Important Updates

Pendal Dynamic Income Fund (APIR: BTA8657AU, ARSN 622 750 734)

Pendal Enhanced Credit Fund (APIR: RFA0100AU, ARSN 089 937 815)

Pendal Fixed Interest Fund (APIR: RFA0813AU, ARSN 089 939 542)

Pendal Monthly Income Plus Fund (APIR: BTA0318AU, ARSN 137 707 996)

Pendal Sustainable Australian Fixed Interest Fund (APIR: BTA0507AU, ARSN 612 664 730)

 
Effective 7 May 2020, the buy-sell spread for a number of Pendal funds (the Funds) will decrease as set out in the table below:

Table 1: Old and New Buy-Sell Spreads

The buy-sell spread is an additional cost to you and is generally incurred whenever you invest in or withdraw from a Fund. The buy-sell spread is retained by the Fund (it is not a fee paid to us) and represents a contribution to the transaction costs incurred by the Fund such as brokerage and stamp duty, when the Fund is purchasing and selling assets. The buy-sell spread also reflects the market impact of buying and selling the underlying securities in the market. Importantly, the buy-sell spread helps to ensure different unit holders are being treated fairly by attributing the costs of trading securities to those unit holders who are buying and selling units in the Funds. 

The further reduction in buy-sell spread reflects continuing improvement in market liquidity for Australian issued investment grade securities.

Pendal will continue to monitor market conditions and review and update the buy-sell spread regularly as required.  You should therefore review the current buy-sell spread information before making a decision to invest or withdraw from a Fund.

Please refer to our website www.pendalgroup.com and click ‘Products’ for the latest buy-sell spread for each Fund.

They are the perennial questions for investors — when, where and what to buy. Here Pendal’s head of Multi-Asset Michael Blayney (pictured) runs through the outlook for major asset classes.

NOW that markets have rebounded somewhat, the questions of when, where and what to buy take on a greater significance.

It is not unusual to get a sharp rally in stock indices during a bear market. The key feature this time is how quickly equity markets fell and then rallied — and how quickly the economic situation has evolved.

This means investors need to look a bit harder to find fair value and they need to be comfortable taking a longer-term view.

Equities

The outlook for the world’s leading equities market — the United States — is mixed.

Large caps, defined as those in the S&P500, have generally rallied hard. The price-to-earnings trailing multiples are just under 20 times earnings and those earnings are forecast to fall.

Purely on a valuations basis, large caps are expensive, particularly when you throw a deteriorating economic backdrop with a massive increase in unemployment into the mix.

Not helping the outlook for large US companies has been a decade-long trend of increasing leverage, in part through corporations regularly undertaking buy-backs. Over the last decade, median US company leverage has almost doubled (measured by the ratio of debt-to-earnings before interest, tax, depreciation and amortisation for the constituents of the MSCI USA Index).

High valuations, increased leverage and deteriorating earnings make up a pretty unattractive combination. The US mid-caps — the next 400 companies by size — look much more reasonably valued.

Although they have increased leverage over the last decade, these are higher-quality companies than small caps in terms of leverage and reliability of earnings. For the US equity market, this is our preferred exposure.

At the small cap end in the US, companies are less profitable, more highly geared and more cyclical. They tend to be lower quality and as such we believe mid caps offer a better risk/return trade-off at this point of the economic cycle.

Aussie equities look reasonable value, but there is a caveat. The big four banks are a large part of the index — around 18 per cent — and there are obvious risks faced by that sector given the deterioration in economic activity and consequently significantly increased risk of bad debts.

Further, the banks are expensive compared to overseas banks. However, overall, the Australian market is reasonable value.

Asian markets still look reasonably valued, though there are red flags are among less-developed nations that lack the ability to manage coronavirus. India, for example, doesn’t have the infrastructure to cope with COVID-19.

As a result, we prefer the more developed economies in the region.

European markets are trading around fair value. The pick of them are Germany and the United Kingdom from a valuation perspective.

The overall picture on equities is they were quite cheap, and now they’re not as cheap, though pockets of opportunity remain.

Real Estate Investment Trusts

REITs have been hit hard by the coronavirus pandemic. Many have suffered from their high exposure to shopping centres and to a lesser degree office space. REITs with exposure to logistics haven’t suffered as much.

