over the last decade,” explains Teodorowski.

“This year, I think the forecast is for declining copper production, and the number of large-scale discoveries has been in decline for decades. So we think it’s a very good setup for that commodity.”

This means producers like Capstone Copper (ASX:CSC) and Develop Global (ASX:DVP), and small caps with high-grade projects of significance like Firefly Metals (ASX:FFM), will likely be among the beneficiaries of this thematic.

The push for cleaner baseload power is also driving an increase in commodities like uranium, particularly across the US where several major tech companies are sourcing clean energy to power their operations.

Microsoft agreed to spend US$1.6 billion for a 20-year supply of power from the restarted Three Mile Island nuclear power facility. Meta, meanwhile, inked a 20-year power deal with Constellation for its data centres, and Amazon has agreed to buy up to 1,920 megawatts of nuclear power from Talen.

This is set to benefit companies like Paladin Energy (ASX:PDN) – the largest ASX-listed uranium producer, Nexgen (ASX:NXG), which owns the largest undeveloped global uranium deposit, and emerging producer Bannerman Energy (ASX:BNM).   

Pendal Smaller Companies Fund holds a position in CSC, DVP, FFM, PDN, NXG and BNM.

Here are the main factors driving the ASX this week according to Pendal portfolio manager JIM TAYLOR. Reported by portfolio specialist Chris Adams

• Find out about Pendal Focus Australian Share fund

THE key building blocks of the positive investment backdrop remain in place.

First, the US labour market continues to hold up very well, with minimal signs of AI disruption leading to job shedding.

Second, April retail sales suggest the consumer remains resilient with tax refunds bolstering economic activity.

Absent the Iran conflict, it is highly likely we would have been upgrading economic growth on the back of consumer strength, the uptick in manufacturing, and the stimulus from AI spending.

The main dark cloud is the prospect of higher inflation as surging energy prices flow into the far corners of the economy.

An incredibly strong 1Q26 US reporting season – where earnings grew 28% – reflects the strength of underlying activity and the commensurate ability of corporates to pass through higher costs into the consumer base.

The hottish US producer price index (PPI) data last week partially undermined the positive narrative and saw the market shift to expectations towards an interest rate hike over the course of the year. US 10-year bond yields rose 23 basis points (bps), while the S&P 500 gained 0.2%.

Domestically, the budget was well flagged but does have the possibility of stifling housing activity. On an economy-wide perspective, this could overwhelm the benefits to the first homebuyers the government is attempting to assist. The S&P/ASX 300 was off 1.2% for the week.

US President Donald Trump’s visit to Chinese President Xi Jinping has come and gone with pronouncements on Boeing sales, a Board of Trade and Investments, and some additional agricultural and energy purchases. But there was nothing conclusive on Nvidia chips and a resolution to the Middle East standoff.

Trump is contending with approval ratings among Republicans at all-time lows, on the back of a foreign war and rising domestic inflation.

It is hard to see his Administration allowing the current situation to drag on; it feels like something needs to give in the near-term. At the moment rising yields, rate expectations and the oil price move all point to a market that expects hostilities with Iran to renew now that Trump is back in the US.

Macro and policy US

Inflation

The consumer price index (CPI) rose 0.64% month/month in April, versus +0.87% in March and a median forecast of +0.60%. The Core measure was +0.38% for April, versus a median forecast of +0.3% and a 0.20% gain in March.

On an annual basis, the CPI was +3.81% for April, up from +3.26% in March. Core was +2.75% year/year, a touch ahead of the median forecast (+2.70%) and up from +2.60% in March. 

The three-month annualised CPI has dipped below the Fed’s 2% target a few times, but the six-month annualised and the 12-month rate never got there – and are now rising again on the back of energy prices and cost-pass through.

The greater surprise was in PPI, where headline rose 1.4% month/month in April well ahead of the +0.5% consensus expectation. It is at +6.0% year/year.

The Core measure rose 1.0%, up from +0.2% in March, the largest gain since March 2022 on the back of a concentrated energy price shock. Consensus was expecting +0.3%. It is at +5.2% year/year.

April’s rise was also driven by a 0.7% rise in the core goods prices component and +1.2% in prices for services, excluding trade services. Transportation and warehousing services prices jumped by 5.0%. 

Trade services prices, which reflects the difference between the cost for distributors to buy goods and the price they charge to customers, rose 2.7% in April. Retailers seem to have been able to take advantage of consumer strength, driven in turn by tax refunds.

The big question is whether this is a material, one-off step-up in the PPI – or the start of a sequence of big increases.

