Here are the main factors driving the ASX this week according to our head of equities CRISPIN MURRAY. Reported by portfolio specialist Chris Adams
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MACRO signals were slightly softer last week, easing concerns about excess growth.
Fed chair Jerome Powell could have been seen as a touch hawkish in a speech at the annual Jackson Hole retreat last week.
But a careful reading indicates he is not expecting an economic re-acceleration which would necessitate further rate hikes.
People are still looking for further stimulus from China, but none is yet forthcoming.
In the US, AI chip maker Nvidia — which triggered the June quarter rally — reported its Q2 results and again blew away expectations.
But this time the stock stalled and did not fuel a NASDAQ rally — hindered perhaps by fuller valuations and the overhang of bond yields.
All combined, the market squeezed a little higher, with the S&P 500 up 0.84%, and bonds stabilising.
The S&P/ASX 300 fell 0.39% in what was the busiest week for company reporting, with substantial variations in stock performance.
The underlying theme is the economy seems fine and earnings are largely holding up for industrials.
While there are pockets of weakness in certain retail categories, these are outweighed by positive signals in travel, commercial demand and building materials.
There are no signs of recession and — with rates on hold — it is hard to see what would trigger one.
The only issue is at some point inflation trends may force the Reserve bank to re-evaluate, but that remains a little way off.
Signals from Jackson Hole
Chair Powell projected a stern tone last week, speaking of maintaining restrictive policy until inflation got back to 2% — as opposed to the “2% range”.
The Fed chair said nothing to change the market’s view that there would be no hike in September, noting the Fed could afford to “proceed carefully”, while remaining prepared to move if needed.
He also noted lags in the effect of monetary policy and the risk of doing too much as well as too little.
All this points to the Fed probably believing it has done enough and can afford to wait to see whether the economy cools further or not.
Should the economy show signs of re-accelerating, it is clear hikes will be back on. But we are well away from that case.
The limited move in 10-year bond yields (-2bps over the week) indicates there is little change to market expectations.
Also speaking at the Jackson Hole conference, European Central Bank president Christine Lagarde struck a hawkish tone on medium-term structural issues.
Lagarde referenced potential supply shocks associated with the energy transition and its call on capital as well as geoeconomic fragmentation.
She also highlighted a labour supply issue, where workers wanting fewer hours could drive up real wages, leading to supply shocks and greater second-order effects. Though she also noted Artificial Intelligence technology could provide some offset.
These are longer-term issues and go more to the potential for rates to stay higher for longer and to stabilise at a higher rate than the previous cycles, rather than a short-term signal.
Nvidia
The poster child for the AI zeitgeist delivered well above market expectations, with Q3 guided revenue of $US16 billion — 18% higher than Q2 and 170% higher than the same quarter last year.
This was 27% ahead of consensus expectations and implied earnings per share (EPS) for Q3 was 39% ahead of consensus.
This is driven by Nvidia’s data centre business, which is closely leveraged to AI. Sales in Q2 were 29% higher than market expectations.
Management indicated they expect supply to improve sequentially through 2024, suggesting they are avoiding bottlenecks holding back their growth.
The market is revising earnings upwards substantially on this theme.
Goldman Sachs, for example, raised its data centre revenue estimates 58% for FY24 and FY25 and EPS estimates by 55% and 52% respectively.
The chip-maker also announced a $US25 billion stock repurchase program, having done $3 billion in Q2.
The AI theme is alive and well and can underpin the broader ecosystem thematic.
While Nvidia’s stock was up 6% week-on-week, it fell back from the immediate post-result reaction.
This signal is worth noting. After a move of about 215% so far this year, it suggests positioning is now full and the earnings beat is helping sustain that, rather than drive it further.
US retail earnings
A number of smaller US discretionary retailers put out negative news, signalling that trading conditions deteriorated from July to August.
Key points included the growing impact of theft and some signs of credit deterioration.
Dick’s Sporting Goods, Macy’s and Dollar Tree all fell sharply.
Previously signals from likes of Walmart and Ross Store had been more positive, so the full picture is still unclear.
This is worth watching as a possible change in trend.
Markets
Australian earnings season is painting a picture of an economy that remains in good shape with very little evidence of slowdown.
Qantas is seeing good travel demand. Wesfarmers has indicated no signs of weakness in Bunnings or K Mart.
Woolworths notes that demand remains decent, though there are signs of downtrading to cheaper items.
BlueScope Steel expects strong demand for building products through to year end.
Fuel retailers Viva Energy and Ampol are seeing strong commercial demand for fuel — and Domino’s is seeing signs of life in pizza demand.
