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Here are the main factors driving the ASX this week, according to Pendal’s head of equities CRISPIN MURRAY. Reported by investment specialist Chris Adams

US equities (S&P 500) gained 1.19% last week and reached a new all-time high – 106 weeks after the previous peak on 7 January 2022.

This happened against a rising US Dollar, an escalation in Red Sea tensions, and despite bond yields rising as Fed Governor Christopher Waller tried to cool the market’s view on the pace of rate cuts.

A combination of positive US economic news, confidence on inflation, and cash on the sidelines beginning to chase the market were behind the move higher.

US corporate earnings season has been solid so far, with some small signs of hope from the regional banks and indications that the consumer is holding up okay.

The Australian market (S&P/ASX 300) was softer, down 1.05%, as sentiment on China continues to wane and drag on the resources sector.

Inflation

There was little incremental information on the inflation front.

The latest Expected Change in Inflation survey from the University of Michigan fell from 2.9% in November to 2.8% on a five-year view in December.

This is constructive in terms of expectations around wages and is at the lower end of the post-pandemic period, but is still above the average pre-Covid level of 2.5%.

The market is aware of the effects that Red Sea disruptions are having on freight rates as well as oil and gas prices, but it is not yet affecting bond yields.

This is probably because the impact has been mainly to Europe-Asia shipping routes.

That said, there is now some spill-over apparent in US-China routes, but the upcoming Chinese New Year may be exacerbating this.

Deflation in Chinese export prices is also acting as an offset.

Business and consumers are not yet showing any concern around the ability to access products, so we don’t see the hoarding noted during the pandemic – however, an escalation of the crisis could shift that sentiment.

Elsewhere, the Consumer Price Index (CPI) in the UK was worse than expected.

This is a reminder that the pathway to deflation may be rockier, even though the main cause was volatile components such as air fares, which are expected to reverse.

In addition, underlying economic data is soft (e.g. retail sales), suggesting inflation pressures should be easing.

Growth

Most recent signals support the view that the economy ended 2023 well and that it is not in recession.

US December headline and core retail sales were solid at 0.6% month-on-month, which is stronger than expected and reinforces the anecdotal evidence that Christmas spending picked up.

The overall trend implies real consumer spending was up 2.3% in Q4 2023, which also implies the economy is holding up.

The University of Michigan Consumer Sentiment indicator rose much more than expected, up 9.1 to 78.8.

This is the largest rise since 2005, though the overall level remains subdued.

Forward expectations of sentiment also rose; falling fuel prices and rising stock prices probably played a large role in this.

Initial Unemployment claims declined 16,000 to 187,000, indicating the labour market is holding up.

December housing starts were also stronger than expected, only falling 4.3% from November in what is traditionally a weak month.

New housing permits rose 1.9%, indicating more optimism over future demand.

Multifamily units under construction have risen to record levels, which is supportive to economic activity but also means supply should help ease pressure on rents – supporting lower inflation.

Policy

Fed Governor Waller dampened expectations on the potential scale of rate cuts for 2024.

He put a lot of store on the next CPI report, as it will incorporate seasonal adjustment revisions for 2023 which may change the rate of disinflation.

This suggests that the March meeting is “live” for a cut.

Waller reiterated his perspective that rates can fall to ensure real rates do not rise as inflation falls, but he also saw ‘no reason to move as quickly or cut as rapidly as in the past’, which reflects the starting point being one where the economy is holding up better than in previous cycles.

He also indicated no rush to slow quantitative tightening.

Bond yields rose in response, as Waller is one of the governors who triggered the shift in sentiment on rates last year.

The European Central Bank’s Christine Lagarde also reiterated the message that rates won’t be cut until the summer, with the market anticipating April as an option.

She also noted that “the risk would be worse if we went too fast and had to come back to more tightening,” highlighting central bank reticence on declaring victory over inflation too early.

One big positive for Europe is that winter has been mild and gas prices have fallen sharply, which translates into lower power prices.

Geopolitics

The Red Sea remains the most immediate issue in terms of the knock-on effects on inflation.

But elsewhere, Trump won big in Iowa – with neither Haley nor De Santis emerging as clear alternatives.

