We believe the next opportunity in Emerging Markets lies with identifying the rebounds and the countries that have lagged.

Here James Syme and Paul Wimborne — managers of Pendal’s Global Emerging Markets Opportunities strategy (pictured above) — reveal two countries where they see new opportunities.

Click here to download this article as a PDF.

 

• We believe opportunities in Emerging Markets lie with identifying the rebounds and the countries that have lagged
• India and South Africa have suffered hard post-pandemic economic landings.
• Both have a huge build-up in domestic bank deposits, significantly increasing the potential for domestic demand recoveries as confidence returns.
• We are excited about the potential for the domestic demand cycle in both countries and have been adding to domestically-focused stocks in both markets.

MUCH OF the commentary on the impact of coronavirus on global economies has emphasised the unprecedented nature of the crisis.

However, the outcome is not new to emerging markets in some ways.

Sudden, brutal hard stops in domestic consumption and activity — accompanied by capital flight and spectacular correlated sell-offs in equities and currencies — have been a sporadic feature of the asset class since at least the Latin American debt crisis of the early 1980s.

That pattern allows us to look for signs indicating which economies — and potentially which markets — are in the best positions to recover.

There are particular indicators that, in our experience, show an economy has the foundations of a recovery in place — although history suggests it is usually worth looking for positive momentum in economic indicators and corporate results/expectations as well.

Looking at these indicators, India and South Africa stand out as two particularly interesting markets right now.

The signs of a hard landing in the economy are obvious: GDP, PMIs, industrial production, retail sales, imports, investment and corporate profits all fall sharply, whether the shock is country-specific, regional or global.

Clearly this has happened in India and South Africa.

India’s composite PMI bottomed out at 7.2 in April, while year-on-year GDP in the quarter to June was -23.9% and -7.5% in the quarter to September.

In South Africa the main PMI index had a lowest reading of 30.3 in April, while year-on-year GDP in the quarter to June was -17.1%.

These numbers represent huge output gaps of economies operating below capacity.

For recovery to happen, though, there has to be a source of demand.

One of these is the stimulative effect of weaker, real effective exchange rates. Weaker currencies stimulate exports (and import substitution) and can also attract capital inflows (when sufficient time has passed after a sell-off — memories are short in the carry trade).

As a result, one key metric for us is change in trade balances and current account balances. Several important historical recoveries in economies and markets have followed big upward moves in external balances.

Looking at the two markets in focus, we see India’s trade deficit averaging US$172 billion per month through 2018 and 2019, but sharply recovering through 2020. The the last two prints show a monthly deficit of less than US$95 billion.

Similarly, India’s current account balance was in surplus in the June quarter for the first time since 2004.

Both balances have also moved strongly towards the positive in South Africa as well. The trade balance in South Africa is the strongest it’s been since the end of apartheid and liberalisation. The current account balance is the strongest it has been in nine years.

While these moves are very positive, they are also seen in several other emerging markets.

Bank deposits are the key

It is another metric that makes India and South Africa stand out: bank deposits.

Both countries experienced a huge build-up in domestic bank deposits during the crisis, significantly increasing the potential for domestic demand recoveries when confidence returns.

In the year to September 2020, credit in India grew by only 5.8%, but aggregate deposits were 11% higher. The central bank noted “the increase was witnessed across all population groups”. Meanwhile the credit/deposit ratio declined to 72%.

This huge growth in incremental deposits was coincidental with an undershoot of consumer spending and private sector investment.

With the central bank’s reverse repo rate sitting well below the banking system’s average cost of funds, there is very real economic pressure on banks to grow credit as soon as demand returns.

South Africa has also seen a sharp move higher in bank deposits. In the year-to-date up to September, public sector deposits were up ZAR95.3bn (US$6.3bn), private sector corporate deposits lifted ZAR109.0bn (US$7.2bn) and household deposits grew ZAR97.1bn (US$6.4bn).

After sharp falls in interest rates there is huge potential for a drawdown of South African bank deposits to drive investment and consumption.

Excess saving has been a global problem since at least 2009.

There is only so much that conventional monetary policy can do in an absence of demand and Keynesian “animal spirits”.

It may partly fall to government spending to convert private sector savings into end demand.

But with improving coronavirus case data in both countries, a vaccine potentially to be deployed soon and other parts of the global economy picking up, we are excited about the potential for the domestic demand cycle in both countries.

We have been adding to domestically-focused stocks, notably banks, in both 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.

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

Find out more about our investment capabilities here. 

Contact a Pendal key account manager here. 

The pandemic accelerated responsible investing as an investment theme, magnifying issues such as resilience and engagement. Pendal’s head of equities Crispin Murray outlined the big lessons at the Responsible Investment Association Australasia’s RI Australia 2020 conference.

View an edited video of the presentation above or read the transcript below.

Key points:

• How 2020 emphasised the importance of responsible investing
• How Crispin Murray thinks and acts on Environmental, Social and Governance (ESG) matters as an active fund manager and steward of capital
• Crispin’s observations on engaging with companies about ESG matters

TRANSCRIPT

Simon O’Connor, Chief Executive of the Responsible Investment Association Australasia:

Crispin you have a long history looking at ASX-based equities. I’m fascinated to hear your view on the year.

Crispin Murray, Head of Equities, Pendal:

Thanks for the opportunity. I’ll focus on three things. One is to give you my thoughts on what’s changed this year — and it’s been an enormous amount.

The second thing is to give you a snapshot of how an active fund manager thinks and acts on Environmental, Social and Governance (ESG) matters. And then some observations on what we’re seeing when we deal with the companies that we invest in.

What changed in 2020

First in terms of what’s changed, the pandemic has really brought attention to how existential risks are real. When they happen they have a dramatic effect. That’s across a number of areas, but from an equity market point of view you’ve seen huge divergence.

You’ve had clear losers and you had clear winners. I think that’s brought home how you need to not just understand where these risks are, but what are the consequences of these risks.

One of the lessons to come out of this is that when we think about investing and sustainability, we need to think about it from a risk management point of view.

