A global shift towards sustainable agriculture and food production is opening attractive opportunities for investors as new technologies and business models start to gain traction.
RESEARCHERS at Regnan, a global leader in sustainable investing, have named four areas of investment that will drive the transformation of food production while minimising waste and developing new sustainable and affordable food products.
The findings are featured in a new Regnan report, Catalysing Sustainable Agriculture and Food Production, by Regnan senior adviser Doug Holmes and Regnan fund manager Mohsin Ahmad.
Reforming agriculture is essential to meeting the challenge of climate change because agriculture and food production accounts for nearly a quarter of the world’s greenhouse gas emissions. Without change, emissions are forecast to grow more than 30 per cent by 2050.
“Industrial farming was the right solution for increasing global production of food back in the 50s and 60s,” says Holmes, who has worked in the sustainability sector for nearly three decades.
Source: WRI analysis based on FAO (2017a); UNDESA (2017); and Alexandratos and Bruinsma (2012).
“But there’s so much evidence out there around the negative impacts from industrial farming as practised now that it’s quite clear we need to change course.”
Climate change aside, large-scale food production is doing astonishing damage to the environment.
Run-off from fertilisers, pesticides and herbicides is polluting waterways and marine habitats, soil is being degraded by reliance on chemicals and irrigation is depleting aquifers.
A third of the planet’s soil has already been degraded. Without significant change, 90 per cent of soil on earth will be degraded by 2050.
But despite the toll, crop land and pasture land will increase by 600 million hectares over the next three decades, destroying forests and natural ecosystems.
The challenge is how to feed a global population that will hit 10 billion by 2050 — requiring 50 per cent more food than we produce today — without inflicting further damage on struggling ecosystems.
In the new report, Regnan’s team identifies four areas of investment that are crucial to the key stress points in global food production, ideal to catalyse change and – perhaps most importantly – largely unsung by the global investment industry.
1. Soil health
The first is regenerative and organic farming aimed at improving soil health.
Organic matter – essentially dead and decomposing plant and animal debris alongside billions of living creatures like bacteria, fungi, insects and worms – plays a vital role in soil health.
A 1 per cent increase in soil organic matter helps soil hold 20,000 more gallons of water per acre. Organic matter is also a powerful store for carbon dioxide that helps mitigate climate change.
The investment opportunity lies in the carbon credits that can be generated by better soil management.
“There are business models being developed monitoring and measuring and tracking soil carbon using various technologies and then creating markets for soil carbon that can be brought into the public space,” says Holmes.
2. Controlled farming
The second opportunity is controlled farming which can be conducted in cities as indoor or vertical farms, or larger-scale state-of-the-art greenhouse farming close to urban areas.
“Within developed economies, this is a real growth area,” says Holmes.
“There are some quite large controlled-farming start-ups and businesses in places like the United States and in Europe developing models that are very focused on feeding a rapidly growing urban population. They typically employ AI and advanced technologies.”
Controlled farming is essential to support the rapid growth of cities and the increasing urbanisation of the world.
The growing risk of extreme weather is another driver, as controlled farming can be better protected, lowering the risk of crop loss.
3. Waste management
Third on the ledger is the growing industry aimed at reducing the enormous waste in food supply chains.
Close to a third of all food produced is lost to waste.
This not only means that fewer meals are available for those in need, but it also lifts the land area and resources required to make up lost food, putting additional stress on the food system and lifting greenhouse emissions.
“By reducing food waste, there’s more food available that eventually reaches the dinner plate, so that means less load on systems upstream.
“Less land is cleared for agriculture and there is less load from the agricultural processes themselves and all the inputs that go into producing food.
“You’re reducing greenhouse impact and the also providing more food at the other end of the cycle.”
Food is lost across the food supply chain, from growing to storage, processing and distribution right through to the food thrown out by retailers and households.
Source: FAO 2011, Regnan 2020
ReFED, a non-profit aiming to end food waste, says a 20 per cent reduction in US food waste over the next decade would be equivalent to removing about 4 million cars from the road.
“It’s a key area for attention,” says Holmes, who says some of the more promising innovations are platforms connecting farmers with pre-determined buyers for food that might otherwise go to waste.
“For example, in developed countries, farmers who have produced crops that might be less presentable from a marketing perspective have pre-determined buyers to take that product and turn it into other value-added food products like juices or similar products.
“The systems are developed to pre-identify buyers for food that may be less visually appealing or perceived to be of lesser quality.”
The Regnan team singles out Tomra, which has its origins as a reverse vending machine company that collects bottles and cans for recycling. Tomra has now expanded into providing sorting technology for the food industry, inspecting produce and helping divert low-quality food to alternative uses.
You can read more about Tomra here.
Regnan funds also hold shares in NYSE-listed Ecolab, which makes antimicrobial water additive products that reduce foodborne pathogens and help control spoilage of processed fruit and vegetables.
