A US recession is highly likely, but it will be shallow and provide compelling valuations for global equities investors, says Pendal’s ASHLEY PITTARD

• US recession is highly likely but should be shallow
• Invest through it with 2022 losers such as Amazon and Netflix
• Find out about Ashley Pittard’s Pendal Concentrated Global Share Fund

A US recession is likely this year – but won’t be as bad as previous downturns, ironically because of Covid and the deterioration of global trade flows in recent years.

That’s the view of Pendal’s head of global equities Ashley Pittard.

“It’s highly, highly likely that there’s going to be a US recession this year,” says Pittard.

“But there’s a difference this time around because of robust capital expenditure. It’s clear this recession is going to be shallow.”

“Yes, we are going to have a recession – but so what? Invest through it, because valuations are compelling.

“There’s been a de-rating of the market and we are going to have earnings growth when we get out of this downturn.

“Inflation has peaked and is on the decline and the Fed is nearly finished raising rates.”

Onshoring drives economy

Breaking that comment down, Pittard says the trend towards onshoring of manufacturing in major economies, including the US, is driving economic activity.

Onshoring is a direct result of the disruption of trade flows — firstly from a deterioration in international relations between major players such as the US and China, and secondly from Covid-induced shutdowns to shipping.

Add in big tax incentives from Washington — particularly for infrastructure and manufacturers via the Inflation Reduction Act of 2022 — and there’s plenty of reason to think some sectors of the US economy will do well, Pittard says.

“Just look at what’s happened in 2023 so far – the market is up 5 or 6 per cent,” Pittard says.

“Why? Well markets pre-empt. Investors are saying there probably will be a recession around the middle of the year.

“But by that time the Federal Reserve will have stopped raising interest rates. All the news about the recession the market already knows — and so has priced it in.”

Earnings decline priced in

Knowledge is flowing through in earnings estimates for 2023, which forecast a fall in income of somewhere between 4 and 10 per cent.

“Let’s say the average is 7 per cent or 9 per cent if you strip out energy,” says Pittard.

“The market has already taken all that into consideration. Right now, on a price-to-earnings multiple, the market is very close to the long-term average.

“Investors are saying ‘yes, earnings will be down’ …. and they’ve brought the PE multiple back four points, from 21 to 17 points.

“But once we get through a mild recession our earnings growth on a three-to-five-year horizon should be pretty good.

“That’s because of capital expenditure. It’s also because of the unemployment rate which is around 3.5 per cent. Even if it went to 6 per cent, that’s still historically low.

“And wages growth is averaging 5 per cent and it’s not going away. Meanwhile, supply chain inflation is reducing, and commodity inflation has declined dramatically.”

What it means for investors

The obvious question is: ‘where should investors be thinking about putting their money?’

“Last year we were pushing the Covid losers – financials and energy — and they’ve done very well.

“Going forward you still want some of those names, but also you need some of the 2022 losers.

“Names like Amazon, Netflix and other media streaming assets. You’ll want to be fully invested.

“You want to have Covid losers plus selective 2022 losers.”

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About Ashley Pittard and Pendal Concentrated Global Share Fund

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

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

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

Find out more about Pendal Concentrated Global Share Fund

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

Contact a Pendal key account manager here.

US earnings point to better days for industrials, supply chain and energy stocks following over-investment in tech, argues our head of global equities ASHLEY PITTARD

• Capital spending should soften recession impact
• Industrials and banks the likely market winners
• Find out about Ashley’s Pendal Concentrated Global Share Fund

A WEAKER earnings season in the US is indicating a recession is likely next year, but there is evidence it could be mild and short-lived as capital spending offsets slowing consumer demand, says Pendal’s Ashley Pittard.

Nine in ten S&P 500 companies have reported their third quarter earnings, with results largely in line with analysts’ expectations.

In a market where the average company typically beats earnings forecasts by 2.7 per cent, the overall picture is one of a weakening economy, says Pittard, who heads Pendal’s global equities team.

