June’s unemployment rise should all but seal a June rate cut. Only a massive quarterly inflation surprise at the end of July would stop it, writes Pendal’s head of government bonds TIM HEXT
- Unemployment may drift higher
- But no suggestion of a sharp or rapid rise
- Find out about Pendal Government Bond Fund
- Browse all Pendal’s fixed-income funds
THE unemployment rate jumped to 4.3 % for June – the highest rate since late 2021.
Job growth was a very tepid 2000. Hours worked fell by 0.9%.
In trend terms – which we prefer over the more volatile, seasonally adjusted data – job growth was 22,800 while unemployment rose from 4.1% to 4.2%.
Unemployment, June 2025 (seasonally adjusted vs trend):
Source: Australian Bureau of Statistics
June was a relatively clean month – no elections or weather events – and the Bureau of Statistics offered no one-off excuses for the poor outcome.
The Reserve Bank expected unemployment to end 2025 at 4.3%, having revised it up from 4.2% in May.
Interestingly their forecast at the start of the year was 4.5%, but they lost patience as results earlier in the year were strong.
Noise or new trend?
The obvious question is whether this is just noise or the start of a new, upwards trend.
Every month one eighth of the survey is rotated as respondents are surveyed over eight months – so there is some impact or noise to consider.
However, as students of statistics will know, since each sample size is 3000 households (24,000 in the survey), the impact should be small.
We won’t get a breakdown by profession until the quarterly numbers, but rapid growth in non-market jobs (mainly education and healthcare) has masked softer market job growth for some time.
There are signs this non-market job growth may be slowing, so unemployment may drift a bit higher into the end of year.
However, forward indicators such as job vacancies and employment indicators in NAB’s monthly business survey, do not suggest a sharp or rapid rise.
August rate cut looks likely
The Reserve Bank next meets on Tuesday, August 12.
Today’s data should all but seal a rate cut – only a massive quarterly inflation surprise at the end of July would stop it.
The Q2 wage data and the next Labour force survey do not come out till after the meeting.
The market has two-and-a-half cuts by year end and a terminal cash rate just above 3%.
We still think bonds are range-bound by this data.
Together with bonds sitting at the cheaper end of the range, we have added some duration to our portfolios.
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.
In this video, Australian equities portfolio manager BRENTON SAUNDERS explains the strategic role of ASX mid-cap stocks in a diversified portfolio
An excerpt from Brenton’s interview
ASX-listed mid caps represent the “ideal sweet spot” of the market, offering compelling opportunities for investors seeking growth, income and diversification in their portfolios.
That’s according to Brenton Saunders, portfolio manager of Pendal Midcap Fund, who explains the opportunity set in the video above.
The ASX mid-cap universe — which Pendal defines as companies ranked 51st to 150th by market capitalisation — is rich with innovation and diversity. It includes high-growth names in fintech, healthcare and technology, as well as early-stage resource companies ramping up production.
“Most of the best growth stocks sit in the mid-cap universe,” argues Brenton.
These often founder-led opportunities are not only a more evenly weighted representation of the economy, but can also be the subject of corporate activity, making it an exciting part of the Australian market.
“These companies augment growth and capital appreciation at a reasonable level of yield,” Brenton says. “In aggregate, they tend to outperform large caps while offering more stability than small caps.”
However, performance is often tied to domestic economic conditions — which means it’s critical to invest with an experienced team with the resources to carry out deep macro-economic insight.
“Most mid-caps have high domestic exposure, so understanding the shape and health of the Australian economy is key,” says Brenton.
Pendal Midcap Fund is well placed to benefit from the scale, infrastructure and experience of Pendal’s Australian equities team, which is one of the biggest and best-resourced in the country.
“We have deep sector coverage and high continuity, which can translate into better research, stronger conviction and more robust portfolios,” Brenton says. “That allows us to find and cover opportunities in different parts of the economy at different times of the economic cycle.”
Supported by a disciplined, research-driven process, the fund offers a powerful tool for enhancing exposure to an exciting part of the market.
Watch the video above to hear more from Brenton and Pendal’s mid-cap strategy.
Get to know our portfolio managers better in these other profile videos:
About Pendal
Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management.
Pendal’s Australian equities team is one of the most experienced and well-resourced equities teams in Australia.
Contact a Pendal key account manager
Find out more about Pendal’s Australian equities capabilities
Regnan Credit Impact Trust (APIR: PDL5969AU)
(the “Fund”)
The following information contains an important update to the exclusionary screens disclosed in the Product Disclosure Statement and Additional Information to the Product Disclosure Statement for the Regnan Credit Impact Trust dated 11 January 2023 (together, “the PDS”) and should be read in conjunction with the PDS.