Where there were poorly-received results, it was often company-specific such as Coles struggling with a surge in theft, Ramsay Health Care facing cost pressures, or Wisetech investing in new products.
There was also some offshore impact such as Reliance Worldwide’s exposure to the repair and remodelling market in North America and Iluka’s headwind from muted zircon demand in China.
The other feature of the current markets is the impact of prior investor positioning.
We are seeing unloved names performing well if there is no bad news (eg Altium and Domino’s Pizza) and well-owned names struggling if there is no new good news (eg Wisetech, Coles, Cleanaway).
The risk looking forward is whether waning momentum in revenues will leave companies exposed to ongoing cost pressures.
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.
The Pendal Diversified Global Equity Fund (Fund) will terminate on Tuesday, 28 November 2023.
Why is the Fund terminating?
The Fund’s small size means that it has high running costs and cannot be managed in a cost-efficient way.
The Fund has also experienced consistent outflows and we consider that it has little prospect of significant growth in funds under management in the foreseeable future.
How this affects you?
We will terminate the Fund on Tuesday, 28 November 2023.
Any application requests received after 2:00pm (Sydney time) on Thursday 24 August 2023 will not be accepted.
We will continue to accept withdrawal and transfer requests up to 2:00pm (Sydney time), Monday 27 November 2023.
As soon as practicable after the Fund is terminated on Tuesday, 28 November 2023, we will begin winding up the Fund. The assets remaining in the Fund will be realised and the proceeds distributed to all investors in proportion to their unit holding.
What does this mean for you?
The cash proceeds from this termination, including any distribution of net income, will be paid directly to your nominated bank account on file on or around Friday, 15 December 2023 or shortly thereafter.
Details of any distribution paid to you will be included in your final distribution statement, which you will receive shortly after the distribution is paid. You will also receive an annual tax statement by the end of July 2024, following the end of the 2024 financial year.
Questions?
If you have any questions, please contact our Investor Relations Team during business hours Monday to Friday on 1300 346 821.
The Pendal European Share Fund (Fund) will terminate on Tuesday, 28 November 2023.
Why is the Fund terminating?
The Fund’s small size means that it has high running costs and cannot be managed in a cost-efficient way.
The Fund has also experienced consistent outflows and we consider that it has little prospect of significant growth in funds under management in the foreseeable future.
How this affects you?
We will terminate the Fund on Tuesday, 28 November 2023.
Any applications received after 2:00pm (Sydney time) on Thursday 24 August 2023 will not be accepted.
We will continue to accept withdrawal requests up to 2:00pm (Sydney time), Monday 27 November 2023.
As soon as practicable after the Fund is terminated on Tuesday, 28 November 2023, we will begin winding up the Fund. The assets remaining in the Fund will be realised and the proceeds distributed to all investors in proportion to their unit holding.
What does this mean for you?
The cash proceeds from this termination, including any distribution of net income, will be paid directly to your nominated bank account on file during the week commencing Monday, 11 December 2023 or shortly thereafter.
Details of any distribution paid to you will be included in your final distribution statement, which you will receive shortly after the distribution is paid. You will also receive an annual tax statement by the end of July 2024, following the end of the 2024 financial year.
Questions?
If you have any questions, please contact our Investor Relations Team during business hours Monday to Friday on 1300 346 821.
The Pendal American Share Fund (Fund) will terminate on Tuesday, 28 November 2023.
Why is the Fund terminating?
The Fund’s small size means that it has high running costs and cannot be managed in a cost-efficient way.
The Fund has also experienced consistent outflows and we consider that it has little prospect of significant growth in funds under management in the foreseeable future.
How this affects you?
We will terminate the Fund on Tuesday, 28 November 2023.
Any applications received after 2:00pm (Sydney time) on Thursday 24 August 2023 will not be accepted.
We will continue to accept withdrawal requests up to 2:00pm (Sydney time), Monday 27 November 2023.
As soon as practicable after the Fund is terminated on Tuesday, 28 November 2023, we will begin winding up the Fund. The assets remaining in the Fund will be realised and the proceeds distributed to all investors in proportion to their unit holding.
What does this mean for you?
The cash proceeds from this termination, including any distribution of net income, will be paid directly to your nominated bank account on file during the week commencing Monday, 11 December 2023 or shortly thereafter.
Details of any distribution paid to you will be included in your final distribution statement, which you will receive shortly after the distribution is paid. You will also receive an annual tax statement by the end of July 2024, following the end of the 2024 financial year.
Questions?