Pittard says one of the most telling signals out of reporting season was the way companies were punished by the markets when they missed forecasts.

“On average, when a company missed this earnings season its share price fell more than 6 per cent. That’s the biggest average fall ever. What that tells us is that we are at a tipping point in the markets,” he says.

Mild recession

There was also a spike in the number of companies mentioning softening demand in their earnings reports this quarter. That’s a measure that traditionally rises prior to a recession, says Pittard.

“In this earnings season, the number of companies mentioning weak demand is at the same highs as it was in the global financial crisis and Covid,” he says.

Still, indications are that any recession should be mild because there are signs companies are stepping up their investment in rebuilding supply chains post the pandemic.

“Capital expenditure by corporations is up 24 per cent year on year — that’s a real positive that may help any recession be milder,” says Pittard.

“It’s companies ‘re-shoring’ supply chains and bringing jobs back to America.”

To be sure, the strong US dollar is counting against corporate America, with the foreign exchange rate at its highest levels for seven years.

“It’s a mixed bag. It’s like a rip tide dragging out to sea while the tide’s coming in — there’s choppy waters ahead.

“You’ve got all of these positives, but you’ve also got a few negatives.”

Which sectors look good in 2023

For global equities investors, the story of the coming year will be one of correcting a “misallocation of capital” that occurred during the pandemic, says Pittard.

“You don’t want to be in the Covid winners, you want to be in the Covid losers.

“During the last few years there has been an over-investment into technology and the cloud and a misallocation away from industrials, supply chain, energy and those sorts of companies.

“You’re now seeing that misallocation of capital unwind.”

He points to “strong-demand” commentary from companies like Delta Airlines, United Airlines and Visa, alongside negative commentary from Microsoft, Meta Platforms and Google.

United claimed there had been a “permanent structural change in leisure demand because of the flexibility that hybrid work allows”, saying “this is not pent-up demand. It’s the new normal”.

Visa said consumers are “still spending the same amount of money… as they did before”.

Meanwhile Microsoft and Meta announced layoffs, along with a slew of other US tech companies.

Microsoft reported “materially weaker PC demand” and Google noted a “pull-back in spend” by advertisers.

Look to industrial and financial stocks

“It’s that misallocation of capital that will drive the hits and misses on the markets,” says Pittard,

“If you look at new job postings, they are down 50 per cent from their peak of 2021 and 41 per cent of consumers are saying it’s tough paying their bills compared to 38 per cent in Covid.

“There’s no doubt stresses are increasing. There’s no doubt the macro is getting weaker.

“But as an investor, you want to look through it.

“Our cash level is at the lowest that it’s ever been, but you’ve got to have the tide going with you.

“That’s why the answer is the industrial companies and the financials.

“Dividend yield on the banks is more than 8 per cent.

“If you hold those kinds of stocks, you’re getting paid to just wait for the economy to turn around.”

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About Ashley Pittard and Pendal Concentrated Global Share Fund

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

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

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

Find out more about Pendal Concentrated Global Share Fund

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

Contact a Pendal key account manager here.

Earnings season is getting underway in the US. Senior global equities analyst SUE SCOTT outlines what investors can expect this quarter

• US Q3 earnings have kicked off
• Post-Covid adjustment still playing through earnings
• Find out about Pendal Concentrated Global Share Fund

COMPANY earnings in the US are likely to cause further market volatility this quarter as investors try to understand how the post-Covid economy is adapting to higher interest rates.

Next week investors will start to get a good look at how US companies fared in the September quarter – and expectations are low.

“There’s no doubt operating conditions remain very, very challenging,” says Sue Scott, a senior investment analyst with Pendal’s concentrated global share strategy team.

“We expect continued volatility. This is partly because the market is finding it very difficult to determine the extent to which a reversal of Covid spending is affecting operating conditions.

“There is also uncertainty around how much interest rates and inflation are affecting the environment.”

Last quarter’s earnings were characterised by cautious commentary about the outlook as management teams focused on cost containment.

