Pendal’s head of equities Crispin Murray (pictured) outlines how the US experience with COVID-19 and the latest vaccine developments are impacting the outlook for Australian equities.

Quick take-outs

• Despite negative sentiment from increased COVID-19 cases, equity markets continued to rise
• Economic data has been supportive, but there are early signs of a slowing in the V bounce
• We’ve seen some positive vaccine news flow
• Locally it’s an important week for sentiment with the risk that stocks leveraged to economic recovery could be impacted by the Victorian lockdown

As bad as it feels with the negative news flow around rising COVID cases in Australia and parts of the US, the market hasn’t responded as some may have expected — and has continued to grind higher. We are now at a juncture where:

• We could see a more significant leg down if case load data continues to worsen;
• But if evidence emerges that virus management has improved, we could get squeezed higher — bearing in mind that overall market positioning has turned more defensive.

Our portfolios are positioned defensively — but not aggressively so. We have stated several times in this weekly Australian equities note that a balanced portfolio with a good mix of recession insurance and recovery plays is very important in this unpredictable and fast-moving environment.

US Economic data surprises to the upside — but there’s evidence of the V stalling and no improvement in US case numbers

Published economic data continues to be positive.

Jobs data is strong, which has supported the market. On the employment front “Hours Worked” (+8.3%) and “Household Employment” (+6.6%) surprised to the upside. Similarly, the PMI diffusion indices are heading in the right direction indicating a stronger growth momentum than many anticipated.

We are now looking at an 8% drop in US Q2 GDP versus an 11% to 12% drop — as most estimates suggested we were facing a few months back. Still a lot to make up, but significantly better. Clearly interest rates will continue to be supportive.

However there is still some evidence that things are slowing. Markets must gauge not only the economic effect of the lockdowns, but a perception of risk that is deterring consumer spending.

A recent University of Chicago study concluded that sentiment — rather than the lockdowns themselves — are the biggest headwind. We know that only around half of the stimulus has been spent so far. This is something to keep watching in the US and Australia.

There are signs of this slowdown coming through in the last week in the worst-affected states of Florida, Texas, California and Arizona — which make up about a quarter of the US population. Restaurant bookings in the Open Table app tapered off quite sharply last week after a post-lock-down recovery.

Cases in the US continue to rise and hospitalisations are increasing — though they remain below the previous peak and deaths are still low. In Florida overall numbers are worse, though there is less strain on hospitals. In contrast, Phoenix and Houston are close to ICU capacity. We are now seeing “surge plans” implemented in many of these cities such as LA, including the deferral of elective surgery.

The data shows some smaller US states have seen improvements — but not the major states such as Florida, Texas and California.

Vaccine news flow is positive

One positive consequence of rising cases is the acceleration of some Phase 3 trials. There is some talk of the first batches being available before year-end.

The three main trials are:

1. Moderna
2. Aztrazeneca (in partnership with the University of Oxford)
3. Pfizer (four variants of a vaccine in development)

Pfizer has just released results of Phase 2 trials on one of its vaccines, which indicate a) the drug is safe to use and b) it is triggering an immune response. This means it can progress to the final Phase 3 trial, which will be 30,000 patients. The rate of new cases actually helps determine the efficacy of the vaccines.

In the best-case scenario, the drug will be approved by October. Pfizer estimates it could produce 1.2 billion doses in 2021, which would equate to 600 million treatments. This shows the problem likely will not be solved by a single vaccine. To meet demand we will likely need several vaccines to be approved.

Pendal portfolio manager Amy Xie Patrick outlines the outlook for bonds and explains where to look for fixed income opportunities in this interview with online business channel Ausbiz.com.au.

Watch the video above or read the transcript below.

TRANSCRIPT

AUSBIZ.COM.AU INTERVIEWER: In the never-ending chase for yield, our next guest Pendal portfolio manager Amy Xie Patrick, is warning investors not to get spooked. She joins us live in the studio. Great to have you here. It’s a really interesting spot that we find ourselves in right now. We know of all the potential dangers, all the potential risks out there. But it’s as if is if there’s FOMO forcing people into equities as people are looking for a return that is hard to find.

AMY XIE PATRICK: Absolutely. I think you’ve hit the nail on the head. Is it because people want all this extra risk in their portfolios right now? I don’t think it is. The risks are well known, but the outcomes of those risks are still highly uncertain as it’s to do with the fact that we’re in a zero-interest rate world.

For most major jurisdictions in this world, policy rates are as low as those policy-makers feel they can go. In the search for return income yield, you have to grab whatever you can. I don’t think it’s so much that people want to go further out the risk curve, but we’re being forced to. When you come out of a crisis, you tend to be more risk-averse and thinking about saving for the future.