The latter subsequently withdrew from the nomination process, which places considerable importance on the New Hampshire Primary on 23 January.

It is an opportunity for Haley, as independents are able to vote; if she can run close, that will potentially give her momentum for her home state of South Carolina on 3 February.

Should she fail, however, the race could be over before Super Tuesday on 5 March.

China

A raft of data for 2023 was released last week.

Q4 GDP came in at 5.2% growth year-on-year, lower than the 5.3% expected (and having grown 3.0% in 2022).

Interestingly, the GDP deflator was -0.5%, which is the largest fall since 1998-99.

This means Chinese economy grew less than the US in nominal terms (the latter growing 4.8%) and actually declined in US Dollar terms.

Given the weakness in Q4 2022, this reinforces how subdued the Chinese economy remains.

The negative inflation and Producer Price Index highlight how the economy is being driven by the supply side, while underlying consumer demand remains weak for structural reasons.

Growth of 6.8% in industrial production and 4.0% in fixed-asset investment for the twelve months ending December 2023 was better than expected – however, retail sales were weaker at 7.4% (versus 8.0% consensus).

The property sector remains soft, with property investment falling 12.3% year-on-year (worse than the -10.9% expected and having already fallen 10% in 2022).

New home sales fell 12.7%, while the value of new home sales fell 17%.

New home completions actually rose 15.4% for the year, due partly to lagged effects and the efforts made to finish projects that were tied up with funding issues.

Unemployment rose to 5.1%.

The National Bureau of Statistics also released a new youth unemployment figure, which excludes those at university and school – this came in at 14.9% versus 21.3% in the old measure.

There were 9.02 million new births in 2023, according to official data, which was more than the market expected but which still means the overall population fell marginally.

The current lack of confidence in the Chinese economy can be seen in stock market weakness and in bond yields falling to cycle lows.

Expectations for 2024 GDP growth currently lie around 4.5%, with piecemeal stimulus propping up growth and an emphasis on infrastructure investment, which should support commodity demand.

Australia

December employment data was weaker than expected, with jobs falling 65,000 versus market expectations of a 15,000 rise, though November was revised up to 73,000.

The three-month run rate has stepped down from 30,000-40,000 to 15,000-20,000 per month and year-on-year employment growth is 2.8%.

Full-time roles fell 107,000 and part-time roles rose 41,000, while hours worked fell 0.5% month-on-month and landed at +1.2% year-on-year – the slowest since March 2022.

Unemployment was flat at 3.9%, as the participation rate fell back from a record high of 67.3% to 66.8%.

All of this indicates the economy is cooling and helped support the market’s view that rates have peaked.

Markets

The S&P 500 market broke to a new all-time high, clearing the peak we saw on 7 January 2022.

This came on option expiry day, which released the gamma overhang in the market, and had been flagged by some bears as a point where the market could roll over.

It was interesting that this occurred despite a higher move in bond yields, and suggests that there is still some scepticism on the economy reflected in positioning.

The early phase of US earnings season has been in line with normal experience, with about half of the companies reporting beating expectations so far.

Earnings revisions remain on track for a 3% uptick year-on-year.

The ASX was weaker due to continued challenges in resources due to softer commodity prices and poor sentiment on China.

We have begun to see more deferrals in mine developments, reflecting cost pressures, and weakness in base metal and lithium prices.

Growth stocks outperformed despite bonds rising, reflecting improving sentiment on the underlying economic outlook.

About Crispin Murray and Pendal Focus Australian Share Fund

Crispin Murray is Pendal’s Head of Equities. He has more than 27 years of investment experience and leads one of the largest equities teams in Australia. Crispin’s Pendal Focus Australian Share Fund has beaten the benchmark in 12 years of its 16-year history (after fees), across a range of market conditions.

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

Find out more about Pendal Focus Australian Share Fund

Contact a Pendal key account manager

Where are we on inflation at the start of 2024? And how is Pendal’s team positioned? Here’s a quick overview from our head of government bond strategies TIM HEXT

Inflation on track in the US
Australian inflation still above target
Why bonds, why now? Pendal’s income and fixed interest experts explain
Browse Pendal’s fixed interest funds

WELCOME back to those returning from a summer break.