The Australian REITs index almost halved last month. For long-term, patient investors, A-REITs look cheap.

As the economy re-emerges and restrictions are relaxed, A-REITs should benefit. They could be very good value for the investor with a 3-5 year time frame.

In a low interest rate environment, yielding sectors are very important for people trying to generate income. Buying into A-REITS is sensible, though the ride may be a little bumpy.

Debt

Government bond yields are very low. While they still have a place in a portfolio — providing some ballast — their expiration date is getting closer.

As bond yields fall, their ability to help protect portfolios in equity market declines reduces because there is less scope for yields to fall further.

It doesn’t mean it is now time to offload all bonds — but investors need to be aware they won’t be providing the returns of the past.

The question becomes whether their defensive qualities make up for the lack of return — and this latter feature is not what it once was.

There are opportunities in investment grade credit.

When economies slow and defaults increase, the magnitude of lost repayments in respect of higher quality borrowers is not normally large.

Meanwhile, the spread in the US between government bonds and corporate bonds is 200 basis points. The long-term median is 110 points.

Given the premium available, and the likelihood that defaults will be relatively benign, investment grade credit provides opportunities for investors.

Conclusion

There are opportunities for investors.

A portfolio of Australian equities where the valuations are fair, some European and Asian equities, mid cap US equities, some foreign currency exposure and investment grade debt looks like a reasonable portfolio in the current climate.

Michael Blayney manages Pendal’s Multi Asset Target Return fund. Michael has more than 21 years of investment management and consulting experience. He is a qualified actuary and holds a Bachelor of Laws (Hons) and a Bachelor of Science from the University of Queensland. 

Find out more about Pendal’s Multi-Asset capability here and Multi-Asset products here.

As social distancing restrictions ease, focus is turning to economic recovery. But what shape will it take? Portfolio manager Tim Hext from Pendal’s Bond, Income and Defensive Strategies team explains

“It’s a recession when your neighbour loses his job; it’s a depression when you lose yours.”

So said President Harry Truman after World War II — and it holds true in 2020, as the coronavirus triggers an economic crisis not seen since before his time.

The global economy is expected to contract by 3 per cent this calendar year, though some market economists expect it to be more.

Unemployment is soaring. Businesses are closing. The only question is whether it’s a recession, a depression or something completely new to economics – a “hiber-cession”.

But what about the recovery? When will it come and what will it look like?

Emerging from a severe economic downturn isn’t a predictable event, particularly when the shock hits both the demand and supply sides of the economy.

That’s what makes the 2020 economic crisis different from most others since World War II. It also makes predicting the path to recovery much tougher.

On the supply side, the shut-down of thousands of factories across China and the rest of Asia — and the closure of borders — stopped the production and distribution of goods.

The supply of finished goods was halted, along with the parts that go into other manufactured products.

For example, most of the glass used in Australian buildings is manufactured in China. With production and distribution halted, local builders can’t get glass.

On the demand side, it is self-evident that individuals and businesses are not spending money on a range of normal activities — from air travel and tourism to eating out, shopping in malls and buying new whitegoods and TVs. (Though there are exceptions — telecos, do-it-yourself retailers and supermarkets have all reported strong revenue growth.)

The double shock has hit all economies hard. Most recessions occur on the demand side. People and businesses cut back their spending. In these classical cases, the government uses fiscal or wages policy, and/or the central bank uses monetary policy, to boost demand.

But how do governments and regulators kick-start economies when both the supply and demand sides are hit?

That’s the $US9 trillion question. ($US9 trillion is what the International Monetary Fund expects to be wiped off the international economy over the next couple of years).

There are three, possibly four, trajectories that the economy could take, though admittedly there are variations within each.

V-shaped recovery

A V-shaped recovery is when economic growth plunges and then soars almost as soon as it hits the bottom. This is a possibility if you don’t think there’s much structural change in global economies as a result of COVID-19.

In this case the health crisis is more akin to a natural disaster — such as the recent bushfires in eastern Australia on a bigger scale.

Once the health crisis is over people get back to work. There’s pent-up demand among consumers and businesses, and everyone starts spending again.