The changes to the Fund’s exclusionary screens are outlined below. In our view, these changes ensure that the Fund remains true to label and more closely aligned with investor expectations in relation to responsible investment funds.
1. Broader screening for fossil fuels
The Fund will limit its exposure to issuers directly involved in the exploration, extraction or refinement of fossil fuels (specifically coal, oil and gas).
2. Broader screening definition for controversial weapons
The screening definition for controversial weapons will broaden to also include white phosphorus weapons. As a result, the Fund will not invest in issuers directly involved in the manufacture of white phosphorus weapons.
3. Additional screen for controversial weapons
The Fund will apply an additional exclusionary screen for controversial weapons as follows:
The Fund will not invest in issuers directly involved in the supply of goods or services specifically related to controversial weapons.
4. Removal of current screen for issuers that directly mine uranium for the purposes of weapons manufacturing
The current screen for issuers directly involved in the direct mining of uranium for the purposes of weapons manufacturing will be removed.
Issuers supplying uranium for the purposes of weapons manufacturing will be captured under the new screen for controversial weapons relating to the supply of goods or services specifically related to controversial weapons.
5. Stricter gross revenue thresholds
The Fund will not invest in issuers directly involved in any of the following activities, where such activities account for 5% or more of an issuer’s gross revenue:
- Alcohol
- Gaming facilities
- Non-controversial weapons or armamentsPornography
- Fossil Fuels.
Exclusionary Screens
Effective 15 July 2025, the disclosure relating to the Fund’s exclusionary screens set out in section 5. How we invest your money of the Fund’s Product Disclosure Statement is replaced with the following:
The Fund will not invest in issuers directly involved in any of the following activities:
• tobacco production (including e-cigarettes and inhalers); or
• controversial weapons manufacture (including cluster munitions, landmines, biological or chemical weapons, nuclear weapons, depleted uranium weapons, blinding laser weapons, incendiary weapons, non-detectable fragments and white phosphorus weapons); or
• supply of good or services specifically related to controversial weapons.
The Fund will also not invest in issuers directly involved in any of the following activities, where such activities account for 5% or more of an issuer’s gross revenue:
• the production of alcoholic beverages; or
• manufacture or provision of gaming facilities; or
• manufacture of non-controversial weapons or armaments; or
• manufacture or distribution of pornography; or
• exploration, extraction or refinement of fossil fuels (specifically coal, oil and gas).
Effective 15 July 2025, the disclosure relating to the Fund’s exclusionary screens under the heading ‘Ethical considerations’ in section 3. Labour, environmental, social and ethical considerations of the Fund’s Additional Information to the Product Disclosure Statement is replaced with the following:
The Fund will not invest in issuers directly involved in any of the following activities:
• tobacco production (including e-cigarettes and inhalers); or
• controversial weapons manufacture (including cluster munitions, landmines, biological or chemical weapons, nuclear weapons, depleted uranium weapons, blinding laser weapons, incendiary weapons, non-detectable fragments and white phosphorus weapons); or
• supply of good or services specifically related to controversial weapons.
The Fund will also not invest in issuers directly involved in any of the following activities, where such activities account for 5% or more of an issuer’s gross revenue:
• the production of alcoholic beverages; or
• manufacture or provision of gaming facilities; or
• manufacture of non-controversial weapons or armaments; or
• manufacture or distribution of pornography; or
• exploration, extraction or refinement of fossil fuels (specifically coal, oil and gas).
Here are the main factors driving the ASX this week, according to Pendal portfolio manager PETE DAVIDSON. Reported by head investment specialist Chris Adams
GLOBAL equity markets are climbing the wall of worry, with most indices now 25% above their post-Liberation Day lows and close to all-time highs.
This suggests investors are backing a Goldilocks version of the US economy with not too much inflation from tariffs (as exporters “pay to play” by absorbing tariffs through lower production margins) and just enough spending growth from consumers to keep growth intact.
The US technology sector has reached record highs, fuelled by optimism that strong earnings will persist following the passage of Trump’s One Big Beautiful Bill Act (OBBBA) on 4 July, which includes tax cut extensions for individuals and new permanent capital expenditure deductions for companies.
NVIDIA’s market capitalisation reached a historic US$4 trillion last week, equivalent to 2.3x the total value of the ASX200 and approximately 30 times the size of Commonwealth Bank (CBA).
Additionally, NVIDIA is reportedly planning to launch a new AI chip specifically designed for the Chinese market in September.
Last week’s key headlines included US copper tariffs, a US Department of Defence rare earth offtake agreement and, domestically, an unexpected pause in rate cuts by the RBA.