A rising US dollar was just starting to emerge as a headwind, particularly for US-based global companies. But there was anecdotal feedback that demand remained resilient.

Shares ended the quarter broadly where they started, trading at about 15 times expected  earnings.

“But that’s only useful if you believe the ‘E’ in the price to earnings ratio,” says Scott. “That’s the big debate.

“The market is still expecting growth — both in the third quarter and in 2023.

“But the real difficulty for investors is making sense of conflicting data points.”

Conflicting data

Over the past three months, US interest rates have continued to rise, the US dollar has hit 20-year highs, oil prices have fallen and commodities have weakened.

“You’ve also had Russia and Ukraine continue to escalate tensions, China-US tensions continue to simmer, further reports of US export restrictions to China particularly in technology, China Covid lock-downs continuing and poor economic data coming out of China.”

The rebuilding of supply chains and a shift in post-Covid consumer demand is also muddying the picture.

This is evident in out-of-cycle results that have come in before the bulk of the earnings season gets underway, says Scott.

“What’s confusing for investors now is that companies are reporting numbers that could reflect deteriorating consumer health or could just be a reflection of some of the dislocation in global trade and spending patterns as a result of Covid starting to normalise.”

“Nike — one of the bellwethers of the US market — said earnings disappointed for the third quarter because of lower margins due to discounting of out-of-season inventory caught up in shipment delays.

“So it was not so much about a weak consumer, but Covid-related logistic challenges.

“We also know the personal computer market was overheated because everyone was working from home and kids were home-schooled.

“But it’s hard to distinguish if current weakness is due to normalisation of an over-heated market – or because interest rates are going up and people are spending less.

“Same with FedEx. They delivered a below-expectation result citing consumer spending shifting back to services from goods.

“As a result of all that, we’ve had consensus forecasts since the end of June revised lower for the third quarter by mid-single digits.”

Consensus estimates for 2023 have also been revised lower by a similar amount.

Scott says these effects are temporary and “we don’t necessarily see them as a massive red flag for the economy.

“But they are going to take some time to play out.

“Average global shipping rates fell 30 per cent in September, which is 60 per cent lower than they were a year ago. But that’s still 170 per cent higher than pre-Covid.”

Impact of the strong dollar

One of the big stories will be the impact of the higher US dollar, says Scott.

“More than 30 per cent of S&P company revenue comes from outside the US, and for some of the big tech companies, it’s more like 50 per cent.”

She says many companies in the sector have been softening up investors for a weaker quarter with talk of a pause in hiring, redundancies or restructures.

“We think some pockets of the technology sector are still very expensive and there is an outsized risk for earnings disappointment.”

But recent presentations from bank CEOs are painting a more optimistic picture.

“The underlying consumer-facing banks business is holding up very well and capital positions are strong.

“They’re benefiting from higher net interest income as a result of lending rates leading deposit rates higher and loan losses are reasonably benign.

“So far they’re not seeing any major signals of a deterioration in consumer activity. And even if they do, the balance sheet of the consumer is in much better shape than it has been historically.”

“Yes, spending patterns are changing away from goods to services — but there’s no real red flags from the banks.”

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The indiscriminate tech sell-off is creating opportunities for investors willing to take a stock selection approach rather than buying the index, says Pendal’s SUE SCOTT

• Indiscriminate sell-off opens opportunity
• Analog semiconductors offer value
• Find out about Pendal Concentrated Global Share Fund

TECH was a stock market darling for more than a decade until last year — providing outsized returns on the back of transformational breakthroughs in personal technology, cloud computing and streaming entertainment.

But higher interest rates in 2022 triggered a sell-off across the sector as the current value of future cash flows reduced and some emerging companies found it harder to raise capital.

“The technology sector was bought indiscriminately on the way up — and now the sell-off is also indiscriminate,” says Sue Scott, a senior investment analyst in Pendal’s global equities boutique.

That means potential opportunities for investors willing to take a stock selection approach rather than buying the index, says Scott.

The rise and fall of tech as a sector disguises the fact it is made up of many different companies that operate in quite distinct markets.