We don’t actually have to prove that responsible investing is always going to beat more generalised investing. What you need to show is that in certain scenarios, that is the thing that could be protecting your portfolio.

That was a very interesting outcome from the pandemic.

Lack of resilience

Another feature of the year is that it’s really demonstrated a lack of resilience within economies, societies and within companies.

This tag that I think [former US treasury secretary] Larry Summers came up with is that we were moving from a just-in-time world to a just-in-case world.

I think that requirement to understand building in resilience to your business models is a really big imperative.

The final thing I’d say is it’s been an acceleration of some of the big themes that we’ve seen over the last few years.

Digitisation, the move online and ESG are are themes that have been supercharged by the lessons from the pandemic. So that’s one set of issues.

Geopolitical issues

I also think globally, geopolitically, we’ve seen some very important developments.

First of all we’ve seen China commit to a net zero target. While it may be a long way out, you can already see some of their policies that have been put into their latest five-year plan, which are very much linked to that long-term target. So I think that’s a strong signal.

On top of that clear, clearly we’re seeing in the US a shift towards the Biden administration, which I think will put in a renewed effort.

So I think there’s a very strong signal globally that a lot of companies are seeing and receiving.

Then the final thing I’d point to is this year’s local events.

There’s [the events of Rio and] Juukan Gorge, we’ve had the situation at AMP. There have been situations that have really demonstrated that if you’re not managing ESG risks well, it has significant impact on companies in terms of how they’re managed and the way investors perceive them.

How we think about ESG today

In terms of how we as investors think about ESG, Pendal’s very fortunate.

We’re a large fund manager. We have $17 billion invested in the Australia market.

That gives us a very important responsibility, which is to engage on behalf of our clients and to use that influence in a positive way.

We’re also fortunate we have a lot of resources. We have 19 people in our Australian equity team. We can also draw upon our colleagues at Regnan who have a team of eight dedicated to doing a lot of research in these matters. And then we have a responsible investing team.

So the resources dedicated to ESG matters has really multiplied in the last few years.

I think what’s shifted is, we’ve always been aware of ESG risks. Our job is about risk management contingency planning.

But the awareness is that these issues and these risks are far more material now and far more significant in terms of the consequence for our portfolios.

In addition, I do also believe that one of the big trends that we’ve seen over the last 25 years is the shift to passive [investing].

Part of that has led to a significant reallocation of resources towards more momentum, more growth-orientated stocks.

I think the next 20 years is going to be about people investing in sustainability-orientated portfolios. Even the managers who are not in those dedicated funds [will] have a greater and greater overlay of that in their investment decisions. In terms of a cost of capital outcome, there’s going to be a very material consequence.

So companies that do not deliver and are not seen to be managing these risks, are going to see their cost of capital rise. They’re going to see their ratings on their stocks fall. And they will not be allocated capital.

Markets are very efficient in terms of determining where they want capital to be allocated. We’ve seen that with growth stocks more recently. I think we’re going to see that increasingly with people’s allocation towards people who are not managing those risks properly.

So when we think about our investments, we think about it both from the perspective of the industry —what are the risks to that industry? what are the longer term trends? — and then how within the company, they are thinking about and managing those risks.

And we rate those companies. So we have a formal process of rating those companies on our own metrics, and we use the Sustainability Accounting Standards Board (SASB) framework to help guide us in what are the key things to focus on.

The importance of engaging with companies

The other element of what we do — and probably the most interesting and the most challenging — is we’re very much at the front line.

Our job — having done the analysis and having listened to perspectives from our investors — is to actually go in and meet these companies and raise these issues.

These are often quite uncomfortable discussions. That’s the nature of our job and that’s what we do.

I’m not expecting much sympathy on that front, but it’s worth highlighting.

You can often go into a meeting and the first part of the conversation with the chairman is ‘we don’t think the executives’ pay is aligned with shareholders, there’s a disconnect here, we need you to reassess that’.

Then we need to talk about how you’re managing your ESG risks and why you’re not thinking strongly enough about your targets on scope two and how you think about scope three and what what actions that you’re taking.

Then you may move on to a discussion about diversity within the organisation and what’s going on.

Keep in mind you’re dealing with people who, for most of their lives, are having people responding to them — they’re the ones directing everyone else.

In the last few years there has been a shift from ‘I’m not really used to people telling me what I need to change’ to an awareness that ‘okay, now I need to embrace this a little bit more’.

But there’s clearly still some resistance to that. That’s part of this process.

On one end of the spectrum there’s an understanding of where society needs to go [and] how economies need to transition to a more sustainable future. But then there’s still a traditional mindset that ‘well, we’re companies, we’ve got to focus on our returns and we’ve got to think about the real issues in front of us now’.

I’m not saying either end of that spectrum is wrong. What we need to do is meld those together so people can see they are actually intertwined.

So a lot of what we do is informing and discussing and trying to share perspectives with companies over these matters.

What we’re seeing when we meet with companies

That takes me to some of the observations we’ve made over the last couple of years within companies.

The first point is that everyone actually understands risks. I don’t think there’s a debate about whether there are issues that we need to be thinking about and taking care with.

The discussion is about the degree to which those risks are real and tangible in any reasonable timeframe.

That’s the push-back that we get. But I do think Rio with Juukan Gorge is a very seminal moment. Understanding community relations and working with the traditional landowners was something a company probably never thought would lead to the CEO and two senior executives being removed if they got it wrong.

That clearly was a risk that was underestimated by that company. That is a very stark lesson for all companies.

That’s one of the areas that’s being reassessed and needs to be continually discussed and highlighted with these companies.

The second thing is the interesting debate about the reporting versus the outcomes on ESG matters.

Both are very important but my observation is there’s an element now where companies feel that by delivering on the reporting side — giving the past — that’s showing that they’ve done their job.

Then I actually think about the point of the reporting and what we’re actually trying to achieve here and what are the outcomes.

We certainly want to emphasise — what is it that a company can do specifically? How can they make a dedicated change rather than just signing off on a series of targets that are not necessarily going to achieve a lot in a good timeframe.