Retail sales

Headline retail sales rose by 0.5% (+0.7% ex-autos) in April, in line with the consensus.

February and March sales – already strong – were also revised up a further 0.2% and demonstrate consumer resilience despite the energy shock.

There was a 0.8% gain in food and beverage sales, driven mainly by higher prices.

However non-store sales rose 1.1%, also driving the headline gain, but suggesting demand also remains strong given that consumer prices for core goods ex-autos didn’t change much last month.

Individual income tax refunds in April were US$22 billion higher than in the same month last year. This is equivalent to roughly 3% of monthly retail sales. That said the rise in total spending on gasoline is estimated to be only slightly less.

Tax refunds are likely to fall away sharply after May, meaning that the consumer loses the buffer against higher energy prices. The market will be focused on consumer activity levels from here.

The Fed

Boston Fed President Susan Collins said that while she still expects inflation linked to the conflict to subside – and that underlying inflation was still heading lower – “the probability around that has declined”.

She noted that there were other “less benign” scenarios that would require rate hikes.

She is watching:

1. Most importantly, households’ and businesses’ expectations of future inflation, which have drifted to the high end of their historical range.
2. Whether price pressures spread beyond energy to other goods and services.
3. The extent to which tariffs continue to pass through the price chain.

Wages aren’t a significant source of inflation, she said.

Macro and policy Australia

The Federal budget flagged more spending on defence and public hospitals, funded largely by changes to the NDIS.

It was interesting to note on the revenue side that a material amount of projections (~$15 billion between FY26 and FY30) is assigned to “decisions taken but not yet announced and not for publication”, suggesting a new policy waits in the wings.

There is risk of unintended consequences from the proposed changes to capital gains tax and negative gearing – potentially from first home buyers being crowded out of new builds by investors and/or reduced renovation and remodelling activity from lower turnover in investment properties.

We saw how policy changes can have unintended effects in Victoria, where increased land tax rates, taxes on vacant homes and windfall gains, increased stamp duties and the short stay accommodation levy resulted in material declines in confidence and activity levels in the state’s property sector.

Investors have been the key driver of accelerating bank sector mortgage growth. New investor loan commitments for purchases of established and new dwellings fell in the quarter, while growth slowed for dwelling construction.

With interest rates higher and changes to CGT and negative gearing announced, investor loan commitments are likely to fall in the coming months, sharpening focus around the outlook for banks.

Markets

US earnings

US Q1 earnings season observations:

• The blended earnings growth rate for Q1 S&P 500 earnings per share (EPS) currently stands at 27.7%, versus 13.2% expected at the end of the quarter.
• The blended revenue growth rate is 11.4%.
• 91% of S&P 500 companies have reported, with 84% beating consensus EPS expectations (the one-year average is 79% and five-year is 78%.)
• 80% have surpassed consensus sales expectations (73% one-year average and 70% five-year.)
• In aggregate, earnings are 17.9% above expectations, above the 7.2% one-year average positive surprise rate and the five-year average of 7.3%.
• In aggregate, sales are 1.8% above expectations, above the 1.6% one-year positive surprise rate but below the five-year average of 2.0%.

Much of the recent US equity market momentum has corresponded with surging near-term earnings estimates.

Bottom-up consensus estimates for S&P 500 EPS in 2026 and 2027 have each risen by 8% YTD.

That said, increasing expectations for AI capex spending and higher energy prices have driven the majority of the positive revisions. Excluding AI infrastructure and Energy companies, S&P 500 2027 EPS estimates have been flat YTD.

In small caps, the median stock in the Russell 3000 is delivering 10% EPS growth – the strongest rate in four years.

EPS revision breadth during the past month has been positive in every S&P 500 sector. The sectors and stocks with the strongest earnings revisions have generally outperformed.

Australian bank reporting and updates

Bank reporting season flagged a couple of things worth thinking about.

There was a surprising decline in sequential revenue growth rates from the December 2025 quarter to the March 2026 quarter.

In February the banks reported strong revenue growth and benign credit issues resulting in ~4-6% EPS upgrades.

In the recent crop of updates the revenue line weakened, asset quality turned down and the banks began rebuilding collective provisions.

This has now fully unwound the EPS upgrades from the Feb 2026 reporting season.

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About Jim Taylor and Pendal Focus Australian Share Fund

Drawing on more than 25 years of experience investing in top-performing Australian companies and a background in accounting, Jim manages our Long/Short Fund and co-manages our Imputation Fund. He is a Chartered Accountant with membership of the Australian Institute of Chartered Accountants.