On tariffs, the Trump administration noted a pending letter to the European Union – delivered over the weekend and imposing 30% tariffs on both it and Mexico – alongside threats of a 35% tariff on Canada and plans for a blanket 15% or 20% tariffs on most other trading partners.
The market was largely inured to these developments last week, perhaps seeing them as a negotiating tactic and preferring to wait for final resolution.
The S&P/ASX 300 fell 0.3% last week. Resources (+0.5%) fared better on a firmer iron ore price – underpinned again by tariff news with the US threat to hit major iron ore producer Brazil with a 50% tariff.
The S&P 500 was also off 0.3% and is +7.2% for the year.
There has been a change in leadership so far in 2025 with European (Euro STOXX 50 +12.8%) and UK (FTSE 100 +11.8%) markets performing well on expectations of far greater fiscal stimulus and a reindustrialisation of Europe. German defence names have been particularly strong.
At the margin these markets are also benefitting from a shift away from dollar assets, with the US Dollar trade-weighted index (DXY) down 10% for the year.
Indian and Chinese equities are also lagging.
US treasuries were relatively quiet, with 10-year bond yields edging up 7bps and remaining contained at the long end.
Commodities were generally stronger, led by copper which jumped 9% after the announcement it will face a 50% US tariff – the same rate as steel and aluminium.
The US uses about 6% of global copper and is expecting a surge in demand, mostly in tech and data centres applications. The Trump administration wants to secure its sovereign supply and bring smelting and refining back onshore.
Copper is now up just under 40% for the year. Lithium remains soft, down 18.5% for the year, in part reflecting reduced EV subsidies in many countries.
US macro and policy
It was a slow news week for macro data in the US.
The June FOMC minutes showed most members are waiting for more clarity on the effects of tariffs before altering rates.
A July rate cut is unlikely, but weaker labour data could prompt action in September.
The committee expects possible 25bp cuts in September, October, and December, though opinions remain divided.
The NFIB Small Business Optimism index inched down to 98.6 in June from 98.8 in June. This is better than this year’s lacklustre average of 93.0, though still far from its peak at 105.1 post Trump’s election, before tariffs dampened the mood.
While business owners’ optimism bounces around, hard data like hiring and investment plans remain soft. With fewer respondents than usual even bothering to answer the survey, things might be rougher than they appear.
Mortgage Applications leapt by 9.4% in the week ending 4 July to reach their highest level since February 2023.
The gradual decline in the 30-year average conventional mortgage rate to 6.77%, from 6.93% four weeks ago, is likely to have helped to bolster demand.
Some consumer surveys, however, also point to a pick-up in optimism and improved perceptions of job security over the last couple months.
The further decline in Initial Jobless Claims (to 227K last week, from 232K the week before) was largely driven by states with relatively large auto sectors where figures can be noisy due to annual summer shutdowns.
Meanwhile, continuing claims increased to 1,965K in the week ending 28 June, continuing to suggest a future rebound in the unemployment rate, which fell from 4.2% in May to 4.1% in June.
There were several developments on the tariff front, with the Trump Administration announcing:
- A 50% tariff on copper, in line with aluminium and steel.
- A 35% tariff on Canadian imports starting next month
- A 50% tariff against Brazil – which is a major supplier of beef, coffee and orange juice to the US. As a major supplier of iron ore, a large tariff is potentially positive for Australia.
- Intended tariffs of 15% or 20% on most other trade partners.
- A 200% tariff on pharmaceuticals is being considered – but the US will give companies extended time to build the manufacturing facilities in the US before applying tariffs if they don’t. Like copper, the aim is to bring manufacturing back to the US.
Tariff revenues have quickly risen from the range of US$6-8bn per month, to over $20bn in May.
A projected US$30 bn per month would equate to US$360bn per annum – the problem is that the US Budget Deficit is US$1800bn and is increasing, thanks to the Trump OBBA, which is projected to add US$240 bn in deficits per annum for next decade.
China macro and policy
Beijing has announced further population growth stimulus measures – with cash payments for children born after January 2025.
There was also further rhetoric related to recent comments around the need to remove excess capacity in core industries – such as steel. The risk here for Australia is that reduced steel capacity results in lower demand and pricing for iron ore, despite higher steel margins.
There was also some social media speculation that the leadership will be holding a meeting to help revive the property sector.
Australia macro and policy
The RBA surprised the market with its decision to leave the cash rate unchanged at 3.85% against expectations of a 25 bp cut.
The decision to pause the easing cycle was “about timing rather than direction” with the RBA just “looking for further confirmation we are on the forecast path”.
Governor Bullock reasoned a “cautious approach” was warranted, because year-over-year growth in the quarterly trimmed mean inflation had only just returned to the 2-3% target band (2.9%yoy), labour conditions were tight with negligible productivity growth, and because global uncertainty remains elevated.