If you take the mining sector, it’s going to be very difficult for the iron ore companies, for example, to push a lot of their customers such as the Chinese steel companies to embrace some of the measures that perhaps they should be embracing.

But what they can do is sit down with their suppliers of trucks and diggers and so forth and put a lot of pressure on them to transition away from diesel towards alternatives such as hydrogen or electric vehicles.

So we’ve been encouraging our companies to think about not just the reporting (you’ve still got to do that) but also the tangible things where we have a point of leverage to deliver a material outcome in a good timeframe.

Amcor as an engagement case study

Another company we’ve had a lot of discussions with is Amcor.

Amcor is an interesting company because it’s in a very controversial area — single-use plastics.

But it also has the potential to drive technology improvements and infrastructure that can lead to recyclable, reusable, combustible packaging becoming pervasive in our consumption habits.

We believe it’s really important to encourage them to realise that by doing something — and I believe  they are doing something about it — that will help the rating of the company and their cost of capital.

And if they don’t do enough about it, it’ll actually go the other way.

So there’s a much more binary outcome in terms of their decision-making.

The carrot or the stick

That also leads me to this issue of the carrot and the stick.

I do believe that generally to motivate people and motivate companies, you need to not only tell them the consequences of not doing something and the penalties that will come. You also need to provide them with an incentive.

I think that’s where the market’s price action, the way that markets are rating companies is actually a very valuable tool in sending that signal and providing an incentive for companies.

In addition I think there’s enormous amount of opportunities. We’ve spent a lot more time recently thinking about the opportunities that are presenting themselves with this transition in the economy.

Going back to the pendemic, the companies that were able to help facilitate remote work and online shopping have had huge returns for investors.

So if you’re talking to a company you can say, ‘think about the opportunity, where can you tap into these trends and how can you actually take advantage of them and deliver a positive outcome?’

Intertwinment of E, S and G

The final observation I’ll make is to really reinforce this point about the intertwinement of the E, the S and the G [Environmental, Social and Governance issues].

When I speak to companies I see a parallel to what we’re seeing in broader society. There’s a group of people who are very much on board with the need to transition the economy. But there’s also still people who realise that they’re probably near-term losers from that transition.

That’s why the ‘S’ is so important.

We need an economy that is able to create industries that create new jobs, create wealth and enables us to transition quicker.

In terms of our portfolios the message we’re giving to companies is we’re really looking for those companies that help deliver on those other aspects of ESG, and are able to help facilitate the transitions that we’re seeking to achieve.

Simon O’Connor (RIAA): Crispin, you have quite unique access to very senior levels of Australian companies. We’ve seen something of a revolution on the investor side around ESG issues which you talked about. Are you saying the response at the leadership level in boards and among executives you speak to is responding and upskilling and building capability and knowledge quickly enough in your view — as a broad observation across the ASX?

Crispin Murray (Pendal): Yes the first thing I’ll say is, there’s an enormous emphasis across the board on these matters. Certainly we are through the stage of people dismissing this as an issue.

The challenge now is the output. I will sit down in some situations and we’ll literally have a 40-page deck, and it will just go through a whole bunch of things that companies are doing. But you get the sense sometimes that this is a case of ‘let’s just create lots of examples of all the things we’re thinking about’. But there’s no common theme or purpose as to what they’re trying to achieve.

The targets have created a mindset which is: ‘as long as we’re answering and delivering on these sorts of KPIs, we’re doing what we’re supposed to be doing’.

Getting people to actually think about the ‘whys’ is really important.

The other observation is it’s a lot easier for large companies to do this than small companies.

One of the things I worry about is that when you look at some of these third-party rating services, they’re penalising smaller companies because they haven’t got the reporting levels that larger companies have.

[Smaller companies] need to raise their game, and that’s a message that we give to them. But in many cases we think there’s a disconnect between the perception and the reality of these companies.

We want to try and find the right balance between, having companies feeling that they have to dedicate resources just to apply reporting standards that work for a global perspective versus if there’s one area of your business that you can really facilitate a change. We’d certainly encourage them to focus on that and work more on that front.

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.

Click here for more information about Pendal’s newly enhanced Ethical Share fund.

For more information, please contact Pendal’s Head of Responsible Investment Distribution Jeremy Dean at Jeremy.Dean@pendalgroup.com.

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

Find out more about our investment capabilities: https://www.pendalgroup.com/about/investment-capabilities

Contact a Pendal key account manager: https://www.pendalgroup.com/about/our-people/sales-team/

Here’s what’s influencing Australian equities this week according to Pendal’s head of equities Crispin Murray (pictured above). Reported by portfolio specialist Chris Adams.

THERE was an unsurprising consolidation in equity markets last week following a strong run. The S&P/ASX 300 gained 0.15%, while the S&P 500 fell 0.82%.

This pause for breath has been orderly — we do not see signals of anything more meaningful at this stage.

As we move into the holiday period, we are monitoring seven key issues in coming days and weeks:

1. Will the global economy continue to surprise on the upside?

The global economy continues to run hot by aggregate measures of GDP and other indicators. However this is driven largely by industrial production.

Stimulus measures have held up consumer spending but there has been a shift from services to goods. As a result, production is running hard as depleted inventories are restocked. This is evident in commodity prices and activity data such as US railcar loadings and trucking stats.

There are signs of weaker consumer activity in the US under the current wave of Covid. This has been felt most in areas such as dining and entertainment. Retail spending remains strong although growth has slowed.

The jobs front in the US remains reasonable. Continuing jobless claims – probably the best real time measure – are slowly but surely continuing to trend down.

The impact of the latest northern hemisphere Covid wave needs to be watched — but at this point the economic situation remains solid. This is also reflected in credit markets, which are signalling a benign view.

2. Will the US see harder lockdowns?

Covid case data has re-accelerated in the US as post-Thanksgiving reporting flows through. The potential for harder lock-downs poses a risk to the current economic situation.