4. Plant-based meat
Finally, Holmes points to the growth of a new plant-based meat industry as an example of a move to sustainable food products that replace resource intensive agriculture.
“Livestock production is enormously greenhouse intensive. The opportunities afforded by the plant-based products is a very big one from a sustainability perspective, and particularly as those products are get better and better.
“It seems to be to me there’s a there’s a very big business opportunity there.”
Download Regnan’s Catalysing Sustainable Agriculture and Food Production report here.
Who is Regnan?
Regnan is a responsible investment leader with a long and proud history of providing insight and advice to investors with an interest in long-term, broad-based or values-aligned performance.
Building on that expertise, in 2019 Regnan expanded into responsible investment funds management, backed by the considerable resources of Pendal Group.
The Regnan Global Equity Impact Solutions Fund invests in mission-driven companies we believe are well placed to solve the world’s biggest problems.
The Regnan Credit Impact Trust (available in Australia only) invests in cash, fixed and floating rate securities where the proceeds create positive environmental and social change.
Both funds are distributed by Pendal in Australia.
Visit Regnan.com
Find out about Regnan Global Equity Impact Solutions Fund
Find out about Regnan Credit Impact Trust
For more information on these and other responsible investing strategies, contact Head of Regnan and Responsible Investment Distribution Jeremy Dean at jeremy.dean@regnan.com.
Here’s what’s driving Australian equities this week according to Pendal’s head of equities Crispin Murray (pictured above). Reported by portfolio specialist Chris Adams.
Find out about Pendal’s Australian shares funds here.
CONFIDENCE in policy stimulus, some better US earnings and easing concerns over vaccines contributed to strong gains for equities last week.
There is evidence of hedge fund de-grossing as a result of recent short squeezes, but at the moment it is showing up in specific stocks rather than disorderly drawdowns. This also helping markets recover.
The S&P/ASX 300 gained 3.5% last week, led by banks and technology. Defensives underperformed. In the US, the S&P 500 rose 4.7%.
Covid and vaccines outlook
Hospitalisations and cases continue to trend down in the US and the UK, while vaccinations continue apace.
In the US, the number of Covid-19 patients in hospital per million people is down 30% from the peak, easing stress on the system. There have been big improvements in the past week in the hardest-hit states such as Texas and California.
The pace of vaccinations continued to accelerate in the UK and the US – although the latter saw some impact from poor weather.
Almost 15% of the UK population has received a first dose – and roughly 90% of those aged 80 and older. The UK and Israel are two bellwether countries to watch. This is where the impact of vaccines on the severity of cases will become evident earliest.
Projections suggest the UK will have vaccinated half its population by mid-March. The US is on track for the same target in the first half of May. Australia is expected to achieve 50% by early July. There is a tactical element to this for investors. Markets where the roll-out has been faster can expect to open up earlier and recover faster.
Economics and policy outlook
US payrolls rose 245,000 in November — well below the consensus estimation of 460,000. This reflects the impact of rising case numbers on retail and service sectors in that month.
The US unemployment rate dropped from 6.9% to 6.7% — but this resulted from a fall in the participation rate. The pandemic has forced roughly 6 million people out of the labour force. This is important in the context of the Fed’s employment milestone towards tighter policy. There are still a lot of people to come back into the workforce.
The data was not all bad. Hours worked (+0.9%) and income (+1.1%) were both better. The lead indicators on consumer spend are still tracking sideways. But with stimulus, lower cases and warmer weather coming through the picture could look very different in two months.
The Democrats look set to pass the Biden stimulus package through Congress via reconciliation – which would not require Republican votes. This means some measures are likely to tighten up — for example there could be greater restrictions on who gets the full stimulus cheques.
There also may be less allocated to States which are already seeing better-than-expected revenues. However it also means the aggregate package amount is likely to be at the high end of the expected range.
It is worth noting that despite a very weak near-term outlook for GDP, the Bank of England reduced the expectation of negative rates. The outlook is for a rapid recovery, helped by a roll-back of restrictions as the vaccine program takes effect. UK banks rallied on the news. We may see a repeat of this in other countries.
Finally, while there is plenty of worried commentary about the risk in equities given the recent strong run, it is worth reiterating the extraordinary moves in fundamentals we think continue to support markets:
- In the US, money supply (M2) is up 26% year-on-year
- The combined balance sheets of the Fed and ECB are up 70% year-on-year
- US fiscal stimulus, as measured by the budget deficit, is up US$2 trillion year-on-year
- Global short interest rate yields are down by 100bps to 0.65% year-on-year.
Macro risk and uncertainty remain elevated. Equity markets have had a strong run. Nevertheless, we think the combination of these effects is extraordinary and continues to provide a substantial foundation for both economic recovery and equity markets. We remain positive. We expect bond yields to rise, coinciding with a rotation to cyclicals.