One opportunity emerging in the selloff is the makers of analog semi-conductors, the sensors that collect data on real world events like sound, speed and temperature, she says.

“Analog semiconductors are the eyes and ears of an electronic device, taking real world signals and translating them into a digital message, enabling the device to react.

“As the world becomes more automated, analog semiconductors become more pervasive. The handset and PC market is only a subset of the broader market.

“In a car, it’s the systems that tell you when you’re going to back into the car behind you and monitor cruise control. They also measure battery charge and discharge in electric vehicles.

“It’s air conditioners and household appliances. In sustainable energy. It’s the monitoring of electrical grids. And in healthcare it is medical devices.

“The other area that’s exploding is factory automation. Robots in factories need to know what’s going on around them and need to be able to act with precision.

“We love the diversity that these analog semiconductor companies offer, catering to multiple industry segments and not heavily reliant on any one industry subsector such as handset or PCs handsets for example.”

Analog semis are good example of how an index approach to technology misses the nuance in individual sectors, says Scott.

“Analog semis have a very long lead time and shelf life — once they are designed into a car, it’s not designed out the next year like for instance the digital semiconductors in a mobile handset may be.”

Semi-conductor companies to watch

Analog semiconductor leaders include Texas Instruments — the tech pioneer that made its name in pocket calculators and once made pop-culture icon the Speak & Spell — and Analog Devices.

“Both of them have proven historically that they can make smart acquisitions and integrate them well.

“They have adapted to changes in technology, they pivoted their businesses, deliberately moving away from the consumer market and moved their R&D focus into automotive and industrial.

“Importantly, they have their own manufacturing footprint, which has led to very strong margins and insulated them somewhat from the geopolitical risks associated with outsourcing manufacture.”

She says that despite the underlying structural tailwinds in the sector such as the growth in electric vehicles, in artificial intelligence, machine learning and the Internet of Things, that fundamentally the technology sector is cyclical.

“As long-term investors we want to own technology companies that manage their cyclicality through diversity of product and end customer or have significant barriers to entry.

“We like the comfort of owning companies that have the ability to record higher highs and lower sales lows , that  have the capacity to  invest through the cycle, have the balance sheets to grow their business when the opportunity arises and return significant amounts of free cash flow to their shareholders.”

Scott says technology is an important part of a well-constructed portfolio.

“Technology has the ability to transform other industries and it seeps into everything we do,” says Scott.

She points to transformation of companies like Deere & Co, the century-old agricultural equipment maker that now offers high tech services to farmers, and Caterpillar, the construction equipment maker that has become a world leader in autonomous mining vehicles.

“Deere can identify a weed in a crop and only spray that weed, think of the productivity gains and reduced costs for farmers,” says Scott.

“Caterpillar’s automated mine trucks are already out there in the Pilbara transporting iron ore.

“These are old industrial companies have been transformed by technology. That’s pretty exciting.”

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It’s time to be fully invested in financial markets, not sitting on the sidelines, believes Pendal’s head of global equities ASHLEY PITTARD

• Strong earnings seasons in US and Europe
• Economic news suggests equities won’t tumble
• Find out about Pendal Concentrated Global Share Fund

EARNINGS seasons in the US and Europe have been strong, and there are signs inflation is peaking, which would allow the US Fed to slow its interest rate cycle, says Pendal’s head of global equities Ashley Pittard.

“The Fed was behind the curve in March and there was earnings risk because of high valuations.

“Fast-forward to today, the market is down 20 per cent and the price-to-earnings multiple has come back from 22 times to about 15 times earnings.”

The June quarter earnings season on Wall Street and in Europe has been solid.

On a sales basis, about half the companies beat consensus forecasts. On an earnings basis that rises to nearly two-thirds.

Not surprisingly, the response from investors has been positive.

There have been exceptions to the good news story. Consumer discretionary stocks in the US, such as Walmart and Target, disappointed.

“But when you look at this market, it’s one that you want to be fully invested in,” Pittard says.