If you’ve been off since mid-December you could be forgiven for thinking nothing happened — since bond rates are largely unchanged.

Though there was some year-end excitement as the “everything rally” pushed yields lower and risk markets higher.

A notion of lower inflation potentially allowing US rate cuts seemed to change into a stronger narrative of imminent big cuts.

The new year has now sorted that one out.

Inflation outlook in the US

As always, the main market driver in 2024 will be inflation. Here’s a brief insight into where we are now.

I will talk more about the current pulse than just annual rates — since annual rates are quite backward-looking and take longer to reflect current conditions.

In the US the Fed’s preferred inflation measure is the core PCE (personal consumption expenditure) price index. This excludes food and energy.

The Fed prefers this measure over CPI because it better reflects changes in consumer spending — instead of relying on fixed weights that only change periodically.

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It also relies on business surveys which are more reliable than consumer surveys. And it has less exposure to rents (CPI includes the notion of owner-equivalent rents, which makes up 25% of the basket).

The good news is that in the US core PCE pulse is now running at 2%.

In other words Q4 — similar to Q3 (see below) — is expected to show the three-month annualised core PCE at 2%. That’s bang on the Fed target.

It was 5% in Q1 and 3.7% in Q2.

The main reason for this move is falling margins, as now fully-open goods and services markets see businesses become more competitive again.

The final impact of the pandemic is washing through the system.

US core CPI is now moving between 0.2% and 0.3% per month, indicative of a 3% annual rate.

This should also settle lower as leading indicators on rents suggest lower levels ahead.

Inflation Outlook – Australia

Australia’s fourth-quarter CPI will be released on January 31.

Thanks to monthly data we already know roughly two-thirds of the number. Expectations are for a 0.7% headline and 0.8% underlying quarterly outcome.

Three-month annualised this would see inflation near 3% as well, though rents in Australia are unlikely to provide the same relief as in the US.

Electricity subsidies (if and when they come off) are an added uncertainty in Australia. These softened the 20% price hikes down to only 10% in recent CPI numbers.

The hope is that falling wholesale prices might offset any removal of subsidies.

The RBA forecast of 3.5% inflation by mid-2024 looks reasonable.

Unlike the US, this would leave inflation still 1% above target, making the case for rate cuts more difficult.

But if inflation can stabilise closer to 3% in the medium term — as the current pulse suggests — then the need for tight monetary policy would lessen.

The hope would be wage outcomes could then moderate from the current 4% levels.

Portfolio positioning

Growth, labour markets, geopolitical events and the usual mix of factors will, as always, be in play in 2024.

For bond markets though, inflation outcomes are now on the “good news” side of the ledger for the first time since Covid.

We are running our portfolios from the long-duration side, though adjusting positions depending on market levels and probabilities of cuts priced into markets.

It also makes us favourably disposed to risk markets.

Though we note — and caution — that the long and variable lags of monetary policy will see a slower economy and more pressure on earnings than in 2023.

About Tim Hext and Pendal’s Income & Fixed Interest boutique

Tim Hext is a Pendal portfolio manager and head of government bond strategies in our Income and Fixed Interest team.

Tim has extensive experience in banking, financial markets and funding including senior positions with NSW Treasury Corporation (TCorp), Westpac Treasury, Commonwealth Bank of Australia, Deutsche Bank, Bain & Co and Swiss Bank Corporation.

Pendal’s Income and Fixed Interest boutique is one of the most experienced and well-regarded fixed income teams in Australia.

Find out more about Pendal’s fixed interest strategies here

About Pendal

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

In 2023, Pendal became part of Perpetual Limited (ASX:PPT), bringing together two of Australia’s most respected active asset management brands to create a global leader in multi-boutique asset management with autonomous, world-class investment capabilities and a growing leadership position in ESG.

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Here are the main factors driving the ASX this week, according to Pendal’s head of equities CRISPIN MURRAY. Reported by investment specialist Chris Adams

MARKETS kicked off the year with a small sell-off, catching their breath from the November-December rally, before staging positive returns last week.