The high number of dissents – the vote passed 6-3 in favour – also caught attention, highlighting clear debate over the appropriate policy stance.
Multiple economists previously calling for a July rate cut pushed back those expectations, but retained terminal rate forecasts of 3.10%, implying three more 25 bp cuts. Bond yields shifted ~14 bp higher across the curve.
Australian equities
July has seen a continued rotation from growth into resources/cyclicals, despite a slight bounce in US bond yields and further tariff agitation from Trump.
Stocks like James Hardie (JHX), BlueScope Steel (BSL) and Sims (SGM) have all benefitted from sector rotation, as have some of the weaker stocks in FY25 such as Amcor (AMC), Orora (ORA) and Light & Wonder (LNW).
The re-rate looks to be outpacing fundamentals in some instances – for example, BSL’s North American steel spreads have stabilised and there is an emerging risk around cost inflation and increased discounts.
Since the RBA surprise “hold” decision, the ASX 200 is flat, while the AUD/USD cross is +0.3% and Australian Government 10-year yields are +10bps.
Banks notably outperformed after the decision while, interest sensitive and defensive sectors have been weaker.
AREIT update
The AREIT sector returned 12.9% in FY25, against 13.8% for the S&P/ASX 300.
Performance was led by Charter Hall Group (CHC, +76.6%), driven by lower bond rates and signs that commercial real estate values have bottomed and, as a result, we have seen a pickup in fund flows and transaction activity.
Goodman Group (GMG, -0.6%) was a drag on the sector, unwinding previous outperformance with the market concerned about the capital required to build its data centres.
We expect stronger EPS growth for the sector, particularly from the retail REITs, affordable housing and fund managers.
We see a stronger-for-longer cycle for quality asset owners, as rising demand (helped by population growth) is met with limited supply – with higher construction costs meaning a majority of proposed developments are uneconomic.
Residential apartments, like many other forms of commercial real estate, are trading below replacement costs.
The sector has a twelve-month-forward dividend yield of 3.4% (5.5% excluding GMG), a price/earnings of 19x (14.7x excluding GMG) and three-year EPS growth rates of 5-6% or more, which is a historical high (4.2% excluding GMG).
Meanwhile we are seeing signs of equity managers buying AREIT cover and reducing active underweights.
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 a global investment management business focused on delivering superior investment returns for our clients through active management.
In this video, ELISE McKAY explains the Pendal process for identifying income, growth and diversification opportunities in Australian shares
An excerpt from this interview
AUSTRALIAN equities have the potential to offer investors a compelling trio of benefits, argues analyst and portfolio manager Elise McKay.
In this video, Elise explains how the Pendal investment process helps her team identify and take advantage of opportunities in Australian shares.
“Firstly you get income, secondly you get growth, and then thirdly you get the diversification benefit,” she says.
High dividend pay-out ratios and a strong franking credits regime make Australian stocks attractive for income-seeking investors, she says.
On the growth front, Australia has been a fertile ground for scalable business models.
“If you can succeed and grow from nothing in Australia, you’re really well placed to scale that model offshore,” she says, noting examples such as CSL, Xero and Wisetech, which are held in various Pendal portfolios.
Diversification is another key advantage. Unlike tech-heavy US markets, Australia’s ASX is weighted towards financials, resources and healthcare companies which can offer additional sector and geographical balance — particularly for businesses with exposure to Asia.
Pendal clients benefit from the experience and tenure of the Australian equities team, which is one of the biggest and best-resourced in the country.
Pendal thrives on respectful debate and diverse perspectives, where “everyone feels free to challenge each other, which translates to better outcomes,” Elise says.
“We’re core managers, so style consistency is critical. We actively monitor performance and risk to avoid surprises.”
Elise manages Pendal Horizon Sustainable Australian Share Fund, which aims to align performance with purpose by supporting companies driving the transition to a more sustainable future.
“We exclude harmful sectors, we support sustainable practices, and we engage with companies to improve,” she says. “It’s about de-risking and building better businesses.”
Watch the video above to learn more about Elise and Pendal’s Australian equities strategies.
Get to know our portfolio managers better in these individual profile videos:
About Pendal
Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management.
Pendal’s Australian equities team is one of the most experienced and well-resourced equities teams in Australia.
Contact a Pendal key account manager
Find out more about Pendal’s Australian equities capabilities
In this video, explore the opportunity set in Australian equities through the eyes of one of the country’s biggest and best-resourced equities teams
An excerpt from the team’s interview
AT the heart of investing in Australian equities is a belief in Australia itself.
In this video, hear more about the opportunity set in Australia through the eyes of the Pendal Australian equities team – one of the biggest and best-resourced teams in the country.