But when I put my savings in term deposits or my savings account, it gives me nothing. And I’ve got to think about my children, right? So how do I get some return out of that saving? I’m pushed further out the risk curve and the savings glut that the world was facing before.

AUSBIZ.COM.AU INTERVIEWER: Amy, the fixed income world is large and very wide. Where would you be investing in this type of market at the moment? Corporate bonds and investment-grade high yield, how would you be playing them?

AMY XIE PATRICK: There’s a great range of thought on this. The majority of the consensus seems to be that you need to chase more yield and government bonds simply don’t give you that much yield anymore.

You need to turn your back on them and go further out the risk curve — especially with the fed buying not only investment-grade debt, junk-rated debt and fallen angel debt. People feel safer going down the risk curve that way.

I would just caution against chasing risk too much down the quality ladder because, at the end of the day, the economic crisis and health crisis is still in full swing. It may mean chasing good headline income now, but what if those bonds default and they don’t pay you any income at all in the future?

You only need to look as far as Japan and Europe to see that just because yields start from a low point, doesn’t mean that they can’t go lower. The power of duration in fixed income means that if you buy longer-dated bonds, you get that beautiful multiplier effect as yield goes lower as well.

AUSBIZ.COM.AU INTERVIEWER: When it comes to Aussie 10-years now we’re seeing record lows. It’s trading at 0.9, 0.92%. Can it go lower?

AMY XIE PATRICK: A year ago, two years ago, the exact same conversations were being had right at 1.5%. Can they possibly go lower? You know, at 1%, can they go low? Well, they did go lower, so we’re just back around that one percentage level. A lot of people’s arguments with longer-dated bond deals and the reluctance to chase them because they think they can’t go lower.

It’s purely because a lot of central banks rightly or wrongly feel that at the zero bound that’s enough, they can’t deliver any more rate cuts. But if you compare the current episode to what happened in the global financial crisis, this hit to economic activity has been far worse than what happened in the GFC.

And yet the number of basis points of cuts that central banks have delivered have been so little compared to what they were able to deliver in the GFC.

Even though zero cash rate sounds like a really easy monetary policy setting. Actually, it might not be that easy. It might actually still be quite tight. And as long as policymakers don’t want to inject extra fiscal stimulus we’re locked at this zero lower bound at the front. How can long end yields really sell off meaningfully?

And then what if we get another shock? Even though lots of people say with yields so low, the asymmetry is actually that yields go higher. With all these risks, the asymmetry is probably still lower.

AUSBIZ.COM.AU INTERVIEWER: I’m curious to know when it comes to central banks when you hear the FOMC when you get minutes from the RBA, what is it that you zone in on to help form your view of where bond opportunities could go and where opportunities in fixed income could lie?

AMY XIE PATRICK: I think you just have to take them at face value. The consensus is deafening right now especially with the market rebound, equities are roaring up.
I think there’s a lot to hold central banks back right now. Not to say that they’ll always be held back, but for me, the more medium-term risk is not so much what the central bank says, but what our governments say.

Will this fiscal stimulus be with us for as long as the economy needs or will there be this urgency to claw back to some kind of fiscal discipline again? Will all that fiscal stimulus get withdrawn right before the economy gets traction in the recovery trajectory? And what happens then?

So it’s not so much reading what the central bank has said, because quite frankly what they say right now is fairly boring. They’re saying that we’re at zero, we’ve done as much as we can. Fiscal, please take over.

Amy Xie Patrick, Portfolio Manager – 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/

What is the outlook for retail REITs in a post-COVID world?

Should retail landlords charge rent based on a tenant’s turnover?

Pendal portfolio manager Julia Forrest tackled this hot issue at The Australian Financial Review’s Retail Summit on June 26, 2020.

Watch the video above.

Julia Forrest is a portfolio manager with Pendal’s Australian Equities team. Julia has managed Pendal’s property trust portfolios for more than a decade and has 25 years of experience in equities research and advisory, initial public offerings and capital raisings.

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/

INVESTORS are advised of the following change to the September 2022 distributions. This change is being made for operational reasons.

The funds set out below will pay their distribution (if any) for the September quarter in the week commencing September 26, 2022 for the period ending September 20, 2022. This change will be for September 2022 only.

Investors will receive distribution statements in accordance with our usual process.
Please call our Investor Services support line on 1300 346 821 if you have any questions.