Localised restrictions have been enacted in some areas – particularly in California last week.

Hospitalisations and Intensive Care Unit (ICU) admissions remain the key factors to monitor. Hospitalisations are up 7% week-on-week.

The rolling seven-day average of net new daily hospitalisations is around 1000 patients. This is down from 2000 in mid-November, but the next week or two will tell if this re-accelerates due to the Thanksgiving lag.

Overall, ICU occupancy continues to sit at high levels but has not deteriorated. Average ICU occupancy in metro areas is running at about 75%, while 14% of metro areas are running at 90% or greater and a quarter are at 80% or greater.

This is the same as last week but bears watching.

We are moving into a period where traditional flu cases rise dramatically. So far this has not happened – but it could also be an important variable in pressure on the medical system.

3) Will new vaccine trial data identify any material issues?

Following initial positive news on high efficacy rates for the Moderna and Pfizer vaccines, subsequent news flow has raised some questions about health impact at the margin.

For example, data released on the Pfizer trial has shown incidence of Bell’s Palsy, lymphatic swelling and even appendicitis are all higher in trial groups taking the vaccine.

The Moderna trial will release more data this week while the UK vaccine roll-out could see other issues identified. Something to watch out for in coming weeks.

4) Ability to deliver an effective vaccine on the necessary scale

The market seems quite jumpy at any noise regarding the availability of vaccines. It’s important to remain aware of any issues regarding the supply chain. We also need to watch how effectively Moderna is able to handle its distribution.

At this point surveys suggest people’s propensity to take a vaccine continues to rise. However this is closely linked to views on its efficacy.

This may become an issue in Australia given our agreements with AstraZeneca and Novavax – and lack of agreement with Moderna.

5) Policy updates

Policy support remains the single greatest factor supporting the recovery in markets. Any signal from central banks that questions this support would be a negative. We are not seeing any sign of this at the moment.

The Fed meets this week and at the moment consensus is 50/50 on whether it will announce a lengthening of the maturity of the bonds they are willing to buy, with a view to containing the current sell-off in bonds.

Last week the European Central Bank extended the length of its current bond-buying program, without adding to its intensity.

The ECB struck a cautious tone, offering no comment on how much it planned to buy each month, saying only it would respond to conditions. This suggests there is greater push-back on the level of stimulus within Europe.

On the fiscal side, the odds of a near-term deal are also around 50% — and have probably deteriorated in recent days.

The tide of liquidity supporting the market is manifesting in several interesting ways. Equity market valuations look very high by historical standards in the US. Although the relative yield between equities and other asset classes is also at high levels, which is supportive.

6) Georgia Senate runoffs

Runoff elections due to take place in the US state of Georgia on January 5 have the potential to move markets. Recent polls suggest a close-fought race.

If the Democrats ended up with control of Congress, it would shift expectation on a fiscal package, prompting a further sell-off in bonds and rotation to value within equity markets.

7) Brexit

A potential wildcard. The situation remains fluid, and it seems negotiators have bought themselves more time overnight.

Markets outlook

Bond yields fell 8bps (US 10-year sovereigns) on concerns on the impact of lockdowns in the US. There will be a lot of focus on the Fed meeting this week, to see if it extends the duration of the bonds they are will willing to buy, to keep yields under control.

In commodities, iron ore continued higher on end-of-year restocking, as well as concerns that recommendations on the government inquest into the Juukan Gorge incident may have some impact on supply.

The Australian dollar broke higher, up 1.4% against the USD, on the back of good domestic economic indicators and higher commodity prices. It is sitting at 75c and may strengthen – an aspect to watch for some stocks.

The Australian market was led last week by Resources (+2.45%). There was some rotation back to growth and defensives following a couple of weeks of under-performance. Information Technology gained 2.76% and Consumer Staples was up 1.5%.

 

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.

Find out more about our investment capabilities: https://www.pendalgroup.com/about/investment-capabilities

Contact a Pendal key account manager: https://www.pendalgroup.com/about/our-people/sales-team/

How many As are enough?

School reports are out this week and for highly driven students (and some parents) anything less than an A is disappointing. For others a single A can be a source of celebration.

Two Australian states this week lost an A.

S&P downgraded NSW from AAA to AA+. This came as no surprise given the massive increase in debt this year.

More surprising though was Victoria, which was double downgraded from AAA to AA, falling from the equal highest-rated state to the lowest.

Victoria has had a double downgrade before. In 1992, while struggling to emerge from a severe recession and the collapse of the State Bank of Victoria, the state was hit by a double downgrade from Moodys.

There were massive blowouts in the spreads of Victorian bonds and a sense of panic crept in. The downgrade was viewed as unacceptable by the new Liberal government of Jeff Kennett, which embarked on a program of asset sales and expense control to regain the AAA. It took six years.

Today we live in very different times. We no longer have mainstream economists and supposed experts like the IMF recommending a dose of large fiscal cuts as the remedy. Cutting government spending at a time of large private sector cuts is seen for the stupidity it always was.

More importantly at a federal level there has been a gradual realisation over the past 20 years that a government in control of the printing press has far more debt and fiscal capacity than previously thought.

We can thank Japan for first experimenting with what were then considered the “crazy” ideas of Modern Monetary Theory.It turns out the framework behind MMT is actually right — something that has embarrassed the many mainstream economists who predicted doom.

Since the facts disrupted the views of these economists they have been busy trying to exercise a triple reverse twist dive to pretend they could see this all along. Even worse, some are revealing their continued ignorance of MMT by still referring to it as “an impossible free lunch”.

This time governments and markets have correctly shrugged their shoulders at these downgrades as largely ho hum.

The cost of debt has barely budged. The RBA and banks chasing High Quality Liquid Assets are soaking up the extra supply. Debt has never been cheaper.

Governments have learned that the welfare of their citizens, particularly in a crisis, is more important than an extra A in the credit rating.

Over the next decade it will be inflation — not the rating agencies — that limits what a government can do. If inflation emerges it will hopefully be the “good kind” brought about by a strong economy, which would be fixing government finances.