According to Crispin Murray, head of equities at Pendal, Australia is not only one of the fastest-growing economies in the developed world – it’s also home to strong institutions, well-run companies and a government with a strong balance sheet.
“Put all that together and you have a market full of opportunities and the potential for strong returns,” Crispin says. “That means it’s a really good part of any diversified portfolio.”
Investing in the Australian market can offer a trifecta of benefits, adds analyst and portfolio manager Elise McKay.
“In Australia, you get income, growth, and diversification,” she explains. “Plus, we have some world-class growth companies – if you can succeed in Australia, you’re well-placed to scale globally.”
However, staying abreast of the opportunity set, navigating market cycles and selecting the best stock ideas calls for the knowledge, skills and research power of a well-resourced team.
Pendal’s 19-strong equities team hail from all walks of life – supporting a diversity of thought that underscores their understanding of industry, sector and business performance through various market cycles.
“We have one of the biggest active Australian equities teams in the market, and we do that very consciously,” explains portfolio manager Brenton Saunders. “We want to understand all the opportunities and have very dedicated coverage across each sector of the market.”
By “acting like business owners”, the team can also harness their knowledge of business fundamentals to get the inside track on the challenges companies face in each environment and the solutions they can offer shareholders.
“We task ourselves with making money in any and every environment,” says co-portfolio manager Lewis Edgley. “The way we do that is having a very good fundamental understanding of the businesses that we’re investing in. And when we get that right, we can identify mispriced opportunities and exploit them.”
Get to know our portfolio managers better in these individual profile videos:
Crispin Murray, head of equities
Elise McKay, analyst and portfolio manager
Brenton Saunders, portfolio manager
Lewis Edgley and Patrick Teodorowski, co-portfolio managers
About Pendal
Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management.
Pendal’s Australian equities team is one of the most experienced and well-resourced equities teams in Australia.
Contact a Pendal key account manager
Find out more about Pendal’s Australian equities capabilities
In this video, our head of equities CRISPIN MURRAY explains Pendal’s advantages in finding opportunities and managing risks in Australian equities
An excerpt from Crispin’s interview
INVESTING in Australian shares is more than a financial decision.
According to Crispin Murray, it’s also a vote of confidence in the country’s economic resilience and institutional strength.
In this video, hear from Pendal’s head of equity strategies about the opportunity set in Australia and why he believes Australian equities deserve a place in your diversified portfolio.
“Investing in Australian equities is really a view on Australia as a country,” he says. “We’re one of the fastest-growing economies in the developed world, with well-run companies and a government that has a good balance sheet.”
This optimism is backed by the depth of experience within Pendal’s Australian equities team.
With 19 members averaging 20 years in financial markets — with 15 of those years at Pendal — the team brings a wealth of insight and historical perspective.
“If you’ve lived through COVID, the financial crisis, and the crises of the 90s, you understand how markets operate and when to step in or step back,” Crispin continues. “You can take a really long-term view and generate returns for your investors.”
At the core of Pendal’s approach, however, are three guiding principles: open-mindedness, critical dialogue, and awareness of bias.
“You need to be prepared to change your investment view,” Crispin notes, emphasising the importance of dynamic thinking and robust critical dialogue.
The Pendal Focus Australian Share Fund exemplifies this philosophy.
An actively managed portfolio of up to 30 stocks, the fund blends large and small caps, growth and value, to deliver consistent performance.
“You’re not relying on the cycle or market themes — just finding really good companies that aim to outperform.”
Tune into Crispin’s interview above to hear more about why, with a 20-year track record of disciplined investing and strong returns, Pendal offers a compelling case for inclusion in any diversified portfolio.
Get to know our portfolio managers better in these individual profile videos:
About Pendal
Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management.
Pendal’s Australian equities team is one of the most experienced and well-resourced equities teams in Australia.
Contact a Pendal key account manager
Find out more about Pendal’s Australian equities capabilities
In this video, our experienced ASX smaller companies team explain how they find mispriced opportunities
An excerpt from the team’s interview
BEYOND the familiar territory of the ASX 100 lies a universe of opportunity in smaller companies.
In this video, Pendal Smaller Companies Fund co-portfolio managers Lewis Edgley and Patrick Teodorowski explore how investors can benefit from the breadth and diversity of Australia’s small-cap market.
For investors seeking more than just the familiar names on the ASX 100, Lewis believes small caps offer a world of untapped potential.
“When we look at the ASX 100, it’s very dominated by financials and resources,” he explains. “Whereas the Small Ordinaries Index really is a very broad and diverse set of investment opportunities.”
This diversity is key — according to Lewis, there are “literally hundreds, if not thousands, of companies that we can look at”.