Pendal Focus Australian Share Fund is managed by Crispin Murray. The fund has beaten its benchmark in 14 years of its 18-year history (after fees), across a range of market conditions. 

Find out more about Pendal Focus Australian Share Fund here.

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

MTR Corporation’s inaugural green bond is mobilising capital to scale low-carbon transport and energy smart urban infrastructure.

• MTR green bond funds low-carbon transport
• Proceeds support rail upgrades, renewables, resilience
• Find out more about Pendal’s Responsible Investing capabilities 

Regnan Credit Impact Trust and Pendal Sustainable Australian Fixed Interest Fund invested in MTR Corporation’s inaugural green bond, which directs proceeds toward a portfolio of low‑carbon transport and energy‑efficient urban infrastructure.

MTR is recognised as a global leader in electrified mass transit, carrying around 6.5 million passenger journeys each week across its networks, including in the Sydney and Melbourne metros.

The green bond finances and refinances eligible green investments under MTR’s Sustainable Finance Framework, with proceeds expected to support a range of climate‑aligned projects.

This includes major rail line extensions in Hong Kong, station energy‑efficiency upgrades, low‑carbon building improvements, renewable energy installations, biodiversity and conservation initiatives, and climate‑resilience works.

Several near‑term projects are likely to be funded through this issuance, including rail expansion programs that increase public transport capacity in new growth districts, replacement of older rolling stock and equipment with more efficient alternatives, and upgrades to station infrastructure aimed at reducing operational energy use.

The bond may also finance enhancements to MTR’s extensive property portfolio, where the company is targeting substantial reductions in scope 1 and 2 emissions intensity by 2030, as well as water and waste‑management improvements across its network.

This bond is significant as it supports one of the world’s most heavily used public transport systems, where scale magnifies climate benefits.

Hong Kong relies on public transport for roughly 11.7 million trips per day, and rail accounts for around 44 per cent of domestic journeys.

Improvements funded through this green bond help avoid emissions by shifting more commuters onto efficient rail networks, reducing road congestion, and accelerating energy‑efficiency gains across MTR’s operations.

These projects contribute to MTR’s science‑based targets, which include reducing well‑to‑wheel rail transport emissions by 46.2 per cent per passenger‑kilometre by 2030 and achieving carbon neutrality by 2050.

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Source: https://www.mtr.com.hk/sustainability/assets/pdf/en/2024/MTR_Sustainable_Finance_Rpt_2024.pdf

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Pendal funds have backed one of ANZ’s SDG bonds – fast-tracking finance into clean energy, climate and social-impact projects.

• ANZ bonds back climate and social outcomes
• Two thirds of funding directed to Australia
• Find out more about Pendal’s Responsible Investing capabilities 

Regnan Credit Impact Trust and Pendal Sustainable Australian Fixed Interest Fund invested in the ANZ Banking Group’s Sustainable Development Goals (SDG) Bond 2031, which allocates proceeds toward a diversified portfolio of social and environmental lending activities aligned with the United Nations SDGs.

Proceeds from ANZ’s SDG bonds are used to fund or refinance eligible assets with a strong emphasis on climate action, sustainable cities, clean energy and positive social outcomes.

The bond finances a broad range of projects, with approximately 80 per cent of proceeds allocated to environmental activities and around 20 per cent to social outcomes.

Around two thirds of funding has been directed to projects based in Australia.

On the environmental side, the bond supports the financing of more than 360 large scale renewable energy projects across Australia, India, Hong Kong and other regions. These include wind farms, solar projects and battery energy storage systems.

One example is the development, construction and operation of the 252-megawatt Wambo Stage I and 254-megawatt Wambo Stage II wind farms in south-east Queensland.

Examples of social projects supported include the operation of specialist disability accommodation across Australia, comprising nearly 1,000 beds, as well as the construction of a further 106 specialist disability accommodation homes providing around 350 beds.

The bond has also supported the delivery of more than 1,200 dwellings to be used as social and affordable housing. Investing in an ANZ SDG bond provides exposure to a high-quality Australian bank while directing capital toward a wide range of activities that support climate stability, social inclusion and sustainable economic development.

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Source: https://www.anz.com/content/dam/anzcom/debtinvestors/sdg-bond-impact-report-september-2025.pdf

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In this article Pendal’s EM team explains why they’re avoiding the most exposed energy importers and favouring markets with strong external positions

• Strait of Hormuz closure is an intensifying macro shock for Asia
• Reinforces underweight positioning in energy‑importing Asian markets
• Learn more about Pendal Global Emerging Markets Opportunities Fund

THE Iran conflict represents an exceptional negative supply shock with severe implications for some emerging markets – and conditions have deteriorated further since our last analysis in April.