The S&P/ASX 300 rose 0.14% and the S&P 500 1.79%.

To recap 2023:

The ASX rose 12%, with tech (+28%) and consumer discretionary (+21%) the lead sectors. Consumer staples (+1%), utilities (+3%), healthcare (+4%) and energy (+5%) all lagged
Globally, the US rose 26%, Europe lifted 26% and Japan gained 29%
US 10-yr Treasury yields ended up flat for the year at 3.88%, having peaked at 5.02% in October
The AUD was flat and the DXY (a trade-weighted measure of the USD) fell 2%
Iron ore rose 22%, gold increased 13% and copper lifted 2%, while oil fell 10% and lithium dropped around 80%

Markets start 2024 with a positive view that disinflation is proceeding faster than previously expected, growth will hold up, and the Fed has reinstated the “Fed put”.

Investors are positioned for this with a systematic strategies limit long in equities.

However, there is still a lot of cash on the sidelines, which may be squeezed into equities.

The breadth of the market is improving, which is usually a positive signal.

The liquidity environment is constructive in the near term, with reverse repurchase agreements (or repos) continuing to be drawn down and a limit on Treasury issuance. Both these factors are likely to reverse after Q1, however.

On the data front last week, we saw slightly negative US Consumer Price Index (CPI) data brushed off by the market.

The Producer Price Index (or PPI) was more positive, while jobless claims data indicated that the economy is holding up fine.

In Australia, inflation data was marginally positive.

We also saw conflicting signals from Fed speakers on the potential for quantitative tightening to be re-evaluated, but there is a growing suspicion this will occur to offset a tightening of liquidity in H2.

Middle East tensions escalated, with the US and UK both launching attacks on the Houthis in Yemen.

This had no sustained effect on oil prices, but freight rates have risen on the need to redirect shipping, which represents a risk to the disinflationary growth narrative.

The market continues to price for six-and-a-half interest rate cuts in the US, starting in March.

Current implied expectations are that the ECB and Bank of England will both start cutting in April and May, respectively.

The market is only pricing two cuts for Australia in 2024, the first occurring between June and August.

Five key questions for 2024

In our last note of 2023 we highlighted some key questions for markets in 2024. We can now assess these in light of recent data and developments:

1. Will disinflation continue to surprise to the upside?

Recent data has been mixed but is supportive of the market’s belief that disinflation will facilitate rate cuts.

US December CPI came in a bit stronger than expected, with the headline index up 0.3% month-on-month – driven, in part, by electricity prices.

However, there was sufficient ambiguity for markets to largely brush off the reading.

Looking forward, the continued drop in fuel prices and rents should help the headline CPI continue to fall.

Core CPI rose 0.31% month-on-month.

The Goods component was flat month-on-month following six months of decline.

The question is whether this signals an end to goods deflation, which has played an important role in positive inflation surprises.

New and used car prices rose, which may not be sustainable.

The recent weakening of the USD and the issues in the Red Sea may also be factors which could lead to an end of goods price deflation, so this remains an issue to watch.

Core Services ex-rents rose 0.4% month-on-month.

This, too, was higher than expected – driven by recreation services, airfares and medical services.

Airfare increases has been seen by a number of inflation bulls as unsustainable, partly due to fuel costs coming down.

These categories are also measured differently in the core Personal Consumption Expenditure (PCE) measure that the Fed prefers.

As a result, the market has not changed its expectations for the December PCE reading, which is that the three-month annualised Core reading could drop to 2.0%.

US PPI came in below expectations at -0.1% month-on-month and 1.0% year-on-year, making this three negative readings in a row.

Some inflation bulls have also cited the potential for more competition to drive corporate profits margins lower.

These rose substantially though the pandemic, and while they are no longer rising, they have not yet normalised.

While this is good for the rate outlook, it would be negative for corporate profitability.

One countersignal is wages data, which is proving to be more stubborn; the Atlanta Fed twelve-month wage tracker held at 5.2% in early January.

The market has priced a 65% probability of a March rate cut in the US, with 165bps of easing expected for the year.

European inflation was in line with the ECB forecast, but higher than consensus expectations (headline 2.9% and core 3.4%).