The bad kind of inflation — supply-driven or stagflation — would be a different matter.

But that is a topic for another time.

 

Tim Hext is a portfolio manager with Pendal’s Bond, Income and Defensive Strategies team.

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

Find out more about our investment capabilities: https://www.pendalgroup.com/about/investment-capabilities

Contact a Pendal key account manager:
https://www.pendalgroup.com/about/our-people/sales-team/

PENDAL is proud today to introduce Regnan Global Equity Impact Solutions Fund in Australia.

The new fund is one of the first to provide Australian investors with access to global public market impact assets. The announcement follows the successful launch of Regnan Credit Impact Trust in January 2020.

Regnan, a specialist ESG research, engagement and advisory business that is fully owned by Pendal Group, expanded into global investment management in 2020 with the appointment of a four-person Global Equity Impact investment team.

The fund is offered as part of Regnan’s Global Equities Impact strategy which is available in the UK and now in Australia. The strategy is managed by Regnan’s London-based investment team and marketed by Pendal’s distribution team locally.

“The Regnan Global Equity Impact Solutions Fund is an important step in our vision to develop Regnan as one of the world’s foremost responsible investment managers,” said Pendal Australia Chief Executive Officer Richard Brandweiner.

“It’s an innovative investment strategy developed by a dynamic and passionate team with proven credentials as impact investors.”

 

Positive impact, active returns

Impact investment products are in high demand. The value of Australian impact investments is forecast to grow to $100 billion in five years — five times the current market size of $20 billion, the Responsible Investment Association Australasia reports.

Regnan Global Equity Impact Solutions invests in mission-driven companies that provide solutions for the growing, unmet sustainability needs of society and the environment while seeking to generate strong financial returns.

Using a proprietary taxonomy system, Regnan has identified more than 50 areas of potential investment based on the United Nations Sustainable Development Goals — and some 2200 innovative companies well-placed to become leaders in these new markets.

“We are excited to launch the fund in Australia,” said Tim Crockford, Head of the Regnan Equity Impact Solutions team.

“Impact investing is a nascent and fast evolving space. Our ethos is about investing in companies that are trying to solve environmental and social challenges like water and food security and embedding circular economy in their business principles. For us, the impact case is the investment case.”

Hear more from Tim Crockford in this video.

Click for detail about Regnan Global Equity Impact Solutions fund

 

Regnan’s new look

Reflecting its new, expanded mission, Regnan has introduced a new look and a new website.

The new Regnan logo evokes shifting tectonic plates, signifying the permanent change that sustainability brings to the investment landscape.

 

Australian investors: For more information, please contact Head of Regnan and Responsible Investment Distribution Jeremy Dean at jeremy.dean@regnan.com.

Information for UK, European and other international investors: www.regnan-johcm.com

WE believe the next opportunity in Emerging Markets lies with identifying the rebounds and countries that have lagged.

Here senior portfolio manager James Syme explains why he believes this opportunity will drive a rebound in the relative performance of Pendal Global Emerging Markets Opportunities fund.

Watch this 5-minute video Q&A with portfolio specialist Chris Adams or read the transcript below.

 

TRANSCRIPT

Portfolio specialist Chris Adams: We’re seeing a narrow rally in growth-oriented East Asian tech, which has driven gains in emerging markets.

Since March we’ve had exposure to the theme, but we believe there is more to emerging market growth opportunities than a handful of these stocks.

We believe the next opportunity in emerging markets is identifying the rebounds and the countries that have lagged.

Very few of the 26 emerging markets (EM) have actually outperformed the index this year.

This rebound will occur at different rates at different times in emerging markets, we believe, based on the economic structure and policy options.

James where do you see the specific opportunity to make money in Emerging Markets (EM) from here?

 

Portfolio manager James Syme: There are two areas of particular interest and the portfolio’s exposed to both of them.

The first is in the countries outside the East Asia, China, Korea and Taiwan space, where we’ve generally seen a lag in performance.

We saw a lot of money leave those markets back in March and April, and that’s only really started to recover.

Now it does feel that November was a real sea change in markets. We saw some strong out-performance from some of those areas including parts of Latin America and including India.

That’s been driven by the pre-existing conditions of low interest rates, a weak dollar and local recoveries; and then new optimism from vaccine news, the change in power in the White House and particularly with a pickup in flows.

So some of those areas we see great opportunity as they go into recovery, which really doesn’t seem to be priced into markets.

Then secondly, in the East Asian space we’ve seen under-performance of Korea relative to China and Taiwan year to date.

Korea is a much more cyclical economy. We saw big outperformance of Korean equities in November and the portfolio is significantly overweight Korea relative to China and Taiwan within that East Asian space.

 

Chris Adams: I’m assuming Korea is one of your highest conviction positions. Where else are you seeing a lot of conviction with EM at the moment? And why do you think they’ll outperform from here?

 

James Syme: Within India we’ve seen a big build-up of liquidity and savings in the economy, a big deferral of consumption year-to-date because of the coronavirus lockdowns.

We see some real evidence of a turn in the Indian economy. We’ve seen improving coronavirus data there. We have significant exposure in the portfolio to India.

We’re becoming much more positive on opportunities within Latin America. Mexico is a big beneficiary of the Biden presidency, as well as normalisation and recovery in the US economy and in the Mexican economy.

We’ve moved more positive on Brazil. We’ve moved to a neutral position there. In Brazil we’re seeing an increase in optimism and foreign investor flows. There a few more stages we’d like to see before we went fully overweight Brazil.

But it’s those kinds of markets — markets like India and Mexico and further down the line potentially Brazil — rather than simply adding more and more to the pre-existing tech winners that did so well through the summer.

 

Chris Adams: Where do you see the largest investment risks clustered within the EM universe at the moment?

 

James Syme: It’s always the case that the biggest opportunities in markets are where consensus is universally bearish and the biggest risks are where consensus is nearly universally bullish.

There are some great companies in that technology space that have done very well from the effects of the coronavirus, as well as from underlying secular trends.