Pendal funds impacted if paying a September distribution:

Pendal Stable Cash Plus Fund (APIR: BTA0459AU) 

Increase to the Fund’s management fee effective 1 October 2022

Effective 1 October 2022, the management (issuer) fee for the Pendal Stable Cash Plus Fund (Fund) will increase from 0.15% p.a. to 0.18% p.a.

Why is the management fee increasing?

Since 2020, Australia has experienced historically low official cash rates due to the economic impact of Covid-19. On 1 July 2020, Pendal temporarily reduced its management fee for this Fund from 0.18% p.a. to 0.15% p.a. Although originally intended as a 12-month fee reduction, the lower management fee has continued to apply in light of the continued lower cash rates.

The management fee will increase to its original rate of 0.18% p.a. effective 1 October 2022.

There are no other changes to the Fund.

An updated Information Memorandum was issued for the Fund on 26 August 2022. Please contact us for a copy if required.

Pendal Stable Cash Plus Fund (APIR: BTA0459AU)
Important information

Reduction in management costs from 1 July 2020 to 30 June 2021

Due to the economic impacts of Covid-19, the RBA reduced the official cash rate from 0.50% to 0.25% on 20 March 2020.

With the cash rate likely to remain at a record low of 0.25%, the Pendal Stable Cash Plus Fund (Fund), currently offered to investors with a minimum initial investment of $500,000 at an issuer fee of 0.18% pa will be reduced to 0.15% pa effective from 1 July 2020, for a period of 12 months. Over this period, the Fund’s issuer fee will be reviewed and any changes will be communicated to investors prior to 1 July 2021.

Pendal Managed Cash Fund (APIR: WFS0245AU, ARSN: 088 832 491)

Increase to the Fund’s management fee effective 1 October 2022

Effective 1 October 2022, the management (issuer) fee for the Pendal Managed Cash Fund (Fund) will increase from 0.12% p.a. to 0.22% p.a.

Why is the management fee increasing?

Since 2020, Australia has experienced historically low official cash rates due to the economic impact of Covid-19. On 1 July 2020, Pendal temporarily reduced its management fee for this Fund from 0.22% p.a. to 0.12% p.a. Although originally intended as a 12-month fee reduction, the lower management fee has continued to apply in light of the continued lower cash rates.

The management fee will increase to its original rate of 0.22% p.a. effective 1 October 2022.

There are no other changes to the Fund.

An updated Product Disclosure Statement (PDS) was issued for the Fund on 26 August 2022 and is available on www.pendalgroup.com. If you would like a hard copy of the PDS, please contact us.

Pendal Managed Cash Fund (APIR: WFS0245AU, ARSN: 088 832 491)

Important information

Reduction in management costs from 1 July 2020 to 30 June 2021

Due to the economic impacts of Covid-19, the RBA reduced the official cash rate from 0.50% to 0.25% on 20 March 2020.

With the cash rate likely to remain at a record low of 0.25%, the Pendal Managed Cash Fund (Fund), currently offered to investors with a minimum initial investment of $25,000 at an issuer fee of 0.22% pa will be reduced to 0.12% pa effective from 1 July 2020, for a period of 12 months. Over this period, the Fund’s issuer fee will be reviewed and any changes will be communicated to investors prior to 1 July 2021.

Here’s the latest outlook for Australian equities from Pendal’s head of equities Crispin Murray (pictured above). Reported by portfolio specialist Chris Adams.

FEARS of a second wave of infections are weighing on markets. This pushed the S&P/ ASX 300 down -0.74% last week.

We are at a critical point in this regard. The next week or two will reveal if the US rise in cases will lead to a surge in hospitalisations, stress on intensive care units and deaths. This is a heightened and material risk with important ramifications for market confidence.

However it is not a foregone conclusion — for reasons discussed below.

The economic data remains supportive and the policy response remains robust. There is political will to do more if needed.

At this point we do not expect recent weakness to morph into a second sharp drop in markets:

1. 1. 1. We believe sufficient measures are underway or will be taken to avoid the resurgence in US cases from triggering material new shutdowns, which would see a big hit to confidence. However this remains a key risk.
      2. The Victorian outbreak should be containable. While delaying border re-opening it does not represent a significant deterioration in the economic outlook.
      3. The current case rise will likely cement the need for more stimulus in US and Australia
      4. Economic momentum is still positive
      5. Significant liquidity remains on the sidelines in cash, which can support equity markets

That said, we expect this period of consolidation to continue. The rate of improvement in economic data will now slow down, the market’s short-term positioning remains too bullish and policy news flow is in a lull to the end of July.

COVID-19 outlook

While second-wave clusters in China and Germany appear contained, cases continue to rise in the US.