This may delay the first rate cut in Europe until May or June.

We note that Europe has experienced another warmer winter so far and gas prices have come in well below the assumptions made by the ECB. 

2. Will the US economy continue to grow?

This question, alongside the first, is likely to drive the outlook for rates and corporate earnings.

US jobless claims have remained very benign, with initial applications near historic low levels and continuing to hold flat.

This reiterates constructive employment data from the week before and helps underpin the economy.

Anecdotes from retailers indicate there was a late surge in Christmas spending, which held up well overall as a result.

Early January sales are on the soft side, although this may be weather-related. 

The consensus expectation is 0.7% GDP growth in 2024, but the upside risk comes from higher consumer demand – benefiting from real disposable income growth combined with the support from an easing of financial conditions.

If the Fed is comfortable with inflation, then it does not need to force the economy into sub-trend growth levels.

Some estimates suggest the potential impact of easier financial conditions could go from a GDP headwind to potentially adding 0.5% to growth.

3. The impact of geopolitics and elections

Threats to shipping via the Red Sea have seen a dramatic decline in traffic, with companies opting for the longer path around Africa.

This effectively reduces supply and impacts freight rates and has raised some concerns about the flow-on effect to the price of goods and the risk of slowing the rate of disinflation.

That said, the trade between Europe and Asia is most heavily affected, with a more limited impact on US routes.

There has also been a material increase in shipping capacity post-pandemic, so the impact will be far more muted than what we saw during Covid.

In Taiwan, the Democratic Progressive Party candidate Lai Ching-te won the party’s third consecutive Presidential term, as expected.

However, the party won 51 of 113 parliamentary seats and lost its majority for the first time since 2012 (again, expected, and unlikely to move the status quo in terms of the level of tensions).

4. China’s ability to sustain moderate growth

Real-time indicators suggest the Chinese economy has started the year softer.

Consumers continue to lack confidence, with the gap between retail sales growth and the pre-Covid trend continuing to widen.

This is tied to weak property market.

Inflation data also remains weak, which leaves scope for continued policy stimulus driven by a supportive fiscal situation.

5. Australia’s ability to engineer its own soft landing

Australian monthly CPI for November was lower than market expectations, up 0.33% month-on-month and 4.3% year-on-year (down from 4.85%).

Core inflation was also lower, up 0.25% month-on-month and 4.77% year-on-year (down from 5.05%).

Housing was the main contributor to inflation for the month, along with rents and new dwellings.

Electricity prices rose to a lesser degree, helped by new Victorian government subsidies.

Services inflation rose 0.7% month-on-month to 4.71%, after a similar fall the previous month.

The three-month trend is now 3.6%. 

Goods rose 0.16% to 3.95%, held down by lower fuel, clothing and recreational equipment, with food higher.

December data should see another step down as the base effects fall out, fuel prices are lower, and Western Australian power subsidies kick in.

Last week, the December Politburo meeting and the Central Economic Work Conference took place, where key economic targets are set (but not announced until March).

Signals were for policy support focused on fiscal policy, though there were no major initiatives which was seen as slightly disappointing.

Australia

Employment data was much stronger than expected (up 61,500) despite a marginal rise in unemployment (to 3.9%) given the continued rise in labour supply.

Total hours worked were flat, which implies average hours worked was lower.

This indicates that businesses are looking to save costs by lowering hours rather than layoffs – possibly due to the difficulty of rehiring in the past.

Forward indicators on unemployment still indicate it should be set to rise further, though these signals have so far not been validated.

Markets

The Fed cutting rates is not necessarily a green light for equity markets, as in the end, the economy gets the final say.

If a recession were to occur, the de-rating of earnings would overwhelm the benefits that the lower rates would bring.

This is why GDP growth next year is key.

We are also seeing some interesting shifts in market internals on the back of this. Notably, mega-caps have done their dash and market breadth is rising.

This can be tracked in the relative performance of the Russell 2000 vs the S&P 500.

For small-caps, this is a particularly positive signal for them to outperform.

Another interesting disconnect is that the market has a very different perspective on the economy than some of the traditional leading indicators of growth, shown by the rotation away from defensives to cyclicals.