A V-shaped recovery can only occur if Australia’s big trading partners — China, Japan, South Korea — power through and keep buying commodities.

This argument received a significant fillip from the IMF which said the Australian economy would shrink 6.7 per cent this calendar year and then rebound by almost as much next year.

The United States, the Euro area and emerging and developing Asia will all follow similar trajectories, the IMF forecasts.

The IMF says COVID-19 will trigger a 3 per cent contraction across the globe in 2020 — much sharper than the 2008-09 financial crisis.

Based on the pandemic fading and social distancing being unwound in the second half of this calendar year, the IMF expects the global economy to grow 5.8 per cent in 2021, led by China.

The argument for the V-shaped recovery is also aided by history. Recessions in the US in 2001, 1990 and after the oil crisis of 1973, all ended up in V-shaped recoveries.

But those recessions were either demand side, or in the case of the oil shock, supply side-induced recessions — not both.

L-shaped recovery

It is a bit of a misnomer to suggest an L-shaped recovery is a recovery. It’s more like a floor. Activity takes years to return to trend levels.

This will occur if infection levels continue to climb, death tolls keeps rising, and there is a protracted period of rolling lockdowns.

An L-shaped recovery is not a likely scenario, given the trajectory of the disease in nations that got hit first. The province of Wuhan in China is re-opening. So are nations in Europe that were hit earliest and hardest.

It is possible some emerging markets will experience an L-shaped recovery — particularly those without adequate health resources to handle the virus, government finances to cushion the economic hit or exports to earn income from offshore.

U-shaped recovery

A U-shaped recovery is a more likely growth trajectory.

As economies fall into recession they will take a couple of quarters to begin growing again after bottoming out.

Governments will gradually relax social distancing rules — and economies will slowly begin to re-open — but businesses may still be reluctant to employ and train new people. Individuals and businesses may remain gun-shy and take longer to start spending and investing.

Re-opening of the economy is likely to occur in stages. School may be first to open, while overseas travel will likely be last.

The full economy won’t be firing on all cylinders for many quarters — it will stutter forward before picking up consistent momentum.

Unemployment is likely to be a prime concern for a long period because many companies will use the COVID-19 to restructure operations and in some cases reduce workforces. There will still be jobs available, but they may be different, or take longer to re-emerge.

Key to whether the economy experiences a V or U-shaped recovery is the damage inflicted on corporate balance sheets. The more damaged, the longer it will take to see a rise in corporate profits and employment.

Investors will try to anticipate the eventual recovery but the slow pace will likely lead to ongoing volatility in financial markets.

Australia’s relatively high household debt also augurs against a quick rebound. In a market where a person’s home is his castle, and house prices are high, there isn’t much left in the bank for tough times.

W-shaped recovery

This style of recovery is sometimes called a double-dip recession. As lockdowns are eased, activity picks up — but the effects of high unemployment and corporate bankruptcies kick in and the economy slides back into recession.

In the worst case the coronavirus gets a new life, infections start to rise again, lockdowns are put back in place and the economy goes backwards.

The risk of a W-shaped recovery is why lockdowns are likely to last longer than many individuals and businesses think necessary. They are very damaging to confidence and ultimately exact the highest economic cost.

The 1980 US recession, bought on by sharply higher oil prices, is an example of a W-shaped recovery. The world’s biggest economy recovered and then went back into recession in 1981.

Why the RBA and federal government will determine the recovery

The shape of the recovery will depend primarily on how and when governments remove restrictions; interest rates and other monetary policy measures; and assistance packages.

Certainly, no-one has been shy about using monetary and fiscal policy (with the possible exception of the Euro zone).

The Reserve Bank of Australia’s response was swift, and seemingly long term. By targeting yields on three-year government bonds, the RBA has extended its direct control further out along the yield curve than ever before and better anchored yields across semi-government and corporate debt.

Strictly speaking, targeting yields on three-year government bonds is not quantitative easing because a price, not a quantity, is being targeted. But the mechanics are the same.

By operating in the secondary market to purchase government bonds, the Reserve Bank is pushing money into the system.

The central bank has also made clear it will keep capping the three-year yield until it begins achieving its legislated charter of heading towards full employment and its stated inflation target.