Within some of those, we’ve seen some extremely heavily owned stocks trading at very expensive multiples. They’re good businesses but it’s hard to see the marginal piece of good news that can drive them even higher.

I think this is a time to be more rotational and contrarian rather than simply trying to rely on those tech businesses getting another 10% better from what already looks like extremely strong operating conditions that have been priced into those markets.

Chris Adams: Do you need to see a large sell-off in some of those tech stocks to outperform or is there something else that’s going to drive relative performance?

James Syme: No, I think particularly if we see a recovery in investment flows into some of these markets like India and Mexico, and some of those other less technologically export-driven markets, we still haven’t seen the recovery from the big unwind in March and April.

I think these markets can deliver good returns in their own rights, irrespective of what happens with the internet and tech space.

 

More information: Download a PDF article with the further detail on Pendal’s Global Emerging Markets Opportunities strategy.

 

James Syme is a senior portfolio manager and co-manager of Pendal’s Global Emerging Markets Opportunities fund.

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

Find out more about our investment capabilities here. 

Contact a Pendal key account manager here. 

Here’s what’s influencing Australian equities this week according to Pendal’s head of equities Crispin Murray (pictured above). Reported by portfolio specialist Chris Adams.

US Covid number continue to increase, while payroll data is disappointing. Nevertheless, equity markets continue to rally.
A number of recent developments bear watching:

• Polls indicate the Democrats may win both of Georgia’s Senate seats in the January run-off, which could hand them control of the Senate. The market has welcomed the prospect of divided US government. This could change that view.
• Delays in approval for the AstraZeneca vaccine — pending more thorough tests — may mean countries outside of the US might not achieve herd immunity until the end of 2021.
• There is some commentary around the potential for vaccine production to be held back by a lack of key inputs such as vials and needles.
• There is potential for certain strains of Covid to be vaccine resistant — specifically the N439K strain which is rare but shown to be resistant to some antibodies in recovered patients.

Nevertheless, the market remains sanguine. The S&P/ASX 300 gained 0.55% and the S&P 500 was up 1.72% last week.

The recent strong run may mean we are in for a period of consolidation — though not necessarily a material pull-back.

We still see plenty of supportive factors for markets in the near term, including:

1. Vaccine means a resolution to the impact of Covid is on the horizon
2. High case numbers, concerns on the economy and uncertainty on the roll-out of vaccines mean policy makers remain in the mindset of “whatever it takes”. Fiscal and monetary stimulus remains in place as a result.
3. The Democrat win in the US — with Congress likely divided — means the end of the unpredictability of the Trump Administration, but lower chance of a dramatic new policy agenda.
4. China’s economy continues to outperform the rest of the world. Positive interest rates are attracting capital which supports the RMB and Chinese spending power. This is good for commodities.
5. Australia is in the sweet spot of summer + Covid suppression + a potential vaccine before winter. This provides a reasonably clear path for the economy.
6. A Brexit deal possibly ends some uncertainty in Europe.

In the market, low rates continue to support growth stocks, which are holding up well. Value stocks are benefiting from accelerating growth and greater earnings certainty all supported by substantial liquidity. This means the current rally has decent breadth.

Covid outlook

Europe continues to improve, leaving the US as the flashpoint for the northern hemisphere wave.

It is still too early to read the consequences of the Thanksgiving break. The next two weeks will be important to determine if this has triggered a re-acceleration.

Regionally the worst states in the Midwest have begun to see some relative improvements. This has been offset by a re-acceleration in Florida, Michigan and New York — though some of this is a catch-up in post-Thanksgiving reporting. Some of the greatest strain on hospitals had been in the Midwest, so this is a marginal positive.

Hospitalisation growth broadly remains more limited than case growth at about 10 per cent. ICU occupancy improved marginally in the Midwest, which had been under some of the greatest strain. But we are seeing a broadening of severe cases, making it harder to help the badly impacted states. There are also reports of healthcare staff shortages emerging.

Economic outlook

Total non-farm payroll data for November was disappointing, suggesting the jobs rebound is decelerating. Though overall unemployment continues to fall.

This may not have too great an impact on Q4 GDP growth, given the strength in industrial production for export and to restock inventories. This continues to drive a disconnection with sluggish real-time mobility data — and the initial data for Cyber Monday retail sales — but suggests Q4 GDP may be stronger than many expect.

Softer payroll data raises the near-term chances of a fiscal package. Commentators suggest something in the order of $US500 million to $US1 billion. There are some signals the Fed may start extending the duration of the bonds it is purchasing.

Globally economic signals remain positive as industrial production ramps up and the expectation of significant on-going fiscal stimulus drives industrial commodities.

Copper rose to a 7-year high. Iron moved higher too, as Brazil’s Vale announced a smaller-than-expected increase in production next year.

These moves in commodities are driving mining stocks globally. The US mining sector has broken back above pre-Covid levels, while Australian resources look set to do the same.

Markets

Ten-year government bond yields rose 12bps in the US and 10bps in Australia, reflecting the USD fall and the rise in commodity prices. This is supportive for the market’s value stocks.

We don’t see the slow rise in bonds as a negative for equities. It’s borne of higher optimism about future growth and a belief the Fed will be later in the cycle to raise rates than normal.

The implied message from central banks is that savers will have to take one for the team in terms of an extended period of low rates.

This is beginning to be reflected in expectations of equity market performance — and in equity market ETF inflows, which have rapidly accelerated since the US election and vaccine news.

US market valuations for the five largest stocks remain extremely elevated. Beyond this, the recent “catch-up” by other parts of the market has left their valuations looking full in historical terms. Nevertheless there is the potential to rise further, particularly given the sharp recovery in earnings coming through.

In the Australian equity market a sell-off at the end of November has quickly reversed. Resources led the way last week (+5.43%) while growth names (Technology +0.34%, Health Care -2.36%) and defensives (Utilities -2.18%, Consumer Staples -0.09%) lagged.