The continued closure of the Strait of Hormuz has extended the shock well beyond energy markets into currencies, rates and growth expectations across Asia.

The transmission mechanism we described previously is now clearly visible.

Asia is highly dependent on Middle Eastern energy supply, and a prolonged disruption functions as a tax on growth.

Higher fuel and transport costs feed rapidly into headline inflation, weaker current accounts and sustained pressure on currencies.

Policymakers are left balancing growth concerns against the need to anchor inflation and protect external stability in an already challenging global monetary environment.

Currency and bond markets react first

Since the conflict escalated, the Indian rupee, Indonesian rupiah and Philippine peso have all moved sharply weaker.

Options markets are now pricing meaningful probabilities of further depreciation over the next three months, signalling that investors see limited near‑term relief without clear de‑escalation.

Bond markets likewise point to tighter financial conditions despite slowing growth momentum.

Official responses underline the severity of the shock.

The Reserve Bank of India has opened a dedicated dollar‑swap window for oil refiners, increased spot FX intervention and restricted offshore derivatives trading, while acknowledging that growth risks are now skewed to the downside.

Bank Indonesia has intensified intervention onshore and offshore and tightened dollar‑buying rules to stem outflows.

The Philippines’central bank has signalled a series of policy interest rate increases to contain inflation despite weakening activity, while Thailand has cut growth forecasts sharply as inflation expectations reset higher.

Across the region, multilateral institutions have revised down growth forecasts and marked up inflation projections.

Equities impact

Equity markets, in our view, remain behind this reality.

Valuations in several Asian markets continue to assume relatively stable earnings growth, with limited adjustment for margin pressure from higher input costs, weaker domestic demand or tighter financial conditions.

Prolonged terms‑of‑trade shocks in energy‑importing economies typically feed into corporate profitability with a lag, particularly where currencies are adjusting and fiscal space is constrained.

We think FX and bond markets are ahead of equities in pricing the effects of the Hormuz disruption.

Our positioning

We remain heavily underweight India, zero weight the Philippines and Thailand, and underweight Korea and Taiwan (despite holding significant exposure to global semiconductor in these two).

Our portfolio positioning remains focused on avoiding the most exposed energy importers and favouring markets with stronger external positions, greater policy insulation or direct benefits from higher energy prices.

We remain significantly overweight Brazil, Mexico and China.

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

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

GLOBAL equity markets continue to rise, led by those with the most semiconductor exposure (e.g. US, Korea, Taiwan) – driven in turn by upgrades to AI capex and supply shortages.

The S&P 500 gained 2.4% and the NASDAQ +4.5% last week. The S&P/ASX 300 was up 0.4%.

Financial markets remain unconcerned that the Iran conflict will trigger a further significant rise in energy prices, suggesting some form of resolution is close.

The worst fears around supply shortages have not eventuated yet, due to adequate inventory and higher-than-expected demand reduction.

This availability of fuel has caused oil and refined-product prices to fall. Brent crude was off 6.4% last week.

The US earnings season has been strong, with broad-based earnings upgrades suggesting an economy in good shape. This was also reflected in their latest jobs data.

Other commodity prices benefitted from reduced fears of a global slowdown; resources was the best-performing Australian sector as a result.

Our market withstood the expected rate hike, and the focus was on several corporate results and updates.

The underlying message is that the economy and earnings are holding up well. Everyone is looking for signs of weakness, but very few have emerged to date – and those tend to be in more structurally challenged franchises.

Gulf crisis

Oil and refined product prices declined last week as the market continues to anticipate some form of deal to reopen the Strait – and the blockage’s impact on the global economy has been less than feared.

Jet fuel, for example, has declined 35% from its peak – albeit still up 65% from February – despite fear of shortages.

That said, there has been a partial rebound in oil following Tehran’s seeming rejection of the latest US peace offer and US President Donald Trump’s bellicose reaction overnight.

When the crisis started, the market would have expected that a nine-week closure of the Strait, with only 4% of product getting through, would lead to far higher oil prices than we have seen.