Markets
Despite some evidence of continued hedge fund de-grossing, the markets had a sharp, broad-based recovery last week as the focus returned to liquidity and better earnings in US.
Normal correlations remained in place across asset classes. Equities were up, US 10-year bond yields rose 10bps, the USD weakened, gold was down 2% and Brent crude up 6.2%.
The Australian market more than caught up with the prior week’s losses. Defensives generally lagged. Staples were only up 0.57% and Utilities fell 1.0%.
Resources (+1.5%) lagged the rebound. We continue to see very supportive fundamentals, but the iron ore price was down 1.4%. There is a sense that resources have been a crowded trade and there may be some rotation to other sectors — potentially exacerbated by hedge fund de-grossing.
Crispin Murray is Pendal’s Head of Equities. He has more than 27 years of investment experience and a strong track record leading Australian and European equities funds.
Crispin manages a number of our flagship funds along with one of the largest equities teams in Australia.
Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management.
We recently re-designed the Pendal Horizon Fund (formerly known as Pendal Ethical Share Fund) to better help investors benefit from the opportunities driven by Australia’s transition to a more sustainable economy.
This guide explains the fund’s approach to mining investments.
PENDAL recently made several material changes to the Pendal Horizon Fund — formerly known as Pendal Ethical Share Fund. The changes include an expanded set of exclusionary screens and a new framework to support in the identification of companies which are leading or enabling the drive to a future-ready economy. As part of this approach, we avoid companies whose industries, business models and products or services undermine a more sustainable economy or cause significant harm to society and the environment. We established a range of sector/activity-based exclusionary screens that effectively knock out harmful companies from the investable universe at the outset. These screens cover sectors such as fossil fuel extraction, weapons, gambling and logging. Some values-based investors might be surprised to see companies that mine non-fossil fuel-related minerals such as iron ore and gold not formally excluded from the fund. To better appreciate Pendal’s approach to mining within the fund, we produced this guide to explain it’s important to understand the fund’s sustainability-related priorities.
Download the guide here: Pendal Ethical Fund – Approach to Mining.
Pendal Dynamic Global Equity Fund (APIR: BTA0321AU, ARSN 140 921 311)
Pendal Dynamic Global Equity Fund (Fund) will be terminated effective 5 February 2021.
Given the declining size of the Fund and anticipation of further withdrawals, we are no longer able to effectively manage the Fund to achieve its investment strategy. We have concluded that it is in the best interests of all investors to terminate the Fund, liquidate the assets and return the net proceeds to investors.
How this affects you
The Fund is closed to all applications, transfers and withdrawals from Thursday, 4 February 2021. Any application, transfer or withdrawal requests received after this date will not be processed.
We will terminate the Fund on Friday, 5 February 2021 and as soon as practicable, begin winding up the Fund. The assets remaining in the Fund will be realised and the proceeds distributed to all investors in proportion to their unit holding.
Questions? (Please note our change of registry service provider effective 22 February 2021)
Please contact our Investor Relations Team during business hours:
On 1800 813 886 up until 19 February 2021.
On 1300 346 821 from 22 February 2021.
Here’s what’s driving Australian equities this week according to Pendal’s head of equities Crispin Murray (pictured above). Reported by portfolio specialist Chris Adams.
Find out about Pendal’s Australian shares funds here.
EQUITY indices fell last week in a remarkable few days of market activity. A frenzy on social media forum Reddit triggered a squeeze on some heavily-shorted US stocks. This forced the hedge funds who were short to de-leverage and sell down long positions, dragging on the US market.
This drawdown was reinforced by concerns over the impact of new Covid strains on vaccine efficacy and the shambles in the EU over vaccine supply. In Australia this led to a large unwind in cyclical stocks.
The S&P 500 was down 3.29%. The S&P/ASX 300 fell 2.88%.
We see three key issues facing markets and sentiment in the near term:
- The impact of retail investors, market speculation and views of valuation
- Concerns over the vaccine roll-out
- Risk of economic slowdown
In our view, we may see some further near-term volatility, but we ultimately expect more positive news on vaccines and the supportive effect of stimulus to win out.
Issue 1: Market sentiment / retail investor impact
Retail investor participation ramped up in 2020 and has recently hit new highs. Sitting at about 15% of US volumes before Covid, lockdowns and stimulus pushed it to 29% mid-year, before it fell back to 23% in September. In recent weeks it has returned to about 30% of daily volume. This has been accompanied by greater use of leverage, which can be seen in option activity.
This retail activity is another feature of current market environment which, alongside stimulus payments and liquidity, is driving speculative activity. Importantly, this activity is concentrated in specific pockets of the market, eg Tesla, Bitcoin, Renewable Energy ETFs and IPOs. Higher retail activity is another symptom.
