Julia is responsible for the development of risk, optimisation and portfolio management tools for equity. She has over 19 years’ industry experience, previously holding analyst positions with JP Morgan and Macquarie. Julia is a CFA Charter holder and obtained a Bachelor of Economics from the University of Sydney.

Retail landlords have borne the brunt of lockdowns, but investor sentiment towards the sector is turning positive, say Pendal’s Pete Davidson and Julie Forrest

• Retail was improving ahead of current lockdowns
• Property investors not as shaken by closures
• WEBINAR: How far will listed property go and what’s its role in portfolios now

RETAIL landlords haven’t had a great time of late.

Covid-inspired lockdowns hit shopping mall owners harder than most. Unlike banks which froze — but did not cancel — loan repayments, unpaid rent money mostly won’t be recouped.

Yet investor sentiment for the sector is turning positive.

The malls are losing about a third of their income “but retail is getting better — it’s finding a bottom,” says Pendal’s head of listed property, Pete Davidson.

The latest lockdowns in New South Wales, Victoria and the ACT came at a time when the retail real estate investment trust sector was looking much healthier than early last year.

Not only were people returning to malls, they were also spending more.

“People had plenty of money to spend and they weren’t holding back. Turnovers were improving quite nicely. Then Delta came along to ruin the party,” Davidson says.

Retailers are effectively being subsidised by landlords, explains Forrest. “During the lockdowns, landlords have to foot the bill.”

A rule of thumb is that about one-third of retail A-REIT (Australian Real Estate Investment Trust) income comes from the majors like Woolworths and K-Mart — and they’re still paying rent, says Davidson.

“Another third comes from the large-scale national speciality stores. They are across the country and still paying rent. Generally, those stores are looking beyond Covid and they’re operating in the States that haven’t closed down.

“It’s the mum-and-dads third that are doing it tough. They’ve been impacted and are finding it hard to pay the rent,” Davidson says.

Confidence is emerging

Notwithstanding the lockdowns, there’s confidence about the sector’s prospects.

“In the last lockdown, no-one knew what would happen and there was no vaccine or cure,” says Pendal portfolio manager Julia Forrest.

“This time around there is a vaccine, and people are prepared to look through the trading valley.”

There is less fear about the unknown, says Forrest.

“Investors have seen the other side of the valley. After the lockdowns last time around, there was all this pent-up demand which unleashed spending.

“There were superannuation drawdowns, fiscal stimulus in the form of JobSeeker supplements and people had a high propensity to spend.

“And people just didn’t take holidays. There was $40 billion in cash that wasn’t spent on holidays.”

The experience of last year has mitigated negative sentiment about the sector this year.

“Investors saw this massive reopening last time,” Forrest says. “They know there will be an end because there’s a vaccine this time around.

“They are prepared to look through the current lockdowns, as opposed to last time when no-one knew what was going to happen.”

About Pete Davidson, Julia Forrest and Pendal Property Securities Fund

Julia Forrest has managed Pendal’s property trust portfolios for more than a decade. She has 25 years of experience spanning equities research and advisory, initial public offerings and capital raisings.

Pete Davidson is Pendal’s Head of Listed Property. Over the past 34 years Pete has held financial markets roles spanning portfolio management, advisory and treasury markets. he specialises in the property, retail, insurance and infrastructure sectors.

Pendal Property Securities Fund invests mainly in Australian listed property securities including listed property trusts, developers and infrastructure investments.

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

Climate change investing tends to focus on removing carbon from portfolios or helping companies decarbonise. But a third opportunity — investing in adaptation — is often overlooked. Regnan’s Alison George explains

• Climate-aware portfolios focused on divestment, decarbonisation
• Adaptation is a third opportunity often overlooked
• Irreversible climate change means adaptation is essential

CLIMATE CHANGE caused by past emissions is likely to be irreversible for thousands of years — even if emissions stopped today.

That was a finding in the latest major report from the United Nations Intergovernmental Panel on Climate Change released in August.

Despite this, climate-aware portfolio construction often focuses on decarbonisation by removing investments with high emissions; tilting to low-carbon stocks and investing in offsets; or by investing in solutions that help companies reduce emissions — such as green hydrogen or low-carbon transportation.

