Take care with US valuations | Time to consider 10-year bonds | What to look for in AI stocks

Investors must collaborate on policy advocacy to protect biodiversity, because individual investor efforts are less likely to succeed, argues Regnan’s OSHADEE SIYAGUNA

• Conservation efforts failing to protect biodiversity
• Policy intervention required
• Download Regnan’s Beyond Biodiversity guide
• Find out about Regnan Global Equity Impact Solutions fund
• Find out about Regnan Credit Impact Trust

Investors should collaboratively prioritise policy advocacy to protect biodiversity, because individual investor efforts are less likely to succeed, says Regnan’s Oshadee Siyaguna.

Siyaguna’s new research paper Beyond Biodiversity sets out six guiding principles for investors to guide the stewardship of ecological and social — or “biocultural” — systems.

Most of the world’s GDP is dependent in some way on nature, but historical efforts at protecting biodiversity, nature and ecosystems have repeatedly failed to achieve their goals.

Siyaguna says a deep interconnectedness between natural systems and thousands of years of human intervention complicate stewardship efforts — meaning a holistic and inclusive policy approach is needed to drive results.

“Advocacy has to be top of the list for investors,” says Siyaguna, a thematic analyst at sustainable investing leader Regnan.

“Essentially, that means investors standing up and saying policy has not been adequate.

“It’s very clear that it needs to be policy led, because as soon as policy changes, everything else will start to fall in line.

“In the absence of holistic regulations, issuers are likely to consider biocultural issues as an externality, which makes it difficult for investors to engage with them.”

Siyaguna says most conservation efforts fail because of a lack of appreciation that natural systems are complex adaptive systems coupled with a flawed framing of “nature” as separate from people.

“We’ve got to stop thinking of ‘nature’ — pristine forests and animals and so on — as a separate system and start thinking of it as a system that constantly interacts with people, economic and political activity.

“People have been transforming landscapes for at least 12,000 years. Nature as we see it now is a product of that transformation. People and nature are inseparable.”

The implication is that traditional conservation actions like fencing off pieces of land is sub-optimal and in some instances counterproductive.

“It is fundamentally impossible to go back — the system has evolved,” says Siyaguna.

“People evolve, environments evolve, economies evolve. Everything constantly changes.

“You are trying to revert to a year in the past without asking yourself ‘why?’”

Siyaguna says preserving the integrity of biocultural systems should be high on investors’ agenda because the deterioration of these systems undermines the stability of our economic, social and political systems.

But he says a new approach needs to be built that takes a systems view that includes both nature and people.

“Distinctions that separate humans and nature are somewhat artificial.

“The planet does not care how it survives — but we care because we need to live on it.

“Our goal should be to keep nature operating within thresholds that are productive to us.”

Siyaguna’s research aims to look at biodiversity in a new way.

Instead of trying to save and protect each ecosystem on its own, the approach is to focus on ‘biocultural resilience’, to make nature, society, and culture stronger and more adaptable.

The case for bonds as rates push towards recession | How China’s weaker economy impacts bond and equity investors | Diversification benefits of impact investing

Here are the main factors driving the ASX this week according to portfolio manager JIM TAYLOR. Reported by portfolio specialist Chris Adams

• Find out about Pendal Focus Australian Share Fund

THE domestic market seems to be awakening to the realisation that Australia and the US are at appreciably different stages of this rate-raising cycle.

It will be interesting to observe the extent to which domestic equity sectors begin to de-sync from global momentum trends, reflecting the heavy lifting still required to tame inflation domestically.

Last week the S&P/ASX 300 shed 0.33%.

On a brighter note, the S&P 500’s +0.41% weekly gain meant it technically entered a bull market; up 20% from the 52-week low (Oct 22).

The NASDAQ gained 0.15% — it’s seventh consecutive weekly rise.

US small caps are rebounding and market leadership is broadening from the “mega-tech” names to autos, airlines, energy, machinery, building products and banks.

RBA hikes rates

The RBA increased the cash rate +25bp to 4.1% at June’s board meeting.

The outcome was a hawkish surprise relative to consensus expectations.

Two-thirds of 30 economists surveyed by Bloomberg were expecting a pause, while financial markets had only around +8bp priced ahead of the meeting.

The RBA noted they were looking “to provide greater confidence that inflation will return to target within a reasonable timeframe”.

They also referenced rising house prices and accelerating public sector and administered wages.

