George’s investment management career spans over 30 years with Pendal and its predecessor firms. He is responsible for management of credit, fixed interest and short term income portfolios, including Pendal’s highly regarded Sustainable Australian Fixed Interest Fund, Short Term Income Securities Fund and Credit Impact Trust.
George holds a wealth of experience in portfolio management and credit analysis. He has also worked across numerous fixed income, credit and money market portfolios in portfolio management, credit analysis and dealing roles for 27 years. Prior to this George worked in an accounting role for three years.
In 2019 George was awarded the Alpha Manager status by Money Management’s parent, FE fundinfo, in recognition of his career-long performance in the asset management industry. George was one out of 11 Australia-based investment professionals included in this list of esteemed professionals across multiple asset classes, after being assessed on his ability to create risk-adjusted alpha (outperformance) over his entire track record.
George obtained a Master’s degree in Business (Finance), a Bachelor’s degree in Business (Accounting & Finance) and a Graduate Diploma in Applied Finance and Investment.
Here are the main factors driving Australian equities this week according to our head of equities Crispin Murray. Reported by portfolio specialist Chris Adams
>> Crispin Murray’s four themes of ASX full-year reporting season 2021
A NUMBER OF issues combined to prompt a pause in equity markets last week following a strong run.
The S&P 500 fell five days in a row. While there was no specific, material market driver, we note these issues:
- Some wariness around central bank tapering balance sheet purchases
- A supply overhang; US$23 billion in new equity has been issued across 32 deals in the US
- Fed officials announced they would liquidate their equity portfolios to avoid conflicts of interest
- Noise around the potential for tax increases as part of the Democrats fiscal package
- Renewed focus on the potential for slowing growth and higher inflation
- Some caution from sell-side research on the US market following its strong run.
We think it is too early to read too much into this drop.
We are still constructive on the outlook for equities, but we are mindful of a number of issues to watch.
We are in a period of shifting policy, which engenders some risk. It is harder to get a read on underlying economic strength at the moment because of the supply bottlenecks.
Cooler weather in the Northern Hemisphere may also have an effect on Covid case numbers.
The S&P/ASX 300 fell 1.3% last week. All sectors lost ground. Real estate (-2.35%) was the worst and communication services (-0.4%) held up best. The S&P 500 ended down 1.7%.
Covid and vaccines
We are seeing new Covid case numbers decline in the US, Europe, Asia and Israel. So far the return to school has not led to a large resurgence in cases, though this is still possible.
There may also be some impact from colder weather. But at this point the trend is positive.
In the US, 41 States (about 83% of the population) are now more than 5% below peak infection levels and the number of hospitalisations is starting to decline.
In Australia, NSW is on track this week to reach 80% of the population with one dose. This is despite a fall in the daily vaccination rate. Second doses are running a month behind.
There are some concerns over the “Mu” variant of the virus.
Newly classified as a “variant of interest”, there is speculation Mu may be as transmissible as Delta and more resistant to vaccines. The latter may be true — as it was for the Beta variant — but it’s not yet clear according to initial studies.
Macro and policy
The European Central Bank struck a dovish tone, signalling a “moderately lower pace” of bond-buying and emphasising that this wasn’t tapering.
In practice, this means reducing monthly bond purchases from EUR80 billion to EUR70 billion, but with flexibility to do more. The next big policy decision moves to December.
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Part of Friday’s US market weakness related to a story in The Wall Street Journal which suggested the Fed would signal in this month’s meeting that tapering would be announced in November, start in December and be completed by June 2022.
This is a little more aggressive than current consensus expectations.
The market is concerned that the Fed’s view of current economic softness as Delta-related — rather than a more structural issue — could be incorrect.
As a result, they risk tapering into an already slowing economy.
The market is looking for a read on the strength of the underlying US economy. The Q3 GDP signal continues to weaken. The Atlanta Fed GDPNow estimate — a reasonably reliable indicator — is now below 4% quarterly growth. This is well below the 5-8% range in market consensus.
There is no doubt Delta-driven disruptions and supply chain bottlenecks are playing a major role. Auto and light truck sales have dropped materially, for example, driven by issues with getting stock into the yards.
Inflation also remains an underlying concern, which may potentially place central banks in something of a policy bind. There is plenty of data that demonstrates higher prices.
While iron ore is down a lot, plenty of other commodities are running hot. Some of this is due to temporary supply disruptions, such as in aluminium and natural gas.
But there are also longer-term issues at play, such as the impact of carbon pricing on coal in Europe and higher power prices in China.