But there is another approach that is largely overlooked — investing in companies that are successfully adapting to climate change.

“Adaptation is always the poor cousin to decarbonisation,” says Alison George, head of research at global responsible investing leader Regnan.

“But it’s a critical component of climate-aware investing given the amount of climate change already baked into the system from historical emissions.

Huge driver of investment

“Adaptation will be a huge driver of investment going forward, alongside transition.

“Climate-resilient infrastructure and water-efficiency solutions that respond to reduced water availability under climate change are two key opportunity areas.”

Adaptation has been discounted as a legitimate investment option due to two investment views that have dominated in recent years, says George.

The first factor is the group of people who did not believe in climate change in the first place. “For anyone who doesn’t think climate change is real, why would you spend money on adapting?”

The second, more important factor is a belief that focusing on adaptation is like giving up the fight against climate change.  

In truth, transition and adaptation are both needed — and both offer investible solutions.

Pendal Group’s responsible investing specialists note in a recent two-part climate-change investing report that the physical impacts of climate change will continue to materialise even in the best-case, low-carbon transition scenario.

The report discusses how permanent changes in rainfall patterns and increased temperatures have significant impacts on agricultural productivity. This means businesses that do not adapt — for example through geographic or product diversification — may see a permanent decline in profits.

“A changing climate also impacts consumer demand,” the report points outs.

“Businesses that don’t pay attention to emerging trends from changing seasons and weather patterns may risk being caught out.

“For example, shorter winters can leave retail businesses with surplus winter stock, while wetter summers may reduce demand for outdoor entertainment.”

The report provides the example of a salmon farming business investing in cooler water offshore pens and ways to lift water oxygen levels.

Download: Pendal’s two-part guide explaining the impact of climate change on business and investing.

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About Alison George

Alison George is Regnan’s head of research. She has deep experience in ESG, responsible investment and active ownership. Alison oversees Regnan’s research frameworks, processes and outputs, ensuring it remains at the forefront of industry practice and meets evolving clients needs.

Significant Features: The Pendal Global Property Securities Fund is an actively managed portfolio of international listed property securities. The portfolio is managed by AEW Capital Management.

Fund Objective: The Fund aims to provide a return (before fees, costs and taxes) that exceeds the return from the FTSE EPRA/NAREIT Developed ex Australia hedged in AUD Net TRI over the medium to long term.

Investors expect China may turn its regulatory spotlight on property after tightening industries such as education. Pendal’s Samir Mehta explains the outlook

• China seeking to reduce cost of living pressures on families
• Property industry may be next in Beijing’s sights
• Slowdown would have global ramifications

CHINA’s regulatory tightening of industries such as education, ridesharing, games and food delivery has sent shudders through global investment markets in recent weeks.

The policy changes — which aim to improve quality of life, redistribute income and relieve cost-of-living pressures among China’s most disadvantaged people — may go further with the giant property industry next on the list of investor concerns.

A tightening of property regulation leading to a slow-down in China’s real estate industry would pose a real risk for Australian investors given our commodity exposure to Chinese growth.

How might a China property slowdown play out?

What should investors be looking out for as they weigh these issues?

A real risk

Pendal’s Samir Mehta, who manages Pendal Asian Share Fund, says investors face a real risk that property is next in Beijing’s policy sights.

“There has been chatter around property, because buying a property or renting one remains one of the biggest outlays for an average family,” says Mehta.

“Disparities of income have led to significant real estate price appreciation, particularly in cities like Shanghai, Beijing and Shenzhen.

“There have been a few local articles that have talked about the rising multiples of annual income now required to buy an apartment.”

Regulatory intervention in China’s real estate market could take a number of forms such as:

• Mandating affordable housing as part of new property developments
• Restrictions on investment properties
• New property taxes
• Changing the way capital gains are taxed

Each of these could have serious ramifications for economic growth.

“This is a very tricky part of the economy because of the interactions between construction, property price appreciation and the way provincial and city governments raise revenue through land sales,” Mehta says.

“If China adjusted its policies there would be a noticeable impact down the whole chain.”