In our view, this does not imply that the entire market is overvalued or in bubble territory.
Nevertheless, the specific focus on shorted positions was unusual. This coincided with hedge funds being levered up more than usual at gross and net level. This combination led to a huge short squeeze.
We can compare this to previous short squeeze events to get an idea of the scale. The impact on performance for an investor caught in the wrong part of the market in large caps last week was material. But less so than the post-GFC value rallies in 2009, the 2016 value rally or the surges in positive sentiment on economic recovery or vaccine news in 2020.
The situation was very different in small caps, however. Here the effect dwarfed anything since 1995, except for the Covid recovery surge in mid-2020. This highlights how increased retail activity is focused in the small cap part of the market.
The losses for hedge funds have been material. Fundamental hedge funds are about 9% below the market for January. This triggers the need to de-lever, which forces more selling. The short-term issue is that underperformance means the selling has not yet cut the level of leverage, so this could continue for a few weeks. A short squeeze event like this in early 2016 lasted 4-6 weeks.
The key questions raised:
1) Is this a flag for the overall market; the final demonstration of extreme speculative activity that marks a top?
We don’t believe so. At this point we see a buying opportunity. It could last a few weeks as hedge funds continue to de-leverage and many long-only funds have low allocations to cash. We still see strong market fundamentals – primarily stimulus, plus the release of pent-up demand as vaccines take effect – as a more important factor, which should underpin markets.
2) Does this signal a shift away from momentum stocks?
It’s possible. But right now we are sticking with the economic outlook and bond yields as the best indicator of this. Bond yields are holding at lower levels than most expected, supporting valuations.
3) How long does this retail effect last?
We now have the perfect storm of cyclical and structural factors supporting this activity:
- Markets have been rising so people are making money
- Stimulus cheques have just been received with more to come
- Lockdowns and cold weather give people more time
- Low-cost, easy investment platforms combined with social media raise interest and insights
We think this means retail participation is likely to remain a factor for next few months.
4) What does it mean for investors like Pendal?
Like the impact of quant, index, ETF and risk parity, this is another factor that can add to volatility which active fundamental investors need to be mindful of. Australia has been less affected by this episode, but there is evidence of impact in the behaviour of some stocks – eg the buy-now, pay-later companies.
Issue 2: Vaccination and re-opening timeline
The key question is whether new data on vaccines — showing lower efficacy to the South Africa variant — and the manufacturing issues in EU delay economic re-opening.
In our view it is likely to cause a small delay — maybe 1-2 months — and may limit the level of international travel for longer. But fundamentally it does not prevent us from reaching herd immunity or diminishing the more serious effects of Covid.
There was a lot of data to digest last week.
The Novavax vaccine trial data showed efficacy as good as Moderna’s — with better tolerance and a great ability to quickly ramp up production. A 65% jump in Novavax stock reflected how well the trial was received. Australia has signed up for 51 million doses of this vaccine.
Trials in the UK and South Africa showed efficacy fell from 96% for the original strain to 86% for the UK variant and 49% for the South African version (60% for patients without HIV). They plan to develop a booster to deal with this, likely to be available in Q3. But this partial immunity still protects against severe infections — even for the South African strain.
The Johnson & Johnson vaccine was more disappointing. Overall efficacy was around 66% — 72% for the original strain, down to 57% for the South African variant. While it may be less effective than other vaccines at stopping infection, it is still very effective in preventing severe infections. As such, it will play a role in alleviating pressure on health care systems and reducing mortality.
The company is also running two-dose trials which may lead to improved results. This is important because it’s a key part of the European supply and can be rolled out more easily.
There are now two paths countries can go down:
- Open up the economy earlier and accept the virus will be prevalent in the community — albeit at a lower incidence level but with severe infection becoming increasingly rare. This is much like the existing flu. We suspect the US and Europe may choose this path, with vaccines such as Johnson & Johnson’s playing a role.
- Seek immunity from mild incidence of the disease, wait for boosters and maintain some constraints. This may be where Australia goes.
Despite the concerns, vaccinations continue apace. Rates are accelerating in the US and the UK. Europe is lagging due to supply and logistics.
The rate of vaccinations in the US is up 35% week-on-week – passing Biden’s goal of 1 million per day. The goal is now 1.5 million per day, with the potential to achieve to 2 million per day – the UK’s current run rate.
Lockdown measures have led to a clear improvement in new case numbers. The US is back to early November levels, half that of the peak earlier in January. This is flowing through to hospitalisations. ICU capacity has materially improved in most US states. The pace of improvement could accelerate further as the effects of vaccinations flow on through February.
Issue 3: The risk of economic slowdown
The final concern is whether mutant strains will have a material effect on the path to normalisation and economic growth.