The Reserve Bank has said it will wind back non-conventional policies first, so the official cash rate won’t change until after the central bank removes its yield target.

This has the dual effect of putting money into the economy while anchoring yields for corporate debt at lower levels than otherwise.

While spreads between government bonds and corporate debt can blow out, the starting point is still lower. So corporate borrowers will continue enjoying lower interest payments than they otherwise would have faced.

The Reserve Bank has also set up a Term Funding Facility (TFF). Its objective is to lower funding costs for the entire banking system, which will flow through to the costs of credit to households and business.

This facility provides an incentive for banks to lend to business — especially small and medium businesses — at discounted rates.

The funding from the TFF is at a fixed interest rate of 0.25 per cent for three years. That’s much cheaper money for the banks than available else.

The Reserve Bank has made clear it doesn’t expect rates to rise anytime soon and inflation is not part of its central case scenario in the foreseeable future. As a result, while it has lowered the starting point for the yield curve, the risk of any near-term back-up in yields appears remote.

Japan and Europe have never emerged from their zero rates and the US took almost seven years — so it may be mid-decade before we see a rate hike. Investors agree. Measures of inflationary expectations in Australia, the US and Europe are near record lows.

These certainly are extraordinary times when so much government spending doesn’t trigger inflationary fears.

Modern Monetary Theory appears to be accurate when it says inflation is not a money supply issue but an excess of real demand over real supply in the economy.

The effect is that during the next few quarters government bonds — which always provide ballast in a portfolio — may not underperform as much as expected when economic recovery gains traction.

We continue to believe massive excess savings will keep real yields very low, providing support for nominal bonds even at these historically low levels.

On the fiscal side, the Morrison government will spend beyond $200 billion paying wages and providing pay-as-you-go tax refunds to businesses as part of its support packages.

The goal is simple: keep people in jobs and keep businesses operating. If the government is successful, households will spend, businesses will invest and the eventual recovery will be somewhere between a U and V-shaped.

Public debt in Australia is low compared to governments around the world. Ahead of COVID-19 spending net debt was forecast this financial year to be $361 billion, or 18 per cent of GDP.

This is low and a dividend from nearly 30 years of growth and fiscally conservative budget policy.

The banks, which ANZ chief executive Shayne Elliott called the intensive care unit of the economy, were in good financial shape entering the COVID-19 crisis.

Tightened lending standards over the past five years improved the quality of bank assets. The banks’ liquidity position was stronger than previously. Slower credit growth meant they didn’t need to issue much debt immediately ahead of the COVID-19 outbreak.

Also, much of the corporate sector had relatively low levels of gearing and most have significant liquid assets which will help them manage the downturn.

The signs to look out for

Keep an eye on the real economy, not just financial markets.

Look out for when businesses start to re-open — and probably more importantly — which ones re-open first. This doesn’t refer to government rules. It’s about management decisions.

Many travel agents, for example, will simply never open their doors again. Some franchisees, regional newspapers, cafes and restaurants won’t be seen again.

Management in professional services and education will take this opportunity to rethink their business models, with an eye on efficiency.

Perhaps the most unpredictable industry is the airline sector. Cruelled by travel bans offshore and internally, all major airlines are suffering.

The Australian government says it wants a duopoly in the air. Why? Because a lack of competition in that sector, in a country the size of Australia, would lead to much higher prices.

But how do you ensure sustainability? Which routes will airlines start flying again and which will they abandon?

Some sectors of the economy — notably mining, parts of agriculture and manufacturing, supermarkets and healthcare — have withstood the crisis well.

It would be a concern if any of these sectors felt second-round effects and started to stand down staff and reduce production.

Are people still building homes? Are the malls around the country filling up again once the government restrictions start being lifted? Is small business re-opening?

This latter question is important. The sector employs almost 5 million people, or two out of every five working Australians. It is why the federal government is ploughing so much money into its JobKeeper package and other support measures for the sector.

Unemployment is critical. People without jobs don’t spend money. If the unemployment rate hits 10 per cent, which is probable, then how fast does it drop again? Are people finding full-time work or part-time work?