In contrast there is still plenty of evidence that points to strong underlying economic momentum.
Despite weak August payrolls, job opening are at record levels. Wages are also strong, which drives consumption. Excess savings also continue to rise, up 12% year-on-year.
If we get a sense that Delta is becoming less of a threat — and if Biden’s plan can drive vaccination rates higher —this may help release some of this pent-up potential demand.
Markets
It is notable that US bond yields are not making new lows despite the weaker economic data.
Falling yields in April and May signalled that the economy was slowing despite strong data. Now the opposite may be true. It is also worth bearing in mind that Quantitative Easing means yields are probably 30bps lower than they otherwise would be.
Australian equities held up better than the US, helped by optimism around the vaccination roll-out and the path for re-opening.
However resources remained weak, driven by concern over China’s property market and rhetoric around weaker steel demand.
There was little news on the stock front last week in the wake of reporting season.
Read Crispin Murray’s four themes of ASX full-year reporting season 2021
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.
Significant Features: The Pendal Wholesale Plus Active Conservative Fund is an actively managed diversified portfolio that invests in Australian and international shares, Australian and international property securities, Australian and international fixed interest, cash and alternative investments. The Fund has a significant weighting towards defensive assets.
Fund Objective: The Fund aims to provide a return (before fees, costs and taxes) that exceeds the Fund’s benchmark over the medium term. The suggested investment timeframe is three years or more.
Fund Objective: The Fund aims to provide a return (before fees, costs and taxes) in excess of the MSCI ACWI ex Australia (Net in AUD) over rolling 5 year periods.
The Reserve Bank is easing off the accelerator instead of tapping the brakes. Pendal’s Tim Hext explains what investors can expect next
THE RBA this week enacted what they would view as stage three of the great stimulus unwind.
Stage one was the end of new money in the Term Funding Facility (TFF). This concluded in June, with $187 billion taken up. This was 3-year money, so it runs off from June 2023 to June 2024.
Stage two was capping Yield Curve Control at April 2024. This was done in early July.
And now Stage three this week is a gentle taper of Quantitative Easing (QE) purchases from $5 billion a week to $4 billion – hardly impactful but a signal things are improving.
Future stages will likely see more QE tapering. The RBA is signalling the next review in February next year.
By then total QE will be nudging $300 billion.
We expect QE to be finished by August 2022. Then we adopt a wait and see before any actual tightenings.
The RBA has been very clear this can only occur once inflation is sustainably within the 2-3% band.
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We think it will be there by late 2022, but the RBA wont tighten until well into 2023. A modest hiking cycle up to 1.25% should then follow.
Why do we think any tightening cycle will be modest?
Well, it’s important to remember mortgage rates and deposit rates fell by more than 1.5% in early 2020, despite cash rates only falling 0.65%. This was due largely to the TFF flooding the system with cheap term money.
As the TFF unwinds, it is therefore expected mortgage rates will move higher, independent of the RBA.
Hikes of 1.25% by the RBA will look more like 2% in the real economy. This is more than enough to tap the brakes.
Of course all this assumes a world where vaccines do their job. It also assumes a world where inflation edges higher, but largely behaves.
Time will tell.
About Tim Hext and Pendal’s Income & Fixed Interest boutique
Tim Hext is a Pendal portfolio manager and head of government bond strategies in our Income and Fixed Interest team.
Tim has extensive experience in banking, financial markets and funding including senior positions with NSW Treasury Corporation (TCorp), Westpac Treasury, Commonwealth Bank of Australia, Deutsche Bank, Bain & Co and Swiss Bank Corporation.
Pendal’s Income and Fixed Interest boutique is one of the most experienced and well-regarded fixed income teams in Australia.
Find out more about Pendal’s fixed interest strategies here
About Pendal
Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management.
In 2023, Pendal became part of Perpetual Limited (ASX:PPT), bringing together two of Australia’s most respected active asset management brands to create a global leader in multi-boutique asset management with autonomous, world-class investment capabilities and a growing leadership position in ESG.
Significant Features: The Pendal Active High Growth Fund is an actively managed diversified portfolio that invests in Australian and international shares, Australian and international listed property securities, Australian and international fixed interest, cash and alternative investments. The Fund has a significant weighting towards growth assets.
Fund Objective: The Fund aims to provide a return (before fees, costs and taxes) that exceeds the Fund’s benchmark over the medium to long term.