This makes early 2024 interesting, as the cyclicals would be sensitive to any weak growth.

In Australia, the ASX saw a broad-based rally with only utilities underperforming.

Rate-sensitive sectors such as REITs and tech led the market.

Energy was supported by the bounce in oil and the continued fallout of the potential STO-WDS merger.

Lithium stocks also had a strong bounce back given how oversold they have become.

Lastly, this environment looks to be positive for the AUD, which continues to look good technically.

About Crispin Murray and Pendal Focus Australian Share Fund

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

Find out more about Pendal Focus Australian Share Fund

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The US election will take the spotlight, but EM investors need to keep tabs on dozens of other national polls this year. Here’s an overview from Pendal’s Emerging Markets team

Elections to come in India, Indonesia, South Africa and Mexico
Global geopolitics will significantly impact emerging markets
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THIS is the biggest election year in history, with half the planet’s population due to elect a national leader.

More than 50 countries will hold national elections in 2024 – including many emerging markets.

“2024 has the highest concentration of elections, possibly in modern history,” says Paul Wimborne, co-manager of Pendal Global Emerging Markets Opportunities fund.

“And emerging markets are very much part of this line up. There has already been presidential elections in Taiwan and later in the year there will be elections in India, Indonesia, South Africa and Mexico.

Those countries represent 40 per cent of the MSCI Emerging Markets Index by weight and 1.9 billion people.

Investors will need to consider the ramifications of elections with the potential to affect the global macro environment that matters so much to emerging equity markets.

We’ve already seen the re-election of Taiwan’s pro-sovereignty Democratic Progressive Party draw the ire of Beijing.

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Financial markets continue to be directly impacted by sanctions on China; the impact of Russia’s invasion of Ukraine on commodity prices and trade; and an evolving set of overlapping conflicts in the Middle East and Red Sea.

Here’s a quick look at the elections that will affect EM investors:

Taiwan (Jan 13)

The Taiwanese election, held in mid-January, was won by Willian Lai Ching-te from the governing Democratic Progressive Party (DPP).

It’s the first time the same party has won a third Presidential term since direct elections were introduced in 1986.

“DPP is the more pro-independence of Taiwan’s main parties and it received just over 40 per cent of the vote,” Wimborne says.

“Taiwan also had a legislative election where the KMT, a more pro-Beijing party, won 52 seats out of 130. DPP won 51 seats. It means the winning President doesn’t have a legislative majority.”

For emerging market investors, an election like Taiwan’s is crucial in understanding where opportunities, and risks, lie.

“In Taiwan’s case, the President does not have a clear mandate, so that really suggests a status quo outcome.

“Clearly the election is very important from a geopolitical point of view with the relationship between the country and China the key issue.

“For investors, the holding of the election reduces the short-term uncertainty because we know what the outcome is.

“And it also tells us in the medium term, the cross-strait tension between Taiwan and China is probably here to stay.”

India (April-May) and Mexico (June 2)

Investors in emerging markets worry mostly about unexpected results which could move equities, bonds, property markets, currencies and other asset classes, Wimborne says.

“In India, there is an election in the next couple of months. The market has priced in continuity, and it would be a shock of Narendra Modi doesn’t win.

“In Mexico, the market is assuming the most likely result is the current incumbent AMLO’s (Andres Manuel Lopez Obrador) preferred candidate will win, and his party will retain power.

AMLO, having served a single six-year term, is unable to run again.

Russia (March 15-17)

March brings the presidential election in Russia.

The last election in 2018 is widely thought of as neither free nor fair. Incumbent Vladimir Putin received 77.5% of the vote then, and the political system in Russia has become intensely more repressive since.

Economic strain is substantial. Many Russians have seen their ambitions destroyed and the country may have taken more than 100,000 casualties so far in its invasion of Ukraine.

A Putin victory has to be the expectation, but there is the possibility of protests and crackdowns that may alter Russian policy.

Venezuela (sometime in 2024)

Similarly, the first half of the year should see a presidential election in Venezuela. Like Russia, the country is in no meaningful sense a democracy.