Again, macro factors were important at the stock level. Mining stocks have broadly consolidated for a number of months, but a weaker USD and stronger global demand have the potential to prompt a move higher relative to market.

 

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.

Find out more about our investment capabilities: https://www.pendalgroup.com/about/investment-capabilities

Contact a Pendal key account manager: https://www.pendalgroup.com/about/our-people/sales-team/

Regnan’s Global Equity Impact Solutions Fund invests in mission-driven companies we believe are well placed to solve the world’s biggest problems.

This is the story of one of those companies, molecular diagnostics innovator QIAGEN.

 

LABORATORY and diagnostic tests influence 70 per cent of medical decisions — but account for only 2 to 5 per cent of healthcare spending, the US Health Industry Distributors Association reports.

Greater diagnostic testing could save $900 million in annual healthcare costs in the US alone, the association estimates.

In poor and middle-income countries lack of diagnostic testing is even more serious.

Some 1.5 million people died of tuberculosis in 2018 — a number that would be much smaller if the disease was identified earlier according to the World Health Organisation.

Two-thirds of cases were in eight emerging economies.

Qiagen offers innovative testing solutions

Regnan’s impact investment team aims to outperform the broad global equity market over the long term by investing in companies that provide solutions for the world’s growing sustainability needs.

One of those companies is Netherlands-based Qiagen.

Qiagen makes molecular testing equipment and consumables for a global customer base.

Molecular diagnostics enables researchers and clinicians to quickly use biological samples to diagnose and monitor diseases, assess patient health and decide which therapies work best.

Qiagen’s molecular testing products diagnose a wide range of conditions, including tuberculosis, influenza, HIV and hospital infections. They are designed for use without requiring sophisticated expertise.

The biotech leader has also developed a number of products to help healthcare professionals quickly identify COVID-19.

For example this video shows a Qiagen solution that can prepare a sample in only two minutes to deliver results under one hour:

Qiagen has also leveraged its product philosophy to expand beyond its mainstay of infectious diseases into immune disorders and prenatal and neonatal health.

For example, the business is soon to launch a low-cost version of its revolutionary diagnostic test for latent tuberculosis detection, QuantiFERON-TB Gold.

This will make the test available for the first time in poor countries with a high incidence rate and a lack of laboratories.

Qiagen is also ramping up production of its comprehensive Covid-19 diagnostics portfolio. It is the world’s leading provider of RNA extraction kits, used as inputs for PCR tests, which detect active infections.

Qiagen’s competitive position

Leadership in technology and innovation – particularly in molecular diagnostics — differentiates Qiagen.

In the global struggle to increase and improve global diagnostics capabilities, Qiagen has achieved breakthroughs.

It has also contributed through improving the speed, accuracy and accessibility of existing diagnostic products.

Qiagen helps solve the world’s biggest problems

Regnan identifies companies such as Qiagen using the 17 United Nations Sustainable Development Goals (SDGs) and their 169 underlying targets as an investment lens.

The SDGs are a 15-year plan to end poverty, protect the planet and improve the lives and prospects of everyone, everywhere.

In 2019 the UN called for “a decade of ambitious action to deliver the goals by 2030.

“Evidence shows that investing in the SDGs makes economic sense, with estimates highlighting that achieving the SDGs could open up US$12 trillion of market opportunities and create 380 million new jobs,” the UN says.

Drawing on the SDGs and their targets, Regnan’s investment team has built a comprehensive, proprietary investment framework – the Regnan SDG Taxonomy.

Qiagen’s activities contribute to three SDG targets for 2030:

• SDG target 2: End preventable deaths of newborns and children under 5 years of age, with all countries aiming to reduce neonatal mortality to at least as low as 12 per 1000 live births and under-5 mortality to at least as low as 25 per 1000 live births
• SDG target 3: End the epidemics of AIDS, tuberculosis, malaria and neglected tropical diseases and combat hepatitis, water-borne diseases and other communicable diseases
• SDG target 4: Reduce by one third premature mortality from non-communicable diseases through prevention and treatment and promote mental health and well-being

 

Find out more

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.

For more than 20 years our pioneering analysis has changed the way investors and businesses think about value creation and their wider responsibilities to society.

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.

Managed by a four-person investment team based in London, the fund aims to outperform the broad global equity market over the long term by investing in companies that provide solutions for the growing, unmet sustainability needs of society and the environment.

Regnan Global Equity Impact Solutions Fund is distributed in Australia by Pendal and in the UK and Europe by J O Hambro.

Australian investors: Contact Jeremy Dean at Jeremy.Dean@Regnan.com

Information for UK, European and other international investors: www.regnan-johcm.com

Regnan’s Global Equity Impact Solutions Fund invests in mission-driven companies we believe are well placed to solve the world’s biggest problems.

This is the story of one of those companies, US water treatment innovator EVOQUA.

 

WATER pollution accounts for 1.8 million deaths a year, according to the Lancet Commission on Pollution and Health.

Governments are responding to the harmful effects of bad water by tightening environmental regulations. But companies are under-investing in pollution prevention and instead spending on costly clean-ups.

Efficiency in water use is also increasingly critical. By 2050, manufacturing demand for water will be 400 per cent higher than 2000, the United Nations believes.

A water treatment innovator

Regnan’s impact investment team aims to outperform the broad global equity market over the long term by investing in companies that provide solutions for the world’s growing sustainability needs.

One of those companies is US water innovator Evoqua which provides water treatment services, systems and technologies mainly to North American customers.

Pittsburgh-based Evoqua serves a broad range of markets including pharma, food & beverage, microelectronics, power and general manufacturing.

It treats influent water (freshwater used in industrial, commercial, and municipal applications) and effluent water (used water that needs treating before returning to the environment).

This allows users to withdraw less freshwater from the environment and properly treat wastewater before discharge. By enabling higher rates of water re-use by manufacturers, Evoqua helps reduce their growing demand for water.

As well as selling filtration systems, Evoqua is disrupting water treatment with an attractive business model based on outsourced water treatment.

This allows customers to focus on their core business. If all industrials outsourced their water treatment, the $US 6 billion industrial water filtration market could double to $US12 billion.