Graeme is an analyst with over 17 years’ experience covering the Banking, Insurance and Diversified Financials sectors. He has previously worked as an equity analyst at Ausbil Dexia, ABN AMRO and Wilson HTM, spending a further 2 years as an actuarial analyst at Trowbridge Consulting. Graeme is a CFA Charterholder and holds bachelor’s degrees in Commerce and Law from the University of Sydney.
Risk is a constant theme for investors and is never more front of mind than amid a once-in-a-generation bull market.
- Investors wary of market rally ending
- But risk pricing indicates benign outlook
- Low institutional complacency a good sign
THE S&P 500 has not had a 5 per cent fall since before last year’s US presidential elections, soaring by more than a third since those lows.
In Australia, the S&P/ASX200 is up by a quarter over the same time frame.
Conventional wisdom says the longer markets rise, the more risk of correction must be building in the system.
But this time around the conventional wisdom looks wanting, according to Tom Ciszewski, a volatility analyst with Pendal’s Bonds, Income and Defensive Strategies team.
Risk measures and positioning can often be a contrarian indicator says Ciszewski.
When investors are hedging themselves it often can be supportive of further bullish performance. On the other hand low hedging and bearish positioning can be a sign of complacency and a relative market top.
“The way derivative risk and implied volatility is priced right now in equities globally, it’s actually pricing in for a pretty benign environment,” he says.
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Ciszewski says investors should keep a close watch on how big institutions position themselves in derivatives markets as they protect their portfolios against the risk downturn.
Perhaps paradoxically, Ciszewski’s confidence is founded on the fact that institutions have been buying downside protection as the market rises.
This is because in the past over-confidence and complacency among institutional investors is an indicator that markets may be close to topping out.
“You’re always looking for when and how things will blow up. What is the next downturn going to be and how will we make money during it?” says Ciszewski.
“But right now, there’s very little complacency. The institutions are giving up a little upside to buy more downside,” he says.
Measuring institutional sentiment
One way to measure institutional sentiment is the ratio of put and call options being traded.
A high put/call ratio indicates more people are buying puts than are buying calls. It’s an indicator that investors are protecting themselves against potential market falls.
The SPX put/call ratio, which measures options on the S&P500, has risen over the past year to above two. That indicates twice as many put options as call options are trading on some days.
Ciszewski says institutions may be buying downside protection simply because they have had a strong year of gains and feel they can afford to protect themselves, or it could be they see genuine risk on the horizon.
Corroborating the high level of put buying and lack of complacency by institutional investors is the current level of SPX Index option skew. The implied volatility of downside strike puts versus upside strike calls is at multi-year highs.
“Either way, it has this kind of circular effect and allows the market to continue to grind higher.”
When will the outlook change?
So, what will change the benign outlook? And what risks should investors be keeping an eye out for?
Ciszewski says inflation is the biggest potential threat, saying that if markets are wrong and the inflation showing up now around the world is not transitory, that could end the equities rally.
The other risk is if the COVID pandemic manages to outmanoeuvre vaccines and triggers new lockdowns and border closures.
Right now, neither scenario looks likely, he says.
Institutional investors are confident inflation is a temporary effect of reopening.
And markets are looking through the COVID pandemic to a time when life returns to normal.
“There’s more American cases of COVID this Labor Day than there were last Labor Day,” says Ciszewski.
“It doesn’t mean they’re going to lock down. We all have to be careful about merely reading the headlines.”
About Tom Ciszewski and Pendal’s Income and Fixed Interest boutique
Thomas Ciszewski manages Pendal’s volatility fund, implements defensive derivative structures and develops multi-asset class strategies. He has 24 years of experience in managing derivative portfolios and producing positive uncorrelated returns for investors.
Pendal’s BIDS boutique is one of the most experienced and well-regarded fixed income teams in Australia. In 2020 the team won the Australian Fixed Interest category in the Zenith awards.
With the goal of building the most defensive line of funds in Australia, the team oversees A$22 billion invested across income, composite, pure alpha, global and Australian government strategies.
Find out more about Pendal’s Income and Fixed Interest strategies here
About Pendal Group
Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management.
James has nearly 24 years’ experience leading emerging markets funds, and throughout his career has been responsible for over 14 mandates with peak FUM of over $4bn. He previously headed the emerging market investment teams at SG Asset Management and most recently Baring Asset Management, where he managed numerous strategies with his colleague Paul Wimborne. He has also worked with Henderson Investors as a portfolio manager and with H Clarkson as an analyst. James is a CFA Charterholder and obtained a Bachelor of Arts (Geography) with honours from the University of Cambridge.