We suspect we are near the nadir on Covid sentiment. In coming weeks countries leading on vaccinations should start to see a material improvement in cases and hospitalisations. This should improve confidence in opportunities for economic re-opening.
The Fed last week made it clear that near-terms risks relating to vaccine distribution and efficacy reinforce their view that they will not be considering balance sheet tapering for a long time.
We also saw the EU show some indications that they may need to cut rates again — recognising specific problems with vaccine roll-out in the region, alongside the strong Euro.
We still see strong near-term drivers of economic demand. In 2020 the relaxation of US lockdowns was accompanied by reduced stimulus. This time around, the relaxation will be in concert with more stimulus. This should be a strong tailwind for demand, through both income growth and use of still high excess savings.
Crispin Murray is Pendal’s Head of Equities. He has more than 27 years of investment experience and a strong track record leading Australian and European equities funds.
Crispin manages a number of our flagship funds along with one of the largest equities teams in Australia.
Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management.
Here’s what’s driving Australian equities this week according to Pendal’s head of equities Crispin Murray (pictured above). Reported by portfolio specialist Chris Adams.
Find out about Pendal’s Australian shares funds here.
THE paradox in current markets was perfectly illustrated last week.
Concerns over the impact of virus mutations on vaccine efficacy and soft economic data from the lockdown-impacted holiday period weighed on sentiment. A confusing statement from the European Central Bank raised concerns when it was interpreted by some as signalling balance sheet tapering sooner than expected.
Yet the market did not go down. The S&P/ASX 300 gained 1.33% and the S&P 500 was up 1.95%.
In current conditions, downturns in sentiment manifest in a rotation of market leaders – to growth stocks. This reflects the huge amount of liquidity that continues to support equity markets.
We expect this rotation to growth to be short lived and that cyclicals will resume leadership.
In our view:
- Sentiment towards Covid is at a nadir and should improve as vaccines ease pressure in key developed markets. New cases and hospitalisations are already rolling over in the US and UK — and that’s before the effects of vaccines flow through from late February.
- The stimulus impact is only just kicking in. Current softer data prints are lagging indicators.
- Money supply growth is re-accelerating as stimulus lands in bank accounts, helping fuel more speculative activity.
It is also important to flag that cyclicals can include growth names as well. For example, Xero (XRO) is leveraged to business creation, while Domain (DHG) is a beneficiary of a strong housing market.
Covid outlook
Key lead indicators are improving. Sharp falls in the number of new daily UK and US cases are reflecting the impact of lockdowns. This improvement may be sustained as the effects of immunising the most vulnerable kicks in.
US hospitalisations are also clearly falling now, with improvements in some of the hardest-hit states such as California. The view is: now the holiday season is over, the spread risk is reduced.
Vaccination rates continue to accelerate in the US, UK and Europe. The US is averaging 914,000 people per day — up 22% week on week. At this rate Biden’s goal of 100 million people vaccinated in 100 days is achievable — and could be as high as 150 million to 200 million. Some 4.5% of the US population has had a first dose and 0.7% have received two doses.
There is some noise around vaccine production difficulties but this is misleading.
There have been plenty of doses produced, however there have been issues with distribution in some places. In the EU it seems there has been some attempt to deflect distribution issues by pointing to the manufacturer.
New vaccines
We should see Phase 3 trial data from Johnson & Johnson this week — and from Novavax in the next three weeks.
There is speculation that the effectiveness of these vaccines may be lower than the Moderna vaccines if the new strains of the virus are harder to fight off. But at this point medical authorities believe they will still be effective and will largely stop severe cases.
Economic outlook
Recent data remains soft, reflecting the lagged effect of lockdowns. But there are some signs mobility data is incrementally improving.
There has been something of a seasonal lull in US housing, though conditions remain supportive. It is worth noting the strong recovery in existing sales has not been fully matched by single new housing starts. If supply is constrained, this will continue underpinning house prices.
With distribution of the “lame duck” stimulus package underway we are seeing a spike in money supply growth — a positive signal for markets.
Market outlook
In the US, a strong week for the big tech FANG stocks, IPOs and renewables — alongside a lag among financials — illustrated the rotation to growth.
In our view this was driven by weaker sentiment on vaccines and economic growth. But it also reflects broader market positioning. There has been a significant rotation into financials and materials in recent weeks.
While this does not preclude them from performing, it does highlight the risk to these sectors from any disappointment on the economy and an associated rally in bonds.
The Australian market continued to grind higher last week — but as with the rest of the world, saw a rotation back towards growth names.
Tech names that have lagged the market caught a bid on this rotation. Wisetech (WTC, +19.73%), for example, was the best performer in the ASX 100 last week.
Growth stocks Dominos Pizza (DMP, +11.76%), Afterpay (APT, +6.14%), Ramsay (RHC, +5.59%) and Seek (SEK, +5.06%) were also among the leaders.