“Our job is to search through them and find where mispriced opportunities exist,” he says. “At different points in the economic cycle, different sectors will be doing better and doing worse. That gives us opportunities to find money-making opportunities regardless of what the economy is doing.”
According to Patrick, small caps can also offer a broad set of industry exposures that investors might not get from large-cap Australian companies.
“We invest in companies that have very long runways for growth,” he adds. “You can also invest in businesses before they can become household names and enter into the major indices.”
With central banks beginning to cut rates globally, Lewis sees a turning point for ASX-listed small caps.
“We think there’s a scenario over the next 12 months where the handbrake comes off. As a category, things get a little easier,” he explains.
Ultimately, the team’s edge lies in its relentless research — drawing from the resources of a 19-strong Australian equities team.
“We are bottom-up stock pickers,” says Lewis. “In small caps, our team has decades of experience. We’re always looking for that information edge and when we find it, we’re willing to exploit it.”
Get to know our portfolio managers better in these individual profile videos:
About Pendal
Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management.
Pendal’s Australian equities team is one of the most experienced and well-resourced equities teams in Australia.
Contact a Pendal key account manager
Find out more about Pendal’s Australian equities capabilities
Despite a period of strong performance, Pendal’s emerging markets team remains cautious on the outlook for Korea
- Korea experienced dramatic gains including strong performance among retail mid-caps
- But underlying economic indicators are weak, giving our team a cautious view
- Find out about Pendal Global Emerging Markets Opportunities fund
STOCK market volatility is driven by a complex mix of formal structures – such as investor mix, regulation and security availability – along with the behavioural tendencies of local and international investors.
These characteristics are often amplified in emerging markets, including Korean equities, which can be prone to big moves in price level in response to minimal fundamental news.
We feel the Korean financial landscape has several components that reinforce its position as an emerging market, despite undoubted technological prowess.
These include relative weakness in corporate governance, volatile politics (very much including last year’s attempt to impose martial law) and instruments and structures that amplify volatility such as use of complicated derivatives among retail investors.
(The latest trend is auto-callable ETFs – which hold structured products that provide income and principal return if the underlying asset meets certain conditions).
Find out about
Pendal Global Emerging Markets Opportunities Fund
Bull market benefits Korea
We are now in a global environment that looks like a broad bull market in emerging market assets.
Historically in these environments, individual emerging markets often experience violent short-term, up-and-down moves as part of a trend of the broader asset class moving higher.
That’s definitely what it looks like in Korea.
The second quarter saw MSCI Korea rise 32.7% in USD terms, with the Korean Won’s 8.9% move up against the US Dollar contributing significantly.
At a stock level there were some exceptional moves, especially in some of the mid-cap names preferred by local retail investors.
Some names in sectors as diverse as shipbuilding and ecommerce rose more than 50 per cent in the quarter.
Of course, no investor will object to being caught in assets that are shooting higher – and Pendal’s top-down country process aims to consider liquidity and sentiment as part of our analysis and allocation process.
However, to be more than just a liquidity-momentum filter, we need to pay attention to the economic fundamentals and corporate earnings that underpin these stocks.
Caution at stock level
We need to think of equities as stakes in real businesses rather than just as tradeable securities.
And at this level Korea looks far more difficult.
The stronger Won is a drag on the exporters which are the backbone of the Korean economy.
Some major exporters in the semiconductor, automotive and steel sectors have seen their forecast earnings revised lower year to date.
First-quarter GDP growth was zero year-on-year, industrial production in the year to May grew only 0.2% and purchasing-manager surveys show an expectation of economic contraction.
Corporate governance and politics remain difficult despite the appointment of a new administration in June after peaceful elections.
Meanwhile the environment for global trade remains uncertain.
Emerging markets we like better
Our security selection within Korea has been strong, allowing us to hold some of the best-performing stocks in the market, and we remain alert to opportunities here.
Overall, though, we generally prefer markets with more sensitivity to the US dollar and less exposure to global trade.
It is markets such as Brazil, Mexico and South Africa where we see more opportunity for a stronger currency leading to faster, and further, interest rate cuts.
About Pendal Global Emerging Markets Opportunities Fund
James Syme, Paul Wimborne and Ada Chan 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.
Here are the main factors driving Australian equities this week, according to portfolio manager JIM TAYLOR. Reported by head investment specialist Chris Adams
LAST week began with genuine concerns about the risk of escalation in the Middle East, moved to risk-on mode when a ceasefire looked to be holding, and ended with renewed commentary and signs of progress around tariff negotiations.
This was interspersed with US economic data (incomes, housing and consumption) which encouraged the prospect of more imminent rate cuts – though US Federal Reserve members appear reticent to change settings in the short term.