If you have any questions, please contact our Investor Relations Team during business hours Monday to Friday on 1300 346 821.
How China is impacting equities | A warning on global bond index funds | Why Brazil is well positioned for EM investors | Where to look for AI winners
The mortgage cliff may not yet have appeared, but we’re only halfway through the roll-off of Covid-era fixed-rate loans, points out Pendal assistant PM ANNA HONG
- Why bonds, why now? Find out more from Pendal’s income and fixed interest team
AUSTRALIAN house prices look to have turned the corner.
But what about mortgage stress?
We’ve repeatedly heard the mortgage cliff warnings since the Reserve Bank started hiking rates.
Yet the cliff doesn’t appear to have appeared.
It’s bank reporting season and the latest updates show mortgage arrears remaining relatively stable, only picking up slightly in the June quarter.
Delinquencies have hardly budged.
It appears that the system is coping just fine. Of course, this does not mean that everyone is.
Despite the positive picture, we are by no means out of the woods.
Most Aussie borrowers who fix their mortgage do so for three years or less.
This means 85 per cent of pandemic-era fixed-rate loans are set to expire by the end of 2024.
As you can see in the graph below, we’re only half-way through the roll-off.
We are at the peak and will remain here into year-end.
The true test of the Australian residential mortgage resilience will only come if significant increases in unemployment collide with repayment stress.
For now, the path to expected higher unemployment is due more to immigration lifting labour supply above demand.
Importantly though, this does not mean people losing their jobs.
For some, the stress is and will be very real.
But for the system, higher rates will be more of a speed bump than a cliff.
What does this mean for investors?
Perhaps, the RBA may yet achieve the narrow path they set out on.
Find out about
Pendal’s Income and Fixed Interest funds
About Anna Hong and Pendal’s Income and Fixed Interest team
Anna Hong is an assistant portfolio manager with Pendal’s Income and Fixed Interest team.
Pendal’s Income and Fixed Interest boutique is one of the most experienced and well-regarded fixed income teams in Australia.
With the goal of building the most defensive line of funds in Australia, the team oversees some $20 billion invested across income, composite, pure alpha, global and Australian government strategies.
Find out more about Pendal’s fixed interest strategies here
About Pendal Group
Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management.
A long-awaited and bigger-than-expected rate cut in Brazil could usher in a positive cycle of growth for Latin America’s biggest economy. JAMES SYME explains
- Brazil cuts rates
- Positive cycle ahead
- Find out about Pendal Global Emerging Markets Opportunities fund
- Watch a recent Emerging Markets overview webinar with James Syme
INVESTORS are underplaying the likelihood of further rate cuts in Brazil, which is showing signs of entering a classic emerging markets virtuous cycle of capital inflows, strengthening growth and rising markets.
That’s the view of James Syme, who co-manages Pendal Global Emerging Markets Opportunities fund.
Brazil cut its key interest rate by a larger-than-expected 50 basis points in its August meeting.
The central bank took the rate from 13.75 per cent to 13.25 per cent, ending eight months of keeping borrowing costs on hold.
Markets expect further cuts to 12 per cent by the end of the year and 9.25 per cent by the end of next year.
But Syme says those expectations are likely short of the mark and a positive cycle of rate cuts and economic growth lies ahead.
“Emerging markets tend to overshoot to the downside and then to upside.
“We think Brazil is setting up to be in a cycle of much more positive news, and that should be reflected in equity prices as well.
“We’ve been talking about rate cuts coming in Brazil for a couple of years and they have now surprised markets with the size of the first cut.
“We don’t think this is the last of those surprises.”
Self-reinforcing cycles
Emerging markets tend to move in self-reinforcing cycles of rate cuts and economic growth attracting capital flows, which strengthen the currency, allowing for reduced inflation and further rate cuts, says Syme.
Find out about
Pendal Global Emerging Markets Opportunities Fund
“There’s a traditional view among investors that markets reflect the real world.
“You have a set of fundamental conditions and the output of them is what happens in markets, whether it’s exchange rates or stock markets or individual share prices, or bond yields.
“But we think what happens in markets also drives what happens in the real world.
“That means what happens with currencies, interest rates and bond yields has a real world effect.
“We think we’re heading to a point where we’re going to see that in Brazil, where a stronger currency, a stronger equity market, and declining bond yields feed back into the Brazilian economy.
“In these kinds of emerging markets, these are very positive, self-reinforcing cycles.”
Domestic demand stocks to benefit
Syme says investors can best take advantage of the rosy outlook by focusing on companies exposed to domestic demand.