Resources generally underperformed last week. Alumina (AWC, -6.27%) was the weakest in the ASX 100. Beach (BPT, -4.59%), Mineral Resources (MIN, -4.12%), Fortescue (FMG, -3.42) and Santos (STO, -2.83%) also fell.
There were several quarterly production updates from the sector. BHP (BHP, -1.47%) and Rio Tinto (RIO, -1.00%) were largely in line with expectations. Some emerging cost issues need to be watched, but current commodity price strength continues to support strong cash flow.
Elsewhere Cleanaway (CWY) fell 5.3% last week as its CEO announced his departure, leaving to join a private company.
Crispin Murray is Pendal’s Head of Equities. He has more than 27 years of investment experience and a strong track record leading Australian and European equities funds.
He manages a number of our flagship funds along with one of the largest equities teams in Australia.
Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management.
Here’s what’s driving Australian equities this week according to Pendal’s head of equities Crispin Murray (pictured above). Reported by portfolio specialist Chris Adams.
Find out about Pendal’s Australian shares funds here.
WE SAW markets consolidate last week as the S&P/ASX 300 shed 0.6% and the S&P 500 lost 0.8%.
Ironically, this came in combination with sign of exuberance in some pockets — notably the US IPO market.
Nevertheless, weaker economic data, chatter about the possible timing of a Fed taper and concerns over delays in vaccination programs weighed on sentiment.
This generally manifested in a rotation from cyclicals and value back to growth and defensives, rather than a material sell-off. This emphasises the strong degree of support markets continue to enjoy.
Economics and policy
President-elect Biden proposed a new stimulus bill of US$1.9 trillion with measures including a federally-mandated minimum wage. His current approach would require a degree of Republican support, so this initial package is likely to be watered down.
Expectations are the final bill will be between US$1.1 trillion and $1.6 trillion and the minimum wage legislation will be dropped. However the stimulus is still materially above the US$800 billion to US$1.4 trillion many had been expecting.
As it stands, nominal disposable income is expected to surge in Q1 2021 to levels above that of Q2 2020. Coupled with pent-up demand as lockdowns and restrictions are rolled back in the northern Spring, this is likely to provide stiff economic tailwinds.
Goldman Sachs last week upgraded its 2021 US GDP estimate from 4.1% to 6.6%, with 10% growth in Q2 and 9% in Q3.
At this point, however, economic data continues to reflect previous stimulus payments rolling off, as well as rising Covid cases and pre-election uncertainty.
US December retail sales provide the most recent example, falling 0.7% versus an expectation of 0%. Consumer sentiment surveys also remain soft.
We expect these indicators to improve as a combination of stimulus, vaccines, accommodating central banks and pent-up demand should win out.
The scale of stimulus is also reflected in higher inflation expectations, prompting some concern that the Fed might have to “taper” its bond purchases sooner than otherwise thought.
The fear here is of a 2013-style tantrum in markets. A number of Fed officials have downplayed this risk, including Chair Powell and Richard Clarida who is widely tipped to be Powell’s successor.
Covid and vaccines
Case numbers fell last week — while still remaining at high levels — as the impact of lockdowns took effect. US hospitalisations are also falling for the first time since September, although several areas remain under strain.
The impact of the vaccine roll-out on hospitalisations is the key issue to watch. Vulnerable parts of the population such as the elderly comprise a disproportionately high segment of hospitalisations and deaths.
Concentrating vaccinations on this cohort may mean that hospitalisations start to fall in February even if cases do not. Mortality rates may also start declining, with a lag.
The rate of vaccinations in the US doubled in the last week. Some 11.1 million Americans have now been vaccinated (about 3% of the population) up from 6 million people a week earlier.
Importantly, half of the phase 1A population — deemed the most vulnerable — and a third of long-term care residents have had their first doses.
We may reach a point in late February where a number of economies can consider re-opening, since Covid will no longer be straining the health care system.
In this vein, it’s been noticeable that government rhetoric has focused on a vaccine’s ability to prevent severe infections, rather than preventing infection entirely.
There have been reports the Oxford vaccine may produce better results in the more thorough AstraZeneca trial, than the 70% efficacy achieved in earlier iterations. However nothing has yet been published here.
Johnson & Johnson released data from its phase 1 trial — but we are still waiting to hear the results of the larger phase 3 trial. The latter is worth watching because it’s a one-dose regimen, which looks to deliver neutralising antibodies in line with the AstraZeneca/Oxford two-dose vaccine.
We think it’s fair to expect more positive developments on the vaccine front in coming weeks which may help calm concerns about vaccine availability and the timing of a roll-out.
Markets
Sentiment swung about last week, seeing some rotation between the cyclical reflation trade and the growth trade.
Valuation remains a key concern in some quarters.