This alone is not causing economic issues. But there are fears of a re-run of March/April, with cases leading to stress in hospitals and ICUs and a surge in deaths. This would likely be a material set-back for market sentiment.

Hospitalisation and mortality data in the next week or two are critical for how the market will trade in coming months.

As China and Germany have demonstrated, a replay of April — in terms of case-loads, hospitalisations and mortality —is not a foregone conclusion. Today’s situation is different in several important ways:

1. 1. 1. The outbreaks are in less densely populated areas compared to New York
      2. The age profile of new cases is a lot lower this time — an average of 20 years younger.
      3. There is substantially more testing. This may result in worse-looking numbers. But it means the problem is being identified earlier than in April
      4. There is more physical distancing and use of face masks — despite well-publicised incidents to the contrary.
      5. Knowledge of how to treat the virus is now far better. Previous treatment had focused on lung issues, which are now thought to be symptomatic in nature. Treatment is now focused on anti-inflammatories, with better outcomes as a result.

We continue to monitor key US data points.

At this point we don’t believe it will escalate to levels seen in New York several months ago. However this cannot be ruled out. Material risks remain in play. Our portfolio continues to reflect a range of possible outcomes.

One silver lining to the US surge is a strong, continuing focus on vaccine development. Pfizer’s CEO alluded to the possibility of a vaccine being available this year. Results of a 30,000-person trial are due in September. If successful he suggested 100 million doses might be available this year, growing to 1 billion in 2021.

Economic data
Economic data remains broadly supportive, off-setting negative news on case-loads.

Last week’s Purchasing Manager’s Indices — PMIs are a leading indicator of economic momentum — showed a sharp rebound from earlier depths.

Credit card data also suggests consumption continues to rebound. Government payments have prompted savings rates to surge. In combination with pent-up demand this can help support higher consumer demand.

Recent data suggests the Australia’s GDP has fallen about 4% from its pre-pandemic level, placing it among the least-affected nations. It is interesting to note China and Sweden have also fared better than most, given the very different approaches taken by all three countries.

Impact on the US is estimated at about 6.5%. GDP expectations have also been improving in recent weeks.

Fed balance sheet

There have been some concerns about the Fed shrinking its balance sheet and the implications for liquidity.

We do not think this should be interpreted as a signal of Fed tightening. Rather, we think it reflects reduced risk aversion from foreign central banks as they run down their swap lines.

The Fed balance sheet can be looked at in three ways:

1. 1. 1. The Quantitative Easing portfolio: This is unchanged. The Fed continues to buy US$80 billion in Treasuries and US$40 billion in mortgage-backed securities per month.
      2. The liquidity programs: The FX swaps provided to foreign central banks to ensure they could access US dollars reached US$450 billion at the peak of crisis. This is now down to US$275 billion as USD funding issues have eased.
      3. Direct credit programs — primary and secondary market corporate credit facilities: These are ramping up more slowly than planned. There has been US$10 billion provided so far, mainly into the secondary program (ie credit ETFs). Part of this is the complexity of getting program running. Also, the availability of credit has not proven to be as big an issue as many feared. The market has seen record levels of credit issuance in recent weeks.

While there are a lot of moving parts, we still see at least US$1 trillion in liquidity to be added by the end of 2020 — and a commitment to keep adding potentially $1.5 trillion next year.

Markets

Equities have sold off and sentiment has shifted negatively. But there has been no breakdown in other key indicators we are watching.

US 2-year yields remain flat, oil rose 5%, the EUR/USD was only up 1%, gold was only up 2% and the copper/gold price ratio held firm. Credit spreads widened — but not outside recent ranges.

At this point it still feels like a market consolidation rather than a reversal and a new phase of crisis. But a lot will come down to hospitalisations in coming weeks.

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/

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 MicroCap Opportunities Fund (APIR: RFA0061AU, ARSN 118 585 354)
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 June 2020, prior notice will no longer be provided in the event of a material increase to the buy-sell spreads of the above mentioned funds (Funds). Section 6, ‘Fees and costs’, of the PDS of the Funds has been updated to reflect these changes.

The buy-sell spread is an additional cost to you and is generally incurred whenever you invest in 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 as a result of applications to or redemptions from the Fund. The buy-sell spread also reflects the market impact of buying and selling the underlying securities in the market.

During periods of heightened volatility, as experienced during the COVID-19 pandemic, the cost of buying and selling securities can increase significantly, and suddenly. As a result, a Fund’s buy-sell spread may need to be adjusted to reflect the increase in transaction costs at short notice. This is to ensure all unit holders are treated fairly by attributing the costs of trading securities to those unit holders who are buying and selling units in a Fund.

You should 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 of the Funds.