Reasons for the more benign reaction include:

1. Reserve/inventory drawdowns have been more significant. This has not just been in crude oil but also in refined products. In oil it is Asia which has worn the loss of supply, however in refined product this adjustment has been in all regions. It is believed this incorporates a material number of “invisible” stockpiles (i.e. held outside of official reporting by private industry, commercial traders or smaller producers).
2. Demand has fallen more than expected at a given oil price. Part of this is due to refined product price moves – which are 1.5x to 3x that of crude – that have destroyed demand (e.g. in jet fuel). But we have also seen weaker demand from China (which may be them drawing on reserves), petrochemicals (linked to availability of naphtha) and poorer Asian countries which have been outbid for product.
3. Higher crude exports from other regions – notably the Americas – running at around 3 million barrels per day.

The most recent easing of crude premiums and crack spreads is also linked to reduced panic buying of refined product, which inflated the initial reaction (notably in jet fuel spreads).

The market seems to have been quite efficient in adapting to the shock and this has given confidence to broader financial markets.

However, a large part of this reflects the ability to draw on stockpiles, both visible and invisible. We do not know where the tipping point may be which, if hit, would require far more material demand destruction.

The other observation has been that it increasingly looks like explicit rationing is less likely to happen, as market pricing does the work of allocating the scarce supply.

US economy

April payrolls and March JOLTS data last week suggested that the employment market is okay.

It is currently in the sweet spot of not being strong enough for the Federal Reserve to worry about wages responding to the energy shock, but also not weak enough to put pressure on the central bank to cut rates.

The employment data shows that the flow on effects of the fuel shock, while affecting confidence, is not impacting the economy. Nor is AI leading to meaningful labour shedding.

Payrolls came in at +115,000 jobs, well ahead of the 65,000 expected. There was a -16,000 revision to the previous two months.

Given data has been messy because of weather and the government shutdown, the six-month average is the best trend proxy – and that is rising and is now above the breakeven level to sustain the unemployment rate.

The mix of job gains was a positive one, skewing to private sector and less reliant on health care.

Unemployment itself was 8 basis points (bps) higher at 4.3%, in line with consensus. Should it break above 4.5%, then the Fed would likely start considering rate cuts again.

Hours worked were solid, rising 0.3%, and wage growth continues to moderate +0.2% versus 0.3% expected. This will give the Fed confidence that input price pressures will not lead to second round effects. It also reinforces the positive productivity trend and the rise of profit share relative to labour share.

JOLTS saw a small drop in job openings to +4.1%, hiring picked up from a softer February to 3.9%, while quits remain at very low levels at 2.0%.

ISM data also signalled no signs of emerging weakness – although it has been less efficient as a leading indicator recently.

The upshot is that the economy is holding up well so far despite the fuel cost impost.

Combined with strong corporate earnings, this has given the market confidence to look through the short-term input cost issues.

US earnings and markets

Week four of US earnings season saw continued strong positive revisions.

The median stock was expected to grow earnings 8% year/year – and instead come in at 14%.

Overall earnings are tracking to 17% growth with revisions rising 5% from the start of April.

This means the S&P 500’s P/E ratio has fallen marginally year-to-date, despite the index being on its highs. 

The overall index is 21x and the median stock 16x.

Both are sustainable given liquidity and earnings trends, with the main risk being an input-cost induced slowdown.

One concern we have, but which has diminished, is a confidence-induced slowdown in consumption or investment. There is no sign of this.

Since the Iran war started the S&P 500 is up 7%, despite higher oil (43%) and bond yields (45bps), led by the technology sector (+20% equal weight).

Market breadth has been a concern, however the small cap Russell 2000 index (+8%) has performed better than the S&P 500.

Laggard sectors have been defensives like staples (-10% equal weight) and healthcare (-8% equal weight) as well as discretionary (-7% equal weight). 

The market’s key driver has been tech – and specifically semiconductors – on the continued wave of increased AI investment.

There has been a surge in company cash usage for reinvesting into capex and R&D (as opposed to dividend and buybacks) and the market has become more positive on this, believing that they can get reasonable returns.

This sentiment is helped by the enormous success of Anthropic, which is now up to a A$44 billion annualised revenue run rate, versus A$14 billion in December 25.

The growth in demand for compute has led to a further rise in hyperscaler capex. Between them Oracle, Microsoft, Meta, Alphabet and Amazon are expected to spend >US$800 billion in 2026 – this is US$100 billion more than expected at the start of April and $200 billion more than at the start of the year.

Amazon and Alphabet both announced significant increases in pipeline for their cloud services which is driven by Anthropic chasing capacity.

The largest bottleneck in supply is in semiconductors, driving up the price of both the chips and stocks.