The scale of expected earnings coming through for the next few quarters is helping alleviate some of this. The MSCI World P/E, for example, is still well below its 2000 peak. It is also important to remember that high valuations are concentrated in the growth part of the market, with value nowhere near as extended.
Bond yields remain the key driver of growth stock valuations — and therefore remain a key factor to watch.
The recent rise in bond yields has been driven by inflation expectations rather than a shift in nominal yields.
This is important because inflation expectations are highly correlated with performance of cyclicals — suggesting they can continue to do well while the market believes the Fed will accommodate stimulus. Nominal yields remaining low is an issue for financials.
Real yields (nominal minus inflation expectations) drive growth stock valuations. The massive increase in fiscal stimulus takes some pressure off monetary policy, which means real rates may not decline further from here.
This may mean growth stocks stop outperforming. But it does not necessarily mean they sell off materially. A shift to 2% yields may prompt this, but we remains some way from that point.
It is worth noting that a value rotation is likely to benefit the Australian equity market in comparison to the US, given our higher proportion of value stocks.
The ASX was off slightly last week. Banks and energy performed best; staples and health care the worst.
Energy stocks continued their recovery, helped by higher spot LNG prices. Recent strength in prices is likely to be temporary — reflecting a cold North Asian winter and a coincidence of maintenance-related supply disruptions.
Gold stocks fell on fears of rising bonds yields; bonds themselves were relatively flat on the week.
US dollar sensitives also fell, more as a funding source for banks, energy and resources.
Crispin Murray is Pendal’s Head of Equities. He has more than 27 years of investment experience and a strong track record leading Australian and European equities funds.
He manages a number of our flagship funds along with one of the largest equities teams in Australia.
Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management.
Our Emerging Markets fund managers have reduced weight in China after spotting challenges to Chinese equities — and some highly attractive opportunities in other markets.
Here James Syme and Paul Wimborne (pictured above) — managers of Pendal’s Global Emerging Markets Opportunities strategy — explain the details.
Click here to download this article as a PDF.
CHINA was the first country into the Covid crisis, one of the (predominantly Asia-Pacific) countries that seemed to manage the pandemic well — and the first emerging market to show economic recovery in mid-2020.
This was partly due to the general normalisation of domestic conditions as lockdowns were removed. But it also came on the back of a marked shift to a more stimulative monetary and fiscal policy.
A long period of tighter policy that China put in place to slow the build-up of debt in the economy was eased in the first quarter of 2020. This helped drive the construction and real estate markets through the rest of the year.
The heavy weight in internet and technology service businesses in Chinese equity markets was a significant additional boost. Even at the start of 2020 this group of companies made up more than 37% of the index weight in the MSCI China index.
A significant, Covid-driven boost to gaming, online media consumption and e-commerce — coupled with strong investor preference for this sector — drove strong performance among these stocks and lifted the overall market higher.
Challenges to Chinese equities
Now, however, we see some challenges to Chinese equities, and have responded by reducing our weight in the country — especially in light of some highly attractive opportunities in other markets.
Signs of a slowdown in Chinese activity in the last quarter of 2020 are the first of these challenges.
This is by no means a crisis. But PMI data through the year-end came in below consensus expectations. November retail sales, while up 5% year-on-year, indicated there had not been a bounce-back in the Chinese consumer to make up for a Spring downturn.
This stands in contrast to several other big emerging markets, where data continue to surprise as recoveries come through.
Other indicators such as parcel delivery volumes and traffic congestion also suggest a softening of activity in November and December. Outside China, Korean exports were up 12% year-on-year in December, but Korean exports to China rose only 3%.
Earnings estimates trimmed
This softness has also come through in earnings estimates.
Consensus estimates of earnings for many Chinese companies were trimmed in the last three months — exactly at the time it seemed the global economy was accelerating and consensus earnings estimates were revised higher in many emerging countries.
Significantly, China lagged Korea and Taiwan in the last quarter on this measure after it tracked them through most of the rest of the year.
Politics and policies
The other set of challenges concern politics and policy — both within China and internationally.
Domestically, fallout continues from Alibaba founder Jack Ma’s October speech in which he criticised Chinese regulators.
Regulators promptly cancelled a planned US$37 billion listing of digital financial services company Ant Group (which counts Jack Ma as a founding shareholder).
In December the State began a full-blown anti-trust investigation into Alibaba. This caused a sharp decline in its share price — and related weakness in other Chinese internet and technology service businesses as investors adjust to what may be a more difficult operating environment.
US investor restrictions
This happened at broadly the same time the US government was ratcheting up restrictions on US investors investing in Chinese state-owned enterprises — principally by targeting the US secondary listings of such companies.
A November presidential executive order prohibits new investments in securities of Chinese businesses that the US government believes have links to the Chinese military.