James Syme, Paul Wimborne and Ada Chan (l-r) … fund managers for Pendal Global Emerging Markets Opportunities fund

The leading opposition candidate Maria Corina Machado was barred from politics in June 2023 – so a victory for the governing coalition (probably for the incumbent Nicolás Maduro) has to be the expectation.

In the run-up to the election, Venezuela has made claims on almost all of the territory of neighbouring Guyana, with possible military action backed by Iran, Russia and China.

This would lead to a substantial worsening of global geopolitics with varying potential outcomes.

Israel

While Israel does not have an election scheduled, the current emergency government formed after the Hamas attacks in October 2023 may not last throughout 2024.

The country has undergone five elections between 2019 and 2022 in search of a viable coalition.

A snap election could lead to anything from a mandate to negotiate a political settlement to the current crisis to a shift to an even more overtly nationalist government that would deepen the conflict with both the Palestinians and with Israel’s neighbours.

United States (Nov 5)

The greatest ‘unknown’ in this election year for emerging markets is the United States.

“The US election is the one that has the potential to cause most uncertainty across emerging markets,” Wimborne says.

“It’s difficult to predict who is going to win — and then it’s also difficult to predict what policies would be, particularly if Trump wins.

“What would US policy be in terms of geopolitics and domestic priorities, as well as what that means for interest rates and the US dollar?”

UN Security Council (mid-2024)

In addition to these national polls, five non-permanent members of the UN Security Council are due to elected in mid-2024.

Although most of the power sits with the five permanent members (who have vetos), it is here where any attempts to resolve these conflicts will start.

Among the countries likely to be elected are Pakistan and Somalia.

Pakistan is close to China and Iran and in dispute with India. Somalia is in a dispute with Ethiopia which has the potential to further worsen the geopolitics of the Red Sea region.

Global geopolitics are fraught as we go into 2024 and all these elections have the potential to lead to a substantially better or worse world.

Investors will need to follow them closely and react accordingly.

Portfolio implications

For investors, all this uncertainty means they must stick to their strategies and processes, says Wimborne.

“Stick to your game plan and then react to changes if the outcomes aren’t as the market predicted.

“You need to build a resilient portfolio and know where the risks are being taken.

“Look at the portfolio as a whole and understand what would happen if the oil price moves or bond yields change, or currencies move.

“Have a cohesive portfolio where you understand the risks, and when the facts change, respond in the appropriate way.”

About Pendal Global Emerging Markets Opportunities Fund

James Syme, Paul Wimborne and Ada Chan are co-managers of Pendal’s Global Emerging Markets Opportunities Fund.

The fund aims to add value through a combination of country allocation and individual stock selection.

The country allocation process is based on analysis of a country’s economic growth, monetary policy, market liquidity, currency, governance/politics and equity market valuation.

The stock selection process focuses on buying quality growth stocks at attractive valuations.

Find out more about Pendal Global Emerging Markets Opportunities Fund here

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

Contact a Pendal key account manager here

Increase to the Pendal Dynamic Income Fund (Fund) transaction costs

The Fund’s financial year ending 30 June 2023 (FY23) estimated transaction costs net of the amount recovered by the Fund’s buy-sell spread (net transaction costs) are 0.11% of the assets of the Fund. The estimated net transaction costs have increased from 0.04% p.a. of the assets of the Fund in financial year 2022.

Transaction costs are incurred when buying and selling the Fund’s underlying securities and may be incurred as a result of changes in a Fund’s investment strategy or investors entering or exiting the Fund.

When the Fund changes its investment portfolio, transaction costs are paid out of the Fund’s assets and are reflected in the daily unit price. They are not charged to you as an additional fee.

If you choose to enter or exit the Fund (to buy or sell units) some or all of the associated transaction costs will be recouped via the Fund’s buy-sell spread (being the difference between the Fund’s entry and exit unit prices).

The Fund’s estimated FY23 total transaction costs for the Fund were 0.16%. Of this amount, we estimate 0.05% was recouped via the buy-sell spread and 0.11% reduced the return of the Fund.

There has been no change to the management fee for any of the Fund’s classes of units.