The PHLX Semiconductor Sector ETF (SOX) is  up 58% since the end of March, led by Intel +183%, AMD +124% and Micron +121%.

The velocity of these moves (51% above its 200-day moving average) has only been surpassed once, which was a peak of +111% ahead of the tech bust of 2000.

From a factor perspective momentum has surged and breadth has been narrow.

Semiconductor strength has also driven the Korean and Taiwanese markets up 78% and 44%, respectively, in 2026.

Three years ago, they were a similar size in market cap to Australia – now they are double the size.

Such moves tend to see some degree of consolidation – but the strength of the momentum, combined with the fundamentals, suggests they will not see significant reversals.

Australian markets

The Australian market is very tame relative to these offshore markets.

One feature of our market is that it is becoming a funding source, as global investors chase returns in Korea and Taiwan.

The main macro news was the expected rate hike of 25bps to return to the previous cycle peak of 4.35%.

This was an 8-1 vote, driven by concerns of firms passing on costs given the tight labour market, the strength of the economy’s momentum prior to the Iran war, and domestic industry structures which gives corporates pricing power.

Reserve Bank of Australia Governor Michele Bullock did indicate that the board now sees policy as slightly restrictive and having risen three times in a row – and given the uncertainty – we would expect a pause.

The market is still expecting one further rise, potentially in August.

This was largely discounted by the market so prompted a limited reaction.

Instead, it eked out a small gain for the week helped by generally supportive corporate sentiment at the Macquarie conference.

Miners (Metals & Mining +4.5%) led the market followed by industrials (+1.2%), with energy (-7.6%) the laggard as oil prices fell and healthcare (-2.8%) continuing its underperformance, mostly driven by sentiment.

There were a few results last week. Observations included:

• The banks saw small downgrades reflecting margins trends not being as positive as expected. It is important to note that they see no signs of weakness or stress in the economy; credit growth remains firm and management are noting the increases in collective provisions are precautionary.
• Domestic industrials Ventia, Downer, SGH and Orica reinforced this message, all providing updates or results which were in-line with or better than expectations; again, there was no evidence of a slowdown.
• Consumer signals were more mixed. Qantas, Sigma Healthcare and Vicinity Centres were positive on sales trends, while Endeavour and Super Retail were not, reflecting the importance of category exposure. JB Hi-Fi fell, the issue being the underlying cost pressures and stock constraints crimping margins, rather than an issue with sales momentum.

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About Crispin Murray and the Pendal Focus Australian Share Fund

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

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

Find out more about Pendal Focus Australian Share Fund  

Contact a Pendal key account manager

With more than half of global GDP reliant on healthy ecosystems, biodiversity is fast emerging as a critical lens for long-term sustainable investing.

• Biodiversity underpins over half global GDP, shaping investment
• World Bank bond funds conservation and sustainable livelihoods
• Find out more about Pendal’s Responsible Investing capabilities 

Regnan Credit Impact Trust and Pendal Sustainable Australian Fixed Interest Fund invested in an AUD Biodiversity and Sustainable Development bond from the World Bank.

More than half the world’s GDP is estimated to be dependent on biodiversity and ecosystem services.

Fresh water, fertile soils, clean air and even insects pollinating plants – the flow-on effects of the degradation of biodiversity are immense.

Biodiversity is emerging as an investment focus, coinciding with businesses increasingly disclosing the different environmental risks they face.

This bond is helping to position nature as central to development through promoting conservation, training, and policy to seek nature-based solutions in agriculture, forestry and fisheries.

Through this bond, the Regnan Credit Impact Trust and Pendal Sustainable Australian Fixed Interest Fund are investing in projects around the world that are promoting biodiversity, including by providing training and opportunities to manage resources. 

The World Bank lists examples of projects that may be funded by bonds like this. One example looks at oases in Tunisia.

Oases, which has long been the centre of trade and cultural exchange, are threatened from water wastage, soil salinity and fertility loss.

Local knowledge about how to manage these resources is being lost.

The World Bank project is funding improved governance of these spaces by improving water saving and reducing land degradation.

This project will place 25,000 hectares under sustainable landscape management practices, providing financial support for 250 small and medium enterprises. 

Another example of a project that is relevant to a biodiversity bond is in Mexico.

There are 12 million people in Mexico who live in poverty in forests and are directly dependent on local natural resources.

This project is helping to strengthen sustainable forest management and provide other economic opportunities.

This includes conservation and business development and providing other economic opportunities apart from logging and land clearing.

This project places a particular focus on the underserved such as indigenous people and women.

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