Residential property construction is an important component of China’s GDP, “so if property does come under the microscope, you should expect further slowdown.”

“Then there is mounting burden of debt in the system; a fair bit on the balance sheet of property developers and individual mortgages for residence or investment purposes.”

Impact ‘way beyond stocks’

“The impact could be way beyond stocks. Because you’re talking about a system that is built on GDP growth, built on construction, built on debt for that sector and revenues for the government. It’s across the board.”

As a major supplier of building materials including iron ore, Australia could endure the biggest impact of policy changes on China’s real estate.

Iron ore prices fell by a third in recent weeks as China slowed steel production to curb carbon emissions.

Changes to the Chinese property industry would put further pressure on the iron ore price.

What are the signs an investor should look out for?

Investors should watch Chinese retail sales, sales of property and credit growth as leading indicators of a Chinese downturn, Mehta says.

If there is evidence of slowing, investors should watch how China’s central bank responds.

The People’s Bank of China has been winding back stimulus — but they may change tack if Beijing’s policies start to affect property process and weaken the economy too much.

“The ramifications of a slowdown in China are going to be global in nature, and therefore it’s very important for the next three-to-six months to observe how the economy in China fairs,” says Mehta.

About Samir Mehta and Pendal Asian Share Fund

Samir manages Penda’s Asian Share Fund, an actively managed portfolio of Asian shares excluding Japan and Australia. Samir is a senior fund manager at UK-based J O Hambro, which is part of Pendal Group.

Pendal Asian Share Fund aims to provide a return (before fees, costs and taxes) that exceeds the MSCI AC Asia ex Japan (Standard) Index (Net Dividends) in AUD over the medium-to-long term.

Find out about Pendal Asian Share Fund

About Pendal Group

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 main factors driving Australian equities this week according to Pendal’s head of equities Crispin Murray. Reported by portfolio specialist Chris Adams.

WE HAVE seen positive developments on two fronts in the past week.

Firstly, Fed Chair Jerome Powell was relatively dovish in his Jackson Hole speech, calming fears of aggressive tightening.

Secondly, there are signs that Covid cases may be peaking in the US.

In response, we saw bond yields rise slightly in a controlled manner, commodities rally and equity market gains. The S&P/ASX 300 rose 0.57% and the S&P 500 1.54% for the week.

The domestic reporting season remains a small positive.

Last week’s theme was the return of the unloved. Some of the re-opening stocks rallied as investors got a better gauge on near-term risks and were prepared to look through them.

We see four key issues facing markets:

1. Economic growth: Having reached peak momentum do we see material downside surprises as a result of fiscal cliffs and the re-emergence of structural issues?
2. Covid: Does a combination of the Delta variant and waning immunity lead to an environment of perpetual new waves that require on-going restrictions, limit the service sector recovery, hit confidence and lead to weaker growth?
3. Inflation: Will it be higher than expected if recent drivers prove to be more than “transitory” and a tight labour market drives wage growth?
4. Policy: Is there a risk of policy mistakes as central banks exit quantitative easing (QE) and attempt to reconcile the need to anchor inflation expectations and support growth?

Good news on Covid and policy should help support markets into the quarter’s end.

Fed policy outlook

At this point, the Fed is managing its message well.

The minutes of the last FOMC meeting indicated that QE tapering would occur sooner than previously indicated.

Cautious statements from some committee members raised concerns that Powell may have struck a more hawkish tone.

While Powell did clearly suggest tapering is coming this year — probably announced in November and started in December — he also signalled:

1. There is almost no chance of tapering in September
2. The Delta strain is a clear risk to growth, which may offset the impact of positive employment data on policy decisions
3. The decision to taper is distanced from the decision on rates. Rate rises may not follow on the heels of QE tapering as quickly as many expect
4. He still sees recent inflation as transitory

The analogy is that, in taking the foot off the accelerator of QE, the Fed is not yet ready to start pumping the brakes of rate rises.

At this point the risk of a 2013-style taper tantrum is low as long as unemployment or inflation data does not materially surprise.

This time around the Fed has been very careful to seed the market and manage expectations.

Tapering looks set to align with a reduction in the issuance of treasuries as stimulus measures fall away. There will be less of an issue with over-supply as a result.