“The US Federal Reserve has lifted interest rates sharply and is now ahead of the curve. In March this year they were behind the curve.”

Pittard doesn’t expect the Fed to continue doing 75 basis point hikes, though rates will still rise.

“We are at the point where the Fed might pause for a bit, or only has a couple of rate rises to go and earnings are growing around 5 per cent.

“That’s a good position for equities. That’s because the price-to-earnings multiple on Wall Street has come back to more normal levels on a historical basis.”

Pittard doesn’t expect Wall Street to fall much further.

“What you’ve seen in this quarterly earnings season is lower margins. Earnings expectations have also come down and forward guidance from companies have come down.  

“You only get massive cuts in earnings growth if you go into a sharp recession.

“That might have happened if the Fed was behind the curve. But the Fed is now ahead of the curve,” he says.

Pittard isn’t definitively calling peak inflation, but he believes it’s close, highlighting a recent drop in oil prices as evidence.

“It doesn’t mean interest rates are going back to zero again, but it does mean rates won’t keep rising,” he says.

In the Fed’s favour is time, Pittard says. The Open Market Committee isn’t meeting again until mid- September — plenty of time for new economic data.

“The Fed has six weeks leeway. It will be data-dependent going forward, and that’s important,” Pittard says.

“Something else could happen such as the war in Ukraine pushes prices back up.

“But right now inflation is peaking, there’s negative real interest rates so policy is still accommodative, there’s wages growth of 3-to-4 per cent, there’s capital spending, there’s savings built up, and there’s a bunch of initiatives from the US government which mandate spending for renewables.

“You could argue very strongly that you just want to be invested and cash levels are close to their lows.”

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About Ashley Pittard and Pendal Concentrated Global Share Fund

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

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

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

Find out more about Pendal Concentrated Global Share Fund

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

Contact a Pendal key account manager here.

Rates are rising and long-duration assets like big US tech stocks are underperforming. Where should global equities look? Pendal’s ASHLEY PITTARD has some answers

• FAANG stocks continue to face headwinds
• Opportunities in energy, financials, real estate
• Look for pricing power, duopolies

RATES are rising and long-duration assets such as the big US tech stocks are underperforming.

The NYSE FANG+ index — which includes Facebook, Apple, Amazon, Netflix and Google — is down more than 30 per cent this year.

So where should global equities investors put their money?

“Look for duopolies, or even better, monopolies because they tend to have pricing power,” says Ashley Pittard, Pendal’s head of global equities.

“Find companies that can move prices with inflation. Keep away from the FAANG stocks.”

While the road into Covid was challenging for investors, the road out will present just as many challenges.

“The world is normalising — and when the world normalises, people don’t need as many streaming services,” Pittard says.

“People aren’t buying as much stuff online. They are going out again and eating a meal and having dinner.

“That’s why in the current earnings season in the US we’ve seen Amazon and Netflix disappoint but Coca-Cola’s numbers were fantastic.”

“Covid brought forward demand for many of the tech companies’ products” Pittard says. “There are supply chain problems and higher input prices.

“And rising interest rates hurt long-duration assets because the discount rate applying to future cash flows increases.

“Foreign exchange weakness in regions, such as Japan, has also knocked them around.”

Where to look

What should investors be considering?

“You want to be in energy companies, financials, consumer beverage companies and also real-estate companies,” Pittard says. “And you can still be in some long-duration assets.”

Pittard says financial stocks should benefit from rising interest rates, with one caveat – keep a watch on bad loans.

“If the US Fed is able to raise interest rates — and not put the economy into recession — the banks will track sideways before accelerating as investors realise the bad loans they’re expecting aren’t as bad as they thought.”

Coke is it

Pittard is also a fan of beverage companies. “Coca-Cola, for example, is in a duopoly market and it’s got pricing power. In an inflationary environment, that’s what you want.”

There are still some long-duration assets that will suit many investors, he says.

“Think about airports – a utility and long duration. But if the rents they’re charging tenants, and the fees airlines are paying, are inflation adjusted then they are getting good returns.”