In Australia we saw inflation data that, while not materially different from consensus, did allow the market to firm its view on the likelihood of a July rate cut.
US Treasuries strengthened, with 10-year yields dropping 10 basis points (bps) to 4.28% and 2-years falling 16bps to 3.74%.
Commodities (ex-oil and gold) had a decent week following the de-escalation of geopolitical concern and progress on tariffs.
The S&P 500 rose 3.5% for the week to finish at all-time highs, led by big tech and consumer discretionary. The S&P/ASX 300 rose 0.3%.
Trade negotiations
There were several moving parts in play on trade last week.
US Commerce Secretary Howard Lutnick said the US and China finalised a trade understanding, codifying terms agreed in Geneva in May.
He said China would deliver rare earths to the US and – once Beijing did this – Washington would remove its countermeasures.
It appears China will also take steps to address US issues with fentanyl trafficking.
Secretary Lutnick indicated 10 major trade deals could be announced by July 9, when the delay to “Liberation Day” tariffs is due to expire.
Elsewhere, there was mixed messaging from the European Union.
There is a view that the EU may lower tariffs in effort to strike a deal with US before the July 9 deadline. Though EU Commission President Ursula von der Lynden noted “all options are on the table” if discussions don’t reach a suitable conclusion.
US Treasury Secretary Scott Bessent flagged an increased level of flexibility around timing of trade deals, stating that the July 9 date was “not critical”.
He also asked Congress on Thursday to remove section 899 language from the Big Beautiful Bill – a risk discussed in our note two weeks ago – after coming to agreement with G7 partners.
On a more negative note, Friday saw President Trump announce an end to trade discussions with Canada due to the latter’s Digital Services Tax. He will inform them of the tariff rate this week.
FedSpeak
Governor Michelle Bowman – having seemingly inherited the mantle from Christopher Walker as the most dovish FOMC member – noted that “retailers seem unwilling to raise prices on essential consumer items” and that “should inflation pressures remain constrained (she) would support lowering the policy rate as soon as our next meeting”.
When asked about a July cut, Fed Chairman Powell noted that “it if turns out that inflation pressures do remain contained, then we will get to a place where we cut rates, sooner rather than later”, while explicitly noting that he was not referencing a specific month.
He cited the challenge that “there isn’t really a modern precedent” for the tariff increases and that the “the process could go on for a long time” with “effects…large or small”.
Other speakers tended to toe Powell’s “wait and see” line, despite pressure to cut from the Trump Administration.
New York Fed President John Williams said the central bank’s interest-rate stance is “entirely appropriate” as uncertainty about tariffs and inflation lingers.
“Measures of underlying inflation…are still somewhat above our 2% target. And there are signs that tariffs are affecting specific categories of goods,” he said. “We need to be vigilant in analysing the totality of the data to see how conditions evolve.”
Boston Fed President Susan Collins signalled she feels July would be too soon to cut rates.
“We’re only going to have really one more month of data before the July meeting … I expect to want to see more information than that,” she said.
San Francisco President Mary Daly said tariffs may not lead to a large or sustained inflation surge, leaving the door open for a rate cut “in the fall.”
Supplementary Leverage Ratio
In addition, the Fed confirmed via a 5-2 vote that it is intending to reduce the enhanced Supplementary Leverage Ratio (SLR) for banks (introduced post-GFC), which will reduce the capital ratio that banks must hold against US Treasuries, relative to other, higher-risk assets.
This means reduction of US $13bn in capital requirements for the largest US banks a $200bn reduction for deposit subsidiaries.
Governor Bowman – in her role as Fed Vice Chair for Supervision – stated that “this proposal takes a first step toward what I view as long overdue follow-up to review and reform what have become distorted capital requirements”.
It is expected that this will free up capital for lending purposes and allow the banks to be more actively involved in buying Treasuries , especially during times of stress.
Powell noted they are trying to reduce the “disincentive to engage in low-risk activities”.
Bessent has stated that he believes this change will leads to a reduction of “tens of basis points” in US treasury yields.
This is likely only the first step that gets taken to reduce regulatory burden on the US banking system and Bowman – who was promoted last month and is now in charge of bank supervision – has made it quite clear that more changes are on the way.
“Our goal should not be to prevent banks from failing or even eliminate the risk that they will,” she said in her first speech in the new role. “Our goal should be to make banks safe to fail, meaning that they can be allowed to fail without threatening to destabilize the rest of the banking system.”
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Australian macro and policy
There was good news on the domestic inflation front.
Headline monthly Consumer Price Index (CPI) fell 0.4% month-on-month (MoM) in May, with the annual rate easing 30bps to 2.1% year-on-year (YoY) – the lowest level since July 2021 and near the bottom of the RBA’s 2-3% target band. This was below consensus expectations of 2.4%.