Here are the main factors driving the ASX this week, according to Pendal’s head of equities CRISPIN MURRAY. Reported by investment specialist Jonathan Choong

THERE was nothing to de-rail the market’s bullishness last week, after the US Federal Reserve signalled its inflation mission had been accomplished.

The reaction was very positive with the S&P 500 up 2.5%, now 25% higher year-to-date.

US yields also fell by 30 basis points (bps) and have now ended up where they started at the beginning of the year.

Market price action is positive, with breadth widening and momentum indicators breaking higher and indicating the pathway to moderate growth and falling rates (ie a soft landing) is in sight.

Near-term consolidation will likely occur in the short term before another move higher into the start of 2024, which bodes well for risk assets.

In addition, last week we saw mildly positive inflation data on a net basis, with US economic data supportive of no imminent recession.

In Europe, the ECB and BoE both took a more cautious stance on the prospect of rate cuts – with the former struggling with weak economic data and the latter more understandable given England’s inflation.

China’s policy meetings were mildly disappointing. There were no strong policy signals, but the background message appears to be that fiscal stimulus would continue to be used to prop up growth.

The S&P/ASX 300 was up 3.5% for the week. The Australian economy continued to signal that things were better than sentiment suggested with a strong employment report.

This was reflected in a break higher in the Australian dollar to more than 67 cents.

Economics and policy

Inflation data came in as expected and continues to trend downward on a net basis.

In November, US CPI was higher at 0.1% month-on-month and 3.1% year-on-year.

Core CPI was firmer at 0.28% month-on-month and 4% year-on year.

There was a bit for the bulls and bears – with core goods seeing material disinflation despite a strong auto inflation component, which should unwind.

The service component was not quite as favourable, with rent growth remaining higher than expected. This is somewhat discounted, as more real-time measures of rents are now flat year-on-year.

Core services ex-OER (Owner’s Equivalent Rent) and rent also saw a small re-acceleration over a three-month period.

Medical services and health insurance were the main drivers in this underlying core services pick-up, but it should be noted that these services are known to lag the most – suggesting that inflation is not, in fact, rebuilding.

This will make the next PCE print (the Fed’s preferred measure for inflation) important, as we are seeing a divergence here from the CPI.

We also saw weaker PPI data in the US, and Michigan inflation expectations also fell back down.

In other US economic news retail sales bounced back, up 0.3% versus expectations, though negative revisions reduced part of this.

The underlying trend looks to be around 2.5% growth, which is consistent with the outlook for a soft landing. This means the overall inflation trend is still supportive for the Fed to shift its policy signal, with the headline target of 2% now plausible.

The Fed

In its meeting, the Fed clearly shifted its policy bias.

The market was initially wary that Chairman Jerome Powell would seek to settle things down given a fall in financial conditions since he spoke, and a warning from Fed member Christopher Waller.

But we got a set of dovish signals:

The dot-plots signalled a move from two to three expected cuts in 2024
Powell noted there had been discussions on how long to keep rates on hold before cutting. This was expected to be a topic for a more detailed discussion going forward
Powell noted good progress on inflation, including core and core services
He also talked about the risk of over-tightening. This was an important shift, relating to the central bank’s desire to avoid having to cut rates too far this cycle
When pushed about the current easing of financial conditions, Powell did not use the opportunity to diffuse the reaction.

All up, the meeting was taken as a green light for markets.

The following day, Fed member John Williams of New York did try to diffuse the message – particularly given the move to March cuts by the market. But it was met with little reaction since the market believed the data would support a cut then.

The market is now expecting six rate cuts in 2024.

There is a concern from some that the Fed has been too dovish, which may prevent a proper slowdown – resulting in a resurgence of inflation.

European Central Bank

President Christine Lagarde took a more cautious stance than Powell, repeating her message of no cuts in the first half of the calendar year, but her message was largely ignored given the perceived weakness across Europe.

She said the ECB had not discussed the timing of cuts, though the market has been pricing in 150 bps of rate cuts in 2024.

China

November data looked better year-on-year.

For example, retail sales were up about 10%, though they have been weak sequentially.

The outlook remains consistent. GDP growth is steady in the low fives for 2023 and the market expects this slowing between 4.5% and 4.8% in 2024.