Pittard warns interest rate disparities across economies make foreign exchange factors even more relevant.

“In Japan, unlike the US, Europe or Australia, the central bank wants to keep interest rates in a very tight band. It means the Yen has been sold off.

“If you then have a look at real estate companies in Japan, they are increasing in value because it costs more to build those assets, to refurbish those assets, and rents will be going up.

“And the sector trades below book value, or construction cost value. The real estate sector in Japan is very compelling at the moment. “

As global economies emerge from Covid, opportunities abound, he says.

“Rather than say no to FAANG stocks, I’m saying yes to everything else. And that’s because everything else is growing.”

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About Ashley Pittard and Pendal Concentrated Global Share Fund

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

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

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

Find out more about Pendal Concentrated Global Share Fund

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

Contact a Pendal key account manager here.

Resolving the humanitarian crisis in Ukraine must be our first concern says Pendal’s head of global equities ASHLEY PITTARD. But if a peaceful resolution is found, what can global equities investors expect next?

• Russia’s invasion of Ukraine could impact pace of US rate rises
• Fears of stagflation could ultimately trigger more rate hikes
• Find out about Ashley’s Pendal Concentrated Global Share Fund

RUSSIA’S unprovoked invasion of Ukraine means global central banks won’t be as aggressive raising interest rates as they would have been otherwise, especially in Europe.

And while bourses have sold off, particularly in Europe, typically equity markets recover within a year, says Pendal’s head of global equities Ashley Pittard.

“On average, markets fall between 4 and 15 per cent in the near term after an attack,” says Pittard.

“When it looks like someone is getting control, usually a year after that equity markets are higher.”

The war in Ukraine is first and foremost a humanitarian crisis, Pittard says, and the flood of refugees out of Ukraine is tragic.

In economic terms, the immediate impact has been on commodities and share markets.

Led by oil, commodity prices are sharply higher. The cost of a barrel of Brent crude headed towards $US140 this week, the highest since 2008. The jump in commodity prices is likely to trigger higher inflation for longer, Pittard says.

Wars tend to be inflationary, he says.

“It may mean inflation in the United States is in the 5 to 7 per cent range for longer than most people expected.

“So, the Federal Reserve will have to raise rates but maybe it will do it a bit slower because it won’t want to be too aggressive when there’s a war on.”

“It means there could ultimately be more interest rate hikes, though they may be delayed,” Pittard says.

“And there’s the risk of stagflation, rather than nice growth and moderate inflation.”

Share market volatility has increased, particularly in the Euro region.

In the first full week of trading after the invasion of Ukraine, European bourses ended down around 10 per cent, whereas the US, Japan and Chinas were down two per cent at most.

The local S&P/ASX200 was one of the few developed economy bourses that ended the week high.

European markets are now down 20 per cent off their peaks of last year, whereas Wall Street is off around 10 per cent.

“In Europe it doesn’t matter if you are a beverage company or a financial. Everything’s being sold because the region’s economies are so intertwined with Russia,” Pittard says.

“And much of that reflects the critical energy supplies that run between Russia and Europe.

“The US is less reliant on Russia so the volatility hasn’t been as great.”

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About Ashley Pittard and Pendal Concentrated Global Share Fund

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

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

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

Find out more about Pendal Concentrated Global Share Fund

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

Contact a Pendal key account manager here.

The first half of this year will be all about volatility, but the Fed’s ability to control inflation will be the critical factor in 2022, says Pendal’s head of global equities ASHLEY PITTARD

• 2022 kicks off with rotation from tech to value stocks
• Fed rate rises critical to second-half outlook
• Commodities should benefit from China acceleration

THIS year will again be a tale of two halves for investors, and the critical factor is whether the US Federal Reserve can control inflation, without busting the business cycle. 

That’s the view of Pendal’s head of global equities Ashley Pittard.

“Last year was a tale of two halves,” Pittard says. “The first was about re-opening, and the second was about Delta and Omicron. 

“This year will also be a tale of two halves, but it will be very different.