Economic outlook

US savings rates have fallen from close to 35% at the peak of early 2020 to a more normalised rate of just under 10%. But this is still well above post-GFC levels.

Although the rate has fallen, the high levels of the past 18 months have left a significant amount of pent-up household savings which can be deployed.

Spending on goods appears to be rolling over from very high levels in the US.

It will important to see how far this falls in individual sectors. But we are also mindful that spending on services has only just returned to pre-Covid levels and is still well below trend growth.

Delta may see some near-term pressure on this, but longer-term this is an additional source of spending growth in the US.

In Australia, retail sales have fallen quickly. Annualised growth was -15% in July, down from -1% in June.

Much of this is driven by NSW where sales fell 35% in July. By comparison, sales were up 11% in Western Australia.

This highlights risk in areas such as household goods, which are still well above trend growth levels.

Some 36% of Australians were under lockdown in July — and likely around 50% in August.

At this point Q3 GDP is expected to be down 3-4%. CY21 is now likely to step down to just over 1% GDP growth.

These near-term issues will affect growth and earnings, but it is clear there is still a lot of confidence in corporate Australia.

This is evident in capex intentions outside the mining sector, which continue to rise.

It has also been reinforced in our company meetings. A lot of management teams are pointing to how quickly demand snapped back once restrictions were lifted previously.

Covid outlook — international

Most regions are seeing a stabilisation in case trends.

Europe has so far avoided a Delta wave similar to that seen in the US and UK, reflecting ongoing caution in re-opening rules.

Israel continues to experience a surge in cases. But the number of hospital patients has stabilised at just over half the January peak.

Markets are focused on the US wave because of its potential to affect the global growth outlook.

Here, we have seen case growth and hospitalisations begin to decelerate.

Risks remain with the return to school and the fact that 38% of Americans live in areas where ICU occupancy is over 85%.

But there is evidence that the peak is close.

The effective reproduction (R eff) number — which measures the average amount of people an infected person goes on to infect — has fallen below one in some of the first-hit states such as Florida.

Testing positivity numbers have also started to fall.

It is becoming apparent China is continuing to get on top of its Delta outbreak. The number of districts categorised as “mid-risk” have halved from the peak. This is also helping sentiment on global growth.

Covid outlook — Australia

Australia is now reaching vaccination levels equivalent to the peak levels in other countries.

Some models suggest that at the current R eff of 1.34, NSW cases will peak in late September at about 2500 per day.

If restrictions lead to an R eff 0.06 lower, the peak could be below 2000 per day.

As vaccination starts taking effect, case numbers could then drop quickly, back to 300 per day by the start of November, and negligible by December.

The same analysis for Victoria implies a peak of 400 cases per day in early October at the current R eff of 1.36.

While modelling of Covid has often proven wrong, this highlights that we may be facing a significant bow wave of new cases in September.

Markets

Powell’s speech helped push all markets higher and increased breadth. Growth and value sectors both rallied last week. 

Key commodities bounced from oversold levels. Copper rose 4.4% and iron ore 10.1%. Brent crude was up 11.5% as Kuwait flagged a potential pause on output increases.

The AUD gained 2.5% against the USD.

We saw a recovery among lockdown-affected stocks.

This was partly better macro sentiment, but also resulted from greater context around the near-term risk.

In several instances the market was been reassured by management’s reminders about how quickly demand bounced back after restrictions were lifted.

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About Crispin Murray and Pendal Focus Australian Share Fund

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

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

Find out more about Pendal Focus Australian Share Fund here.  

Contact a Pendal key account manager here.

As Portfolio Manager, Lewis co-manages our Australian smaller companies and micro-cap funds and conducts fundamental analysis on a range of smaller companies. Lewis joined the Pendal Smaller Companies team in 2013 as a small cap analyst, before being promoted to the role of Portfolio Manager in 2018. Lewis brings 20 years of industry experience with previous roles spanning equities research at boutique stockbroking firm, Taylor Collison, as well as commercial and investment banking roles at Westpac Bank and Commonwealth Bank. Lewis holds a Bachelor of Commerce (Corporate Finance) from the University of Adelaide.