This economic crisis will have a lasting legacy for the employment market. Many over 50-year old workers made redundant may never work again. The career path of school leavers and university graduates will change.

Conclusion

Unemployment holds the key to the shape and speed of any recovery.

If people can find jobs again relatively easily, they will spend again. If the JobKeeper package in Australia saves people from losing their employment, then it’s done its job of averting the greatest ongoing cost of the crisis.

Employment is also critical to fixed income markets. The Reserve Bank charter says its goal is full employment and keeping prices in check.

Only when the central bank sees that happening is it likely to pull back from capping three-year bond rates and eventually lifting the cash rate.

There are no indications the central bank is in any hurry to do that.

The search for yield will soon resume as Australians — like so many citizens of developed economies — get used to a world with rates stuck at the lower bound.

It is a world where there are still good reasons to own bonds.

The COVID-19 crisis has highlighted the critical role Environmental, Social and Governance factors play in evaluating companies.

Here Regnan’s head of advisory Susheela Peres da Costa explains what investors should look for.

Watch this video or read the transcript below:

TRANSCRIPT

A lot of Environmental, Social and Governance (ESG) is about risk management. 

And at the beginning of every year when we get asked by the press what are the ESG themes that we’re focused on for the year, we always resist answering because we don’t really think about it as a fashion.

Instead, we’re focused throughout on whether or not companies are prepared for whatever the world might throw at them — whether that happens to be a crisis in their own industry or the kind of global crisis we’re seeing with COVID-19.

What we look for is whether or not there’s appropriate attentiveness to the kinds of things that might become problems.  [We look for] appropriate resilience within the company’s structures, especially its governance structures, to make sure the company’s in a position to respond.

That means, for instance, having enough capacity on the board and enough skills on the board. [It means] directors who have enough time, so if a crisis is affecting a number of the companies they sit on — including the not-for-profits and others they might have responsibilities for — they’re able to devote adequate time to making decisions on this company.

There’s a whole range of factors like that that really speak to resilience and are in tension with the idea of efficiency.

One of the paradoxes in the corporate form is that efficiency often comes in tension with resilience. Optimising, by taking as many costs as you can out of the business, often leaves you with not enough capacity to respond when a crisis arises.

That crisis might, for instance, be a significant part of your workforce being unable to work because they’re ill or because they’re quarantined.

Or it might be that your directors don’t have enough time to devote to the thorny problems they’re facing right now.

Some of these things go to structures as well.

So having the right kinds of governance in place means people know who it is that needs to make a decision where the delegations sit.

All of these things can seem like overkill during normal times, but their metal is really tested when a crisis arises.

Susheela Peres da Costa is head of advisory at Regnan, a global leader in long-term value, systemic risk analysis and responsible investment advice.

Last year Pendal appointed a London-based impact investment team to launch a Global Equity Impact strategy in late 2020. 

Regnan is wholly owned by Pendal Group.

Important Updates

Pendal Dynamic Income Fund (APIR: BTA8657AU, ARSN 622 750 734)

Pendal Enhanced Credit Fund (APIR: RFA0100AU, ARSN 089 937 815)

Pendal Fixed Interest Fund (APIR: RFA0813AU, ARSN 089 939 542)

Pendal Monthly Income Plus Fund (APIR: BTA0318AU, ARSN 137 707 996)

Pendal Sustainable Australian Fixed Interest Fund (APIR: BTA0507AU, ARSN 612 664 730)

Effective 30 April 2020, the buy-sell spread for a number of Pendal funds (the Funds) will decrease as set out in the table below:

Table 1: Old and New Buy-Sell Spreads

The buy-sell spread is an additional cost to you and is generally incurred whenever you invest in or withdraw from a Fund. The buy-sell spread is retained by the Fund (it is not a fee paid to us) and represents a contribution to the transaction costs incurred by the Fund such as brokerage and stamp duty, when the Fund is purchasing and selling assets. The buy-sell spread also reflects the market impact of buying and selling the underlying securities in the market. Importantly, the buy-sell spread helps to ensure different unit holders are being treated fairly by attributing the costs of trading securities to those unit holders who are buying and selling units in the Funds.