“It’s going to be about banks and other financials, consumer durables and autos, services and leisure, construction and capital investment, and real estate,” he says.
“Now, that doesn’t mean we’re going to end up with exposure to all those sectors because we need to be selective at a sector and stock level as well. But those are the main beneficiaries.”
A rising level of new stock issuance is also a vote of confidence in Brazil’s outlook.
“Companies are raising capital to take advantage of the improving economic situation. We see that as a statement of a positive intent by corporate Brazil.
“One of our newer holdings in the fund is the company that operates the Brazilian stock market, which is a business that could really benefit from this.”
More rate cuts likely
Syme says the opportunity for rate cuts in Brazil is illustrated by the gap between its interest rates and inflation measures compared to other economies.
“Brazil’s inflation level is about the same as the US — but US rates are at 5.5 per cent.
“That’s a nearly eight percentage point gap so just the carry alone should attract lots of capital into Brazil.
“We think that economic data should pick up quite strongly as rate cuts come through.
“This is how emerging markets investing works — the bad times are bad, and the good times are good.
“A lot of the markets we like are doing very well right now including Mexico, India and Indonesia.”
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.
Here are the main factors driving the ASX this week according to our head of equities CRISPIN MURRAY. Reported by portfolio specialist Chris Adams
- LIVE WEBINAR SEP 7: Register for Crispin Murray’s bi-annual Beyond The Numbers webinar
- Find out about Pendal Focus Australian Share fund
A COMBINATION of northern hemisphere summer doldrums and limited data is keeping news-flow reasonably quiet.
US and Australian bond yields are both re-testing cycle highs, capturing a lot of attention.
Rising bond yields and a stronger US dollar saw equities fall last week, continuing their consolidation from the end of July. The S&P 500 fell 2.05% and the S&P/ASX 300 lost 2.34%.
The market is also focused on weakness in China’s economy.
Along with talk of inventory reductions, this encouraged a continued sell-off in the lithium complex. Though iron ore miners maintained their remarkable resilience.
Softer Australian employment data helped drive our dollar lower versus the USD.
In local ASX results, season operational performance has largely been solid. But there have been concerns about debt costs for the more leveraged companies.
China
The Chinese economy remains under intense scrutiny.
This was maintained last week by concern of the imminent default of property developer Country Garden, missed payments from investment company Zhongrong Trust and a continuation of weak economic data.
The challenges are symbolised by Beijing’s decision to stop publishing data on youth unemployment — which stands at about 21 per cent.
Data on land sale volumes and consumer confidence are also suspended in the name of maintaining confidence.
Confidence is the key issue:
- High youth unemployment deters consumer spending
- Fears about the solvency of private developers discourage new home purchases, due to the risk that dwellings may not be completed
- Investment trust defaults such as Zhongrong’s may trigger redemption requests, leading to a liquidity squeeze
This lack of confidence can be seen in a lack of private investment, which is down 7 per cent in the first seven months of 2023, versus state-owned-enterprise investment up 12 per cent.
Concern over property lies at the heart of the confidence problem. New housing starts are down more than 60 per cent from the 2019 peak.
There was a widely-held expectation that the market would stabilise following such a dramatic decline.
But July data indicates the weakness continues.
Goldman Sachs cut its forecast for 2023 new housing starts from -10% to -20% on the previous year and expects the property sector to detract 1.5% from GDP growth.
Beijing’s 2023 GDP target of 5% was initially seen as something of a low-ball target which could be exceeded.
Now the market is cutting GDP forecasts to sub-5% as we see recent trends in retail sales, auto sales and other indicators start to slow.
There have been a number of policy initiatives, including some interest rate easing and bringing forward some spending by local governments.
But these measures have been incremental and unable to reverse deteriorating sentiment.
While this is a bearish portrait, some China-related stocks and sectors on the ASX have held up — notably the miners.
The bulls are taking the view that things are so bad, they’re good — which would increase the chance of a more convincing policy response such as the one we saw in 2015.
They are drawing a comparison with the period prior to the reversal of the Zero-covid policy, where there were incremental signals before the major policy change.
There’s also a theory that Beijing is biding its time, reasoning there would be no point launching an initiative in high summer as it wouldn’t get traction. Beijing may be waiting until September, the theory goes.
If a major policy response doesn’t materialise, we see some risk around bulk commodity producers at these levels.
US macro outlook
US GDP surprised to the upside with 5.8% growth in the second quarter.
The market is trying to understand how this can happen.
Some relates to higher investment.