Trimmed-mean Core CPI eased 40bps to 2.4% YoY, the lowest level since November 2021.
The seasonally adjusted CPI excluding fresh food, fuel and holiday travel increased 0.2% MoM versus 0.3% MoM in April.
The monthly decline in headline CPI was driven by holiday travel and accommodation prices (-7.0% MoM) following the sharp rise in April, as well as softer prices for fuel (- 2.9% MoM) and gas (-2.4% MoM).
These declines were partly offset by increases across volatile items such as electricity (+2.0% MoM) and food (+0.3% MoM).
Inflation continued to moderate across key housing components including rents (+0.3% MoM) and new dwellings, which were flat MoM.
Prices rebounded across vehicle maintenance (1.5% MoM), while insurance prices (-0.5% MoM) recorded a surprise decline.
The upshot is that estimates for Q2 CPI data – due 30 July – remain largely unchanged at 0.6% quarter-on-quarter and 2.6% YoY, while flagging risks to the downside following the May data.
Elsewhere, job vacancies rose 2.8% (or 9,500 jobs) in the three months to May 2025. This was mainly due to a 3.2% increase in private sector vacancies – public sector vacancies were up 0.6%. This indicates that the labour market remains tight.
US macro and policy
There are signs that consumer concerns about the impact of tariffs are receding.
The final June University of Michigan Consumer Sentiment Survey came in at 60.7, versus 59.8 expected and 52.2 in May.
Consumer sentiment surged 16% from May. This is its first increase in six months, but it remains below the post-US election bounce in December 2024.
Inflation expectations also receded. One-year forward expectations moderated from 6.6% in May to 5.0% in June. Five-year expectations came in from 4.2% in May to 4.0% in June.
The housing market remains weak. There were an estimated 623k new home sales in May, down from 722k in April and below the 693k expected.
At the same time the inventory of new homes is at 507k in May, which is the highest since October 2007 and up from 500k in May. This equates to 9.8 months of sales at May’s pace.
There is some recovery in existing home sales, which is taking share from new homes.
Real consumption fell 0.3% in May, versus flat expectations. This, along with negative revisions to previous data, sees consumer spending looking very weak.
That said, May’s fall was driven almost entirely by auto spending – which fell 7% post the pre-tariff surge. Spending on other durable goods remained reasonably flat at elevated levels.
Spending on services was flat in May as it has been for the quarter.
Assuming weakness in autos persists into June – and services sees some modest recovery – then Q2 consumption growth of 1.0-1.5% looks reasonable. This is better than the +0.5% seen in Q1, but well below the 3.1% average growth for FY24.
Given softness in the labour market, 2H consumption growth could be weaker again.
Nominal personal incomes fell 0.4% in May, versus +0.3% expected. The miss was driven by some anomalies in the public sector, so is not as bad as the headline suggests.
Employee compensation rose at 0.4%, which is steady. The savings rate fell from 4.9% to 4.5%. The slowdown in payrolls is likely to flow through to incomes over the remainder of 2025, slowing spending rates.
On the inflation front, the May Core Personal Consumption Expenditures deflator – the Fed’s preferred measure of inflation – increased 0.2% MoM, versus 0.1% expected, resulting in a 2.7% YoY rate, up from 2.6% in April.
The Core PCE goods measure rose 0.3%, showing some modest early pressure from tariffs. Core PCE services rose only 0.16%.
Judging by the 2018 tariff path, it is likely that the core PCE deflator increases by 0.3% to 0.4% in June and July as most companies that will pass on tariff costs do so in the first three-to-six months post implementation.
This sets the stage for the Fed to decide whether they are more concerned about an uptick of inflation – or weakness in employment – which are likely to occur simultaneously.
China macro and policy
There are signs that China is starting to see the impact of tariffs, as it looks for alternative markets to the US.
Industrial firms saw profits drop 9.1% YoY in May, versus a small increase seen in April.
Profits at industrial firms are now 1.1% lower on a January-May basis, versus 0.3% lower forecast by consensus.
Total overall industrial profits were USD379bn in January-May, more than 20% lower than the equivalent period in 2021 and 2022.
Markets
It has been interesting to note the impact of flows in Australian equities in the past eight weeks. Mutual and active funds have been net sellers, but more than offset by ETFs and passive funds.
Foreign-domiciled investors have swing from net sellers to net buyers since late-May and have been buying in more strength than local investors since then.
Financials (+1.8%) and Materials (+1.8%) led the market last week. This was offset by Energy (-4.4%) as the oil price fell. Defensive sectors Consumer Staples (-2.2%) and Utilities (-1.8%) also dragged.
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.