The Funds’ buy-sell spread previously increased on either 19 March 2020 or 20 March 2020 due to substantially reduced market liquidity for Australian issued investment grade securities as a result of COVID-19. The reduction in the Fund’s buy-sell spread reflects an improvement in market liquidity for these assets.

Pendal will continue to monitor market conditions and review and update the buy-sell spread regularly as required. You should therefore review the current buy-sell spread information before making a decision to invest or withdraw from a Fund.

Please refer to our website www.pendalgroup.com and click ‘Products’ for the latest buy-sell spread for each Fund.

Here is a weekly COVID-19 investor overview covering virus outlook, economic impact and market insights from portfolio manager Tim Hext of our Bond, Income and Defensive Strategies team.

Watch this short video recorded at Tim’s home office or read the transcript below.

TRANSCRIPT

My name’s Tim Hext. I’m a Portfolio Manager in the Bond, Income and Defensive Strategies team at Pendal Group.

In terms of crystal ball gazing you need to be a very informed medical scientist to know where this [coronavirus outbreak] is all going. And to be totally honest, we don’t know.

We’re quite hopeful that you will see some antiviral drugs help the situation, but we hear very mixed things about the possibility of when a vaccine may come out.

So we have to face the fact that Australia is doing pretty well at controlling this. The economy itself is likely to have some opening up towards the middle of the year — and probably most of the economy open by the end of the year . But it will probably be well into next year before things go back to what we would refer to as normal.

I think in that situation people want to know are we going to be in a recession, are we going to be in the depression? What’s economic growth going to look like?

I don’t think either of those are particularly helpful. In fact, in years to come we might have a new term like hiber-cession to call what we’ve had.

I think the path out of here is going to be reasonably quick early on, but ultimately quite slow and painful. By that I mean the Australian economy is unlikely to return to the sort of activity levels we saw prior to this for a number of years yet.

With that in mind, it’s important to remember that demand and supply are both going to face issues as they try to come back on board.

On the supply side, importantly, a lot of businesses will come back leaner and trimmer than they were before. That’s going to mean a number of things with jobs and also ultimately for inflation.

From the demand side, of course a number of workers are unlikely to go back to where they were before.

Right now there’s 20% less hours being worked across the economy and unemployment is likely to go up to 10% in the near term and unlikely to really come back to the levels we saw before the crisis for at least another three or four years.

The Reserve Bank has already told us interest rates are going to be stuck down here for probably at least three years. And our view is that it’s considerably longer than that.

Bond markets outlook

So the way we look at bond markets is they’re going to continue to remain very well supported.

There is going to be a continuation of the search for yield that we saw beforehand, but from a lower base obviously.

I think people are going to be far more cautious about the sort of credit they keep on. The way the credit cycle works — like equities, the longer you go, the more upbeat it gets and it’s going to take a lot of time to get back there.

So we continue to like being long duration in bond markets across our portfolios.

We still have a tendency towards government and the more liquid parts, but we do acknowledge that investment grade credit — the more solid credits — have actually now finally for the first time in four or five years reached what we would call good value.

So we’re looking to be overweight duration and overweight investment grade credit, but still avoiding a lot of those high yield credit scores as the default cycle will be running strong for the next year or two.

Here’s the latest Aussie equities outlook from Pendal’s head of equities Crispin Murray (pictured above), reported by portfolio specialist Chris Adams.

SENTIMENT continues to improve in regard to managing the virus – both domestically and abroad.

The debate has now shifted to how and when containment measures can be rolled back.

Real-time analysis suggests economies may have hit their bottom on an absolute basis. But there is still great uncertainty over what that actually means in terms of numbers and for earnings.

This uncertainty, coupled with a strengthening pipeline of capital calls, saw the Australian market come off -4.4% (S&P/ASX 300) last week after a strong bounce.

Health update

Global daily new cases have plateaued.

A gradual decline in Europe and the US has been offset by a pick-up in places like Latin America. But an end to the increasing growth rate, coupled with signs that hospitals are now coping better in the countries most affected, seems to have improved sentiment.

Nevertheless, risks remain. The US recorded its highest daily new case growth over the weekend, while Singapore is scrambling to control a second wave of infections among foreign workers.

This potential second wave of infections is fundamental to the debate about how quickly economies should re-start.