A competitive position

Evoqua has the highest or second-highest market share in the US in every segment.

It has the biggest service network in North America – a competitive advantage that gives Evoqua proximity to a greater number of customers.

The company is developing its outsourcing business further with Water One, a digital platform that enables customers to optimise performance through remote monitoring and predictive maintenance.

There is no upfront cost — clients pay by volume used.

Momentum is picking up far ahead of management expectations. Clients won from competitors account for 20 per cent of Water One sales.

Evoqua is helping solve the world’s biggest problems

Regnan identifies companies such as Evoqua using the 17 United Nations Sustainable Development Goals (SDGs) and their 169 underlying targets as an investment lens.

The SDGs are a 15-year plan to end poverty, protect the planet and improve the lives and prospects of everyone, everywhere.

In 2019 the UN called for “a decade of ambitious action to deliver the goals by 2030.

“Evidence shows that investing in the SDGs makes economic sense, with estimates highlighting that achieving the SDGs could open up US$12 trillion of market opportunities and create 380 million new jobs,” the UN says.

Drawing on the SDGs and their targets, Regnan’s investment team has built a comprehensive, proprietary investment framework – the Regnan SDG Taxonomy.

 

Evoqua’s activities contribute to four SDG targets for 2030:

• SDG target 3.9: Substantially reduce the number of deaths and illnesses from hazardous chemicals and air, water and soil pollution and contamination
• SDG target 6.1: Achieve universal and equitable access to safe and affordable drinking water for all
• SDG target 6.3: Improve water quality by reducing pollution, eliminating dumping and minimising release of hazardous chemicals and materials, halving the proportion of untreated wastewater and substantially increasing recycling and safe reuse globally
• SDG target 6.4: Substantially increase water-use efficiency across all sectors and ensure sustainable withdrawals and supply of freshwater to address water scarcity and substantially reduce the number of people suffering from water scarcity

 

Find out more

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.

For many years our pioneering analysis has changed the way investors and businesses think about value creation and their wider responsibilities to society.

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.

Managed by a four-person investment team based in London, the fund aims to outperform the broad global equity market over the long term by investing in companies that provide solutions for the growing, unmet sustainability needs of society and the environment.

Regnan Global Equity Impact Solutions Fund is distributed in Australia by Pendal and in the UK and Europe by J O Hambro.

Australian investors: Contact Jeremy Dean at Jeremy.Dean@Regnan.com

Information for UK, European and other international investors: www.regnan-johcm.com

Regnan’s Global Equity Impact Solutions Fund invests in mission-driven companies we believe are well placed to solve the world’s biggest problems.

This is the story of one of those companies, Dutch energy pioneer ALFEN.

 

THE RISE of renewable energy is one reason for hope in the battle against climate change.

Electric vehicles — and their gradual replacement of cars powered by internal combustion engines — is an important part of this story.

Transport accounts for 14 per cent of global greenhouse emissions. Electric vehicles also reduce pollution which triggers health problems and premature deaths.

However, the transition to renewable energy poses new challenges.

For example, the grid infrastructure finds it difficult to deal with renewable energy because most of it comes from intermittent sources.

Also, many countries lack sufficient charging points for electric vehicles.

An energy pioneer with new solutions

Regnan’s impact investment team aims to outperform the broad global equity market over the long term by investing in companies that provide solutions for the world’s growing sustainability needs.

One of those companies is Netherlands-based Alfen which has a long history of developing market-leading products based on its expertise in electricity.

The Dutch energy pioneer has a central role in the energy grid as a builder of transformer substations, energy storage systems, electric vehicle charging stations and other products and services.

The business invested early in electric vehicle charging (from 2008) and energy storage (2011), and has now built a competitive advantage in these fields.

Alfen’s transformer substations provide millions of households and companies with energy, while thousands of electric vehicles make daily use of its charging stations.

How Alfen solves energy problems

Alfen makes storage systems that solve the problem of intermittency. This allows power produced by renewable energy to be saved until electricity consumers need it.

This also makes the electricity grid more stable by reducing the unpredictability and volatility of total power generation.

It’s a huge market. Some €40 billion ($A65 billion) must be invested into the grid across Europe in coming years to keep pace with renewables expansion, according to the European Commission.

Alfen also makes charging points for electric vehicles, which will greatly boost their use.

Over the next decade Europe will need to spend €20 billion annually on public charging points to decarbonise road transport, the European Federation for Transport and the Environment estimates.

Alfen helps solve the world’s biggest problems

Regnan identifies companies such as Alfen using the 17 United Nations Sustainable Development Goals (SDGs) and their 169 underlying targets as an investment lens.

The SDGs are a 15-year plan to end poverty, protect the planet and improve the lives and prospects of everyone, everywhere.

In 2019 the UN called for “a decade of ambitious action to deliver the goals by 2030.

“Evidence shows that investing in the SDGs makes economic sense, with estimates highlighting that achieving the SDGs could open up US$12 trillion of market opportunities and create 380 million new jobs,” the UN says.

Drawing on the SDGs and their targets, Regnan’s investment team has built a comprehensive, proprietary investment framework – the Regnan SDG Taxonomy.

Alfen’s activities are linked to two SDG targets for 2030:

• SDG target 7.2: Substantially increase the share of renewable energy in the global energy mix
• SDG target 11.2: Provide access to safe, affordable, accessible and sustainable transport systems for all

 

Find out more

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.

For more than 20 years our pioneering analysis has changed the way investors and businesses think about value creation and their wider responsibilities to society.

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.

Managed by a four-person investment team based in London, the fund aims to outperform the broad global equity market over the long term by investing in companies that provide solutions for the growing, unmet sustainability needs of society and the environment.

Regnan Global Equity Impact Solutions Fund is distributed in Australia by Pendal and in the UK and Europe by J O Hambro.

Australian investors: Contact Jeremy Dean at Jeremy.Dean@Regnan.com

Information for UK, European and other international investors: www.regnan-johcm.com