“The first half this year will be all about volatility. The Fed has been behind the curve and needs to increase interest rates to get inflation under control. 

“Expectations of rate rises have risen over the past couple of months. Late last year we expected market volatility to increase, and January hasn’t let us down,” Pittard says.

There’s already significant rotation from the tech stocks into the value sector, including banks and energy companies, he says. That’s demonstrated by the big fall in the tech stock heavy NASDAQ, which so far this month is down more than 10 per cent.

“A lot of these stay-at-home companies are being torched,” Pittard says. 

“Heading into the holiday period, we thought tech stocks were likely to underperform, and the lofty valuations in that part of the market, and the relative weighting of tech companies in indices, meant equities would underperform. And that’s what’s happened.”

It’s likely to continue if early profit reports for the last quarter are indicative. With about 5 per cent of companies having reported, two of the most notable have been tech stocks, Pittard says. 

Netflix’s share price fell more than 20 per cent immediately after it reported disappointing subscriber growth numbers.

High-tech home fitness company Peloton outlined production challenges and potential staff lay-offs and its share price fell as low as $US24 a share. That’s down from its peak of $US160 a share last year.

In contrast, several non-tech companies have provided positive earnings results. 

Rail companies Union Pacific and Alston, construction company Scandic Builders, and sportwear group PUMA have all performed relatively well, Pittard says.

What’s next?

That’s the story of the first half of 2022 — inflation and higher interest rates, volatility and rotation out of tech stocks.

“The second half will depend on how well the Fed does its job,” Pittard says. “Will it go too hard and push the economy into recession or will it do enough to cap inflation and not kill the business cycle?”

“If the Fed does a good job — clamps down on inflation without short-circuiting the cycle, then in the second half there’ll still be geopolitical tensions.

“And there’s mid-term elections in November. If the Republicans win the House back, it makes it harder for President Joe Biden to do much in his second two years.

“But at least if you get four rate hikes, and not six or seven, then in the back half of the year there should be a re-rating of the market,” Pittard says.

One sector which could benefit is commodities.

“While the US is raising rates, China is cutting rates. They’re adding more liquidity and that economy is built on manufacturing which needs commodities. That underlying dynamic should help commodities over time.” 

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About Ashley Pittard and Pendal Concentrated Global Share Fund

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

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

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

Find out more about Pendal Concentrated Global Share Fund

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

Contact a Pendal key account manager here.

The key question for 2022 is whether the US Fed can keep inflation under control without short-circuiting the business cycle, says Pendal’s head of global equities ASHLEY PITTARD

• Investors head into 2022 with unusual macro settings
• Risk is tech stocks underperform, dragging down the market
• Opportunity for mid and small caps to outperform

GLOBAL equities investors enter 2022 with very unusual macro-economic settings in place – high inflation and low bond yields.

It’s Covid-related — as is the recent rotation back to perceived safer assets such as US tech stocks.

The rotation is contributing to one of the biggest risks to global equities in the coming year — mega caps underperforming and markets going backwards with increased volatility, says Pendal’s head of global equities, Ashley Pittard.

“The past year has been a tale of two halves,” says Pittard.

“The Delta variant of Covid-19 hit mid-year and delayed the recovery and the re-opening story. The market rotated back to safe havens.

“For example, five of the top stocks in the Nasdaq 100 – Microsoft, Apple, Alphabet, Tesla and NVIDIA – contributed 72 per cent of the total NASDAQ return.

“There’s lofty valuations in equities and a narrowness of the market because of the tech companies.

“There has been a massive initial public offering frenzy, there’s inflation that is now more than transitory and the US Federal Reserve is withdrawing stimulus.”

Inflation is critical. Pittard argues it’s more than transitory because wage increases are now being embedded into economies, and the cost of housing – be that home prices or rents – are set to rise. Higher inflation will impact company profit margins and earnings.

“So the big risk for 2022 is muted or negative returns for global indices and increased volatility,” he says.

Opportunity in 2022

Opportunity in 2022 depends heavily on the US Federal Reserve, Pittard says.