At this point places like the US seem to be managing to a certain case-load that can be dealt with by the medical infrastructure.

A material spike in infections prompted by an easing of restrictions could quickly erode market confidence.

The scale of testing in the US has increased — it now out-strips South Korea in terms of per-capita tests. This means US authorities should be able to identify a new outbreak and contain that pocket, rather than reverting to nation-wide measures.

New cases in Australia have plateaued at a very low level. The scaled roll-back of measures announced by Western Australia could serve as a model for the rest of the nation. The next few weeks remain critical.

Economics

We continue to see a grand tussle between the largest and sharpest economic downturn in our investment careers – set against the largest policy package we have ever seen.

A unique feature of this downturn – apart from its scale – is that both the industrial and service sides of economy are equally hit.

This is very different to the GFC where the hit to services was more muted. This has implications for the measures that can be used to stimulate a recovery; services are typically slower to recover.

This week several key data points will provide more colour around the scale of the economic hit. US payrolls are expected to see a further 15-20 million increase in jobless people.

The US has topped up its policy package with a further $484 billion in funding for small businesses.

This is probably the last US package we will see for a couple of weeks. There is more in the pipeline relating to what follows on from the initial eight-week program of individual payments which requires further debate and negotiation.

There is also some talk of how stressed States are supported. This issue remains at risk of a financial spot-fire.

Potential risks

Control of the virus and the policy response has seen sentiment improve from where we were a month ago — for good reason.

The possible worst-case scenarios from a few weeks ago now appear largely off the table. However we remain mindful of two potential headwinds.

Firstly, people are yet to comprehend the full effect this episode could have on earnings — not only in directly-impacted parts of the market but where this flows into other companies and sectors.

Secondly, there could be an unforeseen secondary shock from the virus’s impact on demand. One potential example could be Europe, which is still haggling over the best way to deal with the crisis.

There is resistance to the idea of jointly-backed “Coronabonds”. Disagreement about how and where aid is focused may put further pressure on the structure of the EU. This is a tail risk. The ECB, which can move more swiftly, is likely to step up QE to help alleviate stress.

Oil

The oil market remains another source of risk.

The May contract for West Texas Intermediate going negative was a high profile, though largely technical issue. It was possibly related to poor contract management by oil-tracking ETFs.

Nevertheless, it does reflect a huge imbalance in supply and demand. Around 27 million barrels per day (mbpd) are rapidly filling available storage. This surplus drops to around 11mbpd once OPEC cuts in May.

We have seen around 5-6mbpd already shut down, but need the same again. This is likely to see material oil price volatility until someone is forced to shut production.

That said, there are signs a shut down in capacity could mean oil goes from famine to feast quite quickly. Oil companies have slashed capex, with no capital made available for new projects.

Given the natural annual production decline rate of 5% from oil wells, supply could quick shift back to deficit once the current storage is cleared. If we start to see demand pick up again as containment is relaxed, oil could be back in production deficit by the end of this year. One area to watch.

Markets

The impact of capital raising is a key issue – more than $8 billion has been raised so far and there’s more to come. The standard discount seems to be around 8%.

But given the money is largely paying down debt or bolstering liquidity – rather than funding growth – the discount is often offset by the dilutive effect.

Being selective is critical here; there are some reasonable opportunities. However the scale of raisings is likely to weigh on the market in coming weeks.

REITs (-8.0%) fell the furthest last week. Investor caution was driven by the twin issues of commercial rents and expectations of further capital raising. The rent issue bears watching.

There are signs many commercial tenants are withholding rent payments regardless of whether they have closed stores or are eligible for government relief. This is an almost chaotic situation with important implications for both landlords and retailers as it is worked through.

Industrials (-7.1%) were also weak. Defensives generally did better than the broader market. Utilities were only down -1.7% and Consumer Staples -3.9%.

Iron ore miners are serving as defensives in this environment. Resilience here, coupled with outperformance by the gold miners, saw Materials (-2.4%) outperform.

Energy (-3.6%) outperformed despite ructions in the oil market.

There are signs investors are thinking about which well-placed domestic companies may benefit from easing of restrictions on the domestic economy. 