It’s too early for the Inflation Reduction Act (IRA) to be felt, but the 2022 CHIPs and Science Act (CHIPS stands for Creating Helpful Incentives to Produce Semiconductors) of 2022 is having some effect.
Consumption, however, is the main driver.
One observation is that business tax refunds have surged since March, adding an additional $100 billion in potential spending power.
A lot of this relates to small business and is tied to the Covid-era policy of employment-retention tax credits.
This policy, which remains in place until 2025, is seeing business tax refunds run at four times pre-pandemic levels.
The policy’s original costing was US$85 billion over 10 years. It has cost US$150 billion in the past 12 months alone.
This is a good example of how some stimulative fiscal settings have become entrenched and are helping the economy outperform expectations.
The stronger economic outlook can also be seen in the Atlanta Fed’s GDP NOW measure, which is indicating an almost 6% growth in GDP for the third quarter.
We suspect this is overstated. But it still retains a healthy buffer over the 1& to 2.5% range of forecasts from consensus.
The New York and Philadelphia Fed regional manufacturing surveys appear to be bottoming, reinforcing the soft-landing case.
They are also signalling a pick-up in prices received, which may give the Fed some pause for thought.
This more resilient economy means markets are expecting interest rates to stay higher for longer, and reinforce the view that real rates need to stay higher for this cycle.
Combined with structural pressure on the government budget deficit from funding costs and more legislated spending — plus extra supply and lower offshore demand for treasuries — this helps explain the increase in bond yields.
It also suggests that while the market is bearish on bonds — allowing potential for a near-term reprieve — we should not expect a sustained reversal in yields.
Markets
Australian equities were down last week, in line with the US.
Only REITs (+1.27%) held up, largely due to the influence of Goodman Group.
Lithium names were weak on a macro trade against them.
Domestic high-yield names were also soft, partly due to the realisation that bond yields were staying higher.
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.
The big questions for equities | Two stocks taking off | Why you can look past ESG volatility | How investors are making the world better
Pendal’s head of government bond strategies TIM HEXT explains the latest wage data and what it means for rates and bonds
- Why bonds, why now? Pendal’s income and fixed interest experts explain
- Browse Pendal’s fixed interest funds
WAGE growth – a key indicator that the Reserve Bank monitors when weighing up rates decisions – was surprisingly benign in the June quarter.
The Bureau of Statistics published the latest Wage Price Index on Tuesday.
The index, which measures changes in salary across 18 industries, showed overall wages grew by only 0.8% in the period.
We’ve now had three quarters in a row of 0.8%.
This indicates an annual rate of only 3.2%. Though a 1.1% number last September gives us an annual rate of 3.6% with rounding.
More surprising is that public sector wages grew only 0.7% in the quarter.
This remains below private sector wages — mostly because three-year agreements in the public sector are slower to respond to changing dynamics.
The opposite was true as wage growth fell across most of the last decade — as you can see in the ABS graph below.
This lower public sector result comes despite a trend for public sector workers to get at least 4% in agreements.
The federal government is now offering 4% next year to unions (and 3.5% and 3% the following years).
Unions have rejected this.
The NSW government has agreed to 4% from July for more than 80,000 workers covered by the Public Service Association.
Teachers and nurses across a number of states have received 4% wage increases over the past 12 months.
Governments offered additional incentives and payments to avoid higher increases given the inflation backdrop.
Wages across the economy are likely to settle on 4% rises for several years yet.
Actual inflation is going to be around 4% and unless unemployment has a very large rise employees will maintain a level of bargaining power.
This 4% is the new 2.5% that we got used to last decade.
GDP data shows a different story
Note that the Wage Price Index is but one measure of renumeration.
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Pendal’s Income and Fixed Interest funds
It measures salary across 18 industries on a like-for-like jobs basis through time.
It does not account for overtime, bonuses, shifts across industries or the extra 0.5% of super paid each year as we move from 9.5% to 12%.
During strong job markets the index underestimates the total renumeration employees are receiving.
When measuring total compensation of employees we rely on GDP data.
This points to total compensation growing closer to 6%, which partly explains the resilience of the economy.
Since even this data lags by three months, Pendal also tracks data from a number of business liaison surveys to create our own diffusion index.
This currently points to wages being a touch above 4%, in line with the RBA forecast for year end.
What it means for rates and bonds
Overall, the wages number continues to buy the RBA time, with steady cash rates for now.
The market now has a bit less than one hike priced in – and that’s towards year-end or early 2024, so there’s no clear opportunity around mispricing.
Short-ends should remain rangebound for now.
Longer bonds remain vulnerable to higher long-end rates globally.
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.