“Can the US Fed keep inflation under control without short-circuiting the business cycle? That’s the key question.

“If earnings growth can broaden outside tech companies — and capital spending increases outside really large caps and the top five NASDAQ stocks — markets will do very, very well.

“We have already seen some fragility in the earnings growth of the ultra-large tech companies.

“But if we see broad-based capital spending and earnings growth, the mid and small caps will do well.

“The banks will do well. Businesses that have pricing power will do well and emerging markets will do well.”

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About Ashley Pittard and Pendal Concentrated Global Share Fund

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

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

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

Find out more about Pendal Concentrated Global Share Fund

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

Contact a Pendal key account manager here.

Are the FAANGs losing their bite? The latest US earnings season has revealed new opportunities and risks, says Pendal’s head of global equities ASHLEY PITTARD

• Global equities earnings growth extends beyond tech stocks
• Europe, small caps provide opportunities
• Find out about Pendal Concentrated Global Share Fund

FAANGs out, MAMAAs in. At least in terms of acronyms — maybe not in terms of earnings.

Facebook’s decision to change its company name to Meta Platforms — and the incredible performance of Microsoft, which is now the largest company in the world — has made obsolete the famous acronym that’s dominated global equity markets for five years.

FAANG (Facebook, Apple, Amazon, Netflix, Google) doesn’t work anymore.

Instead, the more homely, less ferocious, MAMAAs better represents the tech market leaders, says Ashley Pittard, head of global equities at Pendal. That’s Microsoft, Apple, Meta (Facebook’s new name), Amazon and Alphabet (Google’s parent company).

The new acronym doesn’t quite bare the teeth of the old acronym.

“During the last couple of quarters, other sectors away from the MAMAAs have been compounding really strongly,” Pittard says.

“We are getting through the US earnings season and most of the ultra-large caps have reported.

“You are seeing sales up 15 per cent. Earnings are up 39 per cent. Of that, 79 per cent have beaten on third-quarter earnings and 73 per cent have beaten on revenue.

“The results are still being impacted by the Delta lockdown which affected the September quarter earnings season, so it isn’t yet a true indication of what a re-opened, normalised environment is,” Pittard says.

“It’s upbeat for the third quarter. There was strong demand, productivity measures helped keep costs down and there are headwinds of supply chain cost pressures.

“But there’s no doubt that if you look at those FAANG stocks, it’s the first time in many years that they’ve missed on revenue,” Pittard says.

“If you take Apple as an example, it missed revenue forecasts for the first time since 2017. Its earnings were in-line for the first time since 2016.

“Amazon missed on revenue. They’re getting hit on wages growth, supply chain and network inefficiencies.”

The result is a broadening out in earning growth.

“You’re continuing to see broadening of the sectors growing… and you will continue to see the rotation to other sectors and out of those MAMAAs stocks, which have been the darlings of the last five years.

Where to next?

So, the question is where to rotate into.

The stocks and sectors doing best are those leveraged to better economic growth including sectors like energy, materials, industrials, and financials, Pittard says. Small caps could also outperform.

“Defensive areas like consumer staples, health care and telecommunications aren’t growing by as much,” Pittard says.

He adds that Europe, which is relatively underweight tech stocks and overweight energy, materials, industrials, and financials, is growing faster than the US.

The ultra large tech stocks have led the S&P500 up more than double over the past five years, whereas the STOXX Europe 600, which measures a basket of European stocks, is up less than 50 per cent in the same period.

“It’s because Europe hasn’t grown earnings like the US over the last five years. That’s because the growth in earnings has been driven by tech stocks,” Pittard says. “But I expect this to mitigate.”

“I expect to see the European markets, small caps on Wall Street and sectors outside the MAMAA stocks to re-rate higher and that’s where there’s going to be earnings growth.”

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About Ashley Pittard and Pendal Concentrated Global Share Fund

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

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

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

Find out more about Pendal Concentrated Global Share Fund

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

Contact a Pendal key account manager here.