Pendal Concentrated Global Share Fund Hedged (APIR: RFA0031AU, ARSN: 098 376 151)

Effective 1 May 2020, the buy-sell spread of the Pendal Concentrated Global Share Fund Hedged (Fund) will decrease from 0.50% (with 0.25% payable on application and 0.25% payable on withdrawal) to 0.40% (with 0.20% payable on application and 0.20% payable on withdrawal).

The buy-sell spread is an additional cost to you and is generally incurred whenever you invest in the Fund. The buy-sell spread is retained by the Fund (it is not a fee paid to us) and represents a contribution to the transaction costs incurred by the Fund such as brokerage and stamp duty, when the Fund is purchasing and selling assets. The buy-sell spread also reflects the market impact of buying and selling the underlying securities in the market.

Importantly, the buy-sell spread helps to ensure different unit holders are being treated fairly by attributing the costs of trading securities to those unit holders who are buying and selling units in the Fund.

The Fund’s buy-sell spread will decrease to reflect a reduction in the Fund’s brokerage costs.

As transaction costs may change depending on various factors such as market conditions and brokerage costs, buy-sell spreads may also change without prior notice. You should therefore review current buy-sell spread information before making a decision to invest or withdraw from a Fund.

Please refer to our website www.pendalgroup.com and click ‘Products’ for the latest buy-sell spread for each fund.

Pendal Concentrated Global Share Fund No.3 (APIR: BTA0056AU, ARSN: 087 593 299)

Pendal Concentrated Global Share Fund No.3 – Wholesale B Class (APIR: BTA0270AU, ARSN: 087 593 299)

Effective 1 May 2020, the buy-sell spread of the Pendal Concentrated Global Share Fund No.3 (Fund) will decrease from 0.50% (with 0.25% payable on application and 0.25% payable on withdrawal) to 0.40% (with 0.20% payable on application and 0.20% payable on withdrawal).

The buy-sell spread is an additional cost to you and is generally incurred whenever you invest in the Fund. The buy-sell spread is retained by the Fund (it is not a fee paid to us) and represents a contribution to the transaction costs incurred by the Fund such as brokerage and stamp duty, when the Fund is purchasing and selling assets. The buy-sell spread also reflects the market impact of buying and selling the underlying securities in the market.

Importantly, the buy-sell spread helps to ensure different unit holders are being treated fairly by attributing the costs of trading securities to those unit holders who are buying and selling units in the Fund.

The Fund’s buy-sell spread will decrease to reflect a reduction in the Fund’s brokerage costs.

As transaction costs may change depending on various factors such as market conditions and brokerage costs, buy-sell spreads may also change without prior notice. You should therefore review current buy-sell spread information before making a decision to invest or withdraw from a Fund.

Please refer to our website www.pendalgroup.com and click ‘Products’ for the latest buy-sell spread for each fund.

Pendal Concentrated Global Share Fund No.2 (APIR: RFA0821AU, ARSN: 089 938 492)

Effective 1 May 2020, the buy-sell spread of the Pendal Concentrated Global Share Fund No.2 (Fund) will decrease from 0.50% (with 0.25% payable on application and 0.25% payable on withdrawal) to 0.40% (with 0.20% payable on application and 0.20% payable on withdrawal).

The buy-sell spread is an additional cost to you and is generally incurred whenever you invest in the Fund. The buy-sell spread is retained by the Fund (it is not a fee paid to us) and represents a contribution to the transaction costs incurred by the Fund such as brokerage and stamp duty, when the Fund is purchasing and selling assets. The buy-sell spread also reflects the market impact of buying and selling the underlying securities in the market.

Importantly, the buy-sell spread helps to ensure different unit holders are being treated fairly by attributing the costs of trading securities to those unit holders who are buying and selling units in the Fund.

The Fund’s buy-sell spread will decrease to reflect a reduction in the Fund’s brokerage costs.

As transaction costs may change depending on various factors such as market conditions and brokerage costs, buy-sell spreads may also change without prior notice. You should therefore review current buy-sell spread information before making a decision to invest or withdraw from a Fund.

Please refer to our website www.pendalgroup.com and click ‘Products’ for the latest buy-sell spread for each fund.