This could potentially hit many listed companies. In the first instance it led to the delisting of three state-owned telecom companies from the New York Stock Exchange (and the removal of those securities from the MSCI China and MSCI EM indices).
It’s particularly concerning that the executive order may also affect US investors’ stakes in other US-listed Chinese companies — including most of the internet names — and also products such as ETFs and derivatives based on various Chinese equity indices, including the Hong Kong Hang Seng Index.
How we’re responding
We had already reduced exposure to US-listed Chinese State-owned enterprises (SOEs) in the portfolio in 2020, selling CNOOC, Sinopec and China Mobile.
We have further reduced our weighting in China, partly in response to the concerns highlighted above and partly in response to the much better macro environments we find in some other emerging markets.
More information: Download a PDF article with the further detail on Pendal’s Global Emerging Markets Opportunities strategy.
James Syme and Paul Wimborne are senior portfolio managers and co-managers of Pendal’s Global Emerging Markets Opportunities fund.
Find out more about the fund HERE.
Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management.
BT Super Trust PST – Investment Fund (APIR: BTA0502AU) Termination
The BT Super Trust PST – Investment Fund (APIR: BTA0502AU) (PST) will be terminated on 16 April 2021.
The BT Super Trust PST was closed to new investors in 2012 due to low demand from investors. In a recent review, the Trustee[1] noted that the fund’s small number of investors, and low funds under management has meant it has become unviable. As a result, a decision has been made that it’s in the best interests of investors for the fund to be terminated.
What does this mean for investors?
From 15 January 2021 any request for an application or withdrawal from the PST will be assessed on a case by case basis by the Trustee to ensure a price can be determined that is fair and reasonable for all unit holders. If this cannot be satisfied, then the Trustee of the PST may not be able to process your request. If you have arranged regular scheduled contributions to be made into your investment, they may be returned to you.
Payment of the proceeds of your investment holding will be made by the end of April 2021 and credited to the nominated bank account we have on file for your superannuation account. A separate notice confirming this payment will be sent to the registered unit holder.
A small proportion of your holdings may be withheld to meet outstanding tax payments. If there are residual amounts owed to you after any outstanding taxes are paid, we expect to pay these to you by October 2021.
We understand that this is an important change and encourage you to seek independent financial advice from your financial adviser and specific tax advice from a registered tax agent.
What do investors need to do?
To ensure that the proceeds of your investment are credited to your preferred bank account, and that you don’t miss out on important communications about your investment(s), please contact us if your bank account or mailing details have changed. To do this, you can write to us at the following address:
BT for Pendal Fund Services Limited
Attn: Corporate Accounts Team
GPO Box 2675
Sydney NSW 2001
Your letter should include the following details:
- Your investor number: the C number found at the top of this letter
- Your investment name: BT Super Trust – Investment Fund
- What you would like to change e.g. your address or bank details
- Authorised signature(s): for your account this is the nominated signatures held on your account, which were recorded at the time of your investment application (i.e. authorised signatories must sign either individually or any two jointly)
- investment application (i.e. authorised signatories must sign either individually or any two jointly)
We’re here to help
We can also help if you need historical transaction information, to assist your financial adviser or tax agent to determine your taxation position (e.g. any likely capital gain impact) resulting from the termination.
If you have any questions about the PST termination, and your investment with us please call our Customer Relations team on 1800 813 886 between 8.00am and 6.00pm (Sydney time) Monday to Friday – We’d be happy to help.
[1] The Trustee of the Fund is BT Funds Management Limited (BTFM) ABN 63 002 916 458
As the COVID-19 pandemic continues to impact the global community, we remain focused on taking proactive measures and precautions to ensure the health and safety of our employees, while maintaining our ability to service our clients and manage our business.
Majority of our JOHCM staff have been working at home since mid-March and given the recent introduction of high-level restrictions in the UK and the ongoing situation in the US, our staff in these jurisdictions continue to work from home. They are well supported with technology and support programs and our comprehensive Business Continuity Plans in place for all of our offices ensure we continue to operate uninterrupted.
In Australia and jurisdictions where restrictions have been wound back and depending on government advice, employees where they can and are comfortable to do so are returning to the office, although this is a gradual and controlled process.
As always we continue to prioritise communication with our clients, keeping them informed through market updates, webinars with our fund managers and thoughtful insights on how to navigate through these uncertain times. Additionally we remain in regular dialogue with our core suppliers to ensure there is no disruption to services.
Our hearts and thoughts goes out to everyone who has been directly impacted and especially those families who have had to endure the loss of loved ones. We wish you and your family the best of health.
These are unprecedented times and the situation is changing daily. We closely monitor the local and World Health Organisation updates and practices in local jurisdictions and where required we will take further sensible and informed action.
If you have any questions or concerns, please do not hesitate to reach out to your Pendal Group contact.
Emilio Gonzalez
Group Chief Executive Officer