Some key observations of the RBA’s release:

• The RBA retains a bias towards further tightening, noting “some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will depend upon how the economy and inflation evolve”.
• Inflation: “While goods price inflation is slowing, services price inflation is still very high and is proving to be very persistent overseas.”
• Wages: “Growth in public sector wages is expected to pick up further and the annual increase in award wages was higher than it was last year”. The RBA reiterated that “unit labour costs were also rising briskly, with productivity growth remaining subdued”. The latter point was confirmed by subsequent data.
• Labour: “Conditions in the labour market have eased” but “remain very tight”. The unemployment rate, which has “increased slightly” to 3.7% in April, is “still very low”.
• Housing: “Housing prices are rising again”. While “some households have substantial savings buffers, others are experiencing a painful squeeze on their finances”.

Governor Lowe reiterated these points at a subsequent conference.

Now that house prices were rising again, they had shifted from a headwind to a tailwind for consumer spending, he emphasised.

He also noted that labour productivity remained poor, public sector wages were going up and services inflation remained sticky elsewhere in the world.

Lowe wanted to “make it clear … that the desire to preserve the gains in the labour market does not mean that the board will tolerate higher inflation persisting”.

The board couldn’t just “sit idle” given these risks and there was a limit to their patience on inflation.

The “unevenness” of the effect of higher rates across the community was “not a reason to avoid using the tool that we have”. 

The sum effect was that the three-month interest rate implied by bank bill futures had shifted from a peak of about 4.1% in September to a touch under 4.5% by December.

There have also been nearly three more hikes priced into the outlook in the past month.

Australian Q1 GDP and other data

The punchline is that the GDP data release painted a picture of an economy slowing materially.

GDP grew 0.2% sequentially in the first quarter — a touch softer than the +0.3% consensus forecast.

This was the third quarter in a row in which growth slowed. Annual growth now sits at 2.3%.

There were a couple of bright points. Business investment (3.4%) and public investment (4%) accelerated in the quarter, reflecting eased supply constraints to a degree.

On the negative side:

• Consumer spending increased only 0.2% for the quarter (3.5% annual). Spending on essentials rose 1.1% for the quarter, but discretionary spending fell 1.0%. This is an important trend to monitor.
• The savings rate fell to 3.7%, below its pre-Covid average.
• Disposable income fell 4% year-on-year in real terms, the biggest annual decline since 1983. While wage income has been strong, the effect of higher taxes (+15% yearly) and interest costs (+107% yearly) are providing a material drag.
• Labour costs are still accelerating. Total Compensation of Employees (COE) has risen 10.8% for the year – the strongest rate since 2007 – given the still tight labour market and rising wages. Productivity continued to decline. GDP per hour worked fell 0.2% quarterly and -4.5% over the past year. This meant that unit labour costs (wages adjusted for output) accelerated in Q1, up 2% for the quarter and 7.9% for the year.

On the housing market, data from CoreLogic showed 11.7% annual rent growth in Australian capital cities in May — a record high. The national vacancy rate is near a record low at 1.2%. New listings are a third below the long-term average.

This suggests little relief for Australian renters through to the end of the year.

US economy

Headline initial jobless claims rose to a cycle high of 261k, ahead of 235k consensus expectations.

The next few data points are likely to be a little messy given auto makers re-tool over summer. 

The May ISM services index from 51.9 to 50.3. There is a clear shift down following a period in which services remained resilient compared to manufacturing.

At a sub-sector level, declines in the employment and prices indicate slower growth in payrolls and wages. This is good news for the Fed.

Other snippets to note:

• The NY Federal reserve Global Supply Chain Pressure index has hit a record low point extending back to 1998.
• The prime age workforce participation rate moved up to 83.4% in May. This represents 65% of the total workforce. Participation among workers aged 55+ was unchanged at 38.4%.
• The RealPage rent measure came in at 2.3% year-on-year in May, down from 15.6% a year earlier. This is a lead indicator of the rent component of the PCE, which was still at 8.4% for April and is likely to see a substantial fall. This highlights an aspect of the difference between Australia and the US at the moment.
• The three-month moving average Service PMI for prices has fallen sharply this year. It leads the core PCE for services, which is likely to slow significantly for the rest of 2023 and into 2024.

Rest of the World

The Bank of Canada raised rates 25bps to 4.75%. This followed a pause, and was contrary to most expectations.

China’s exports declined 7.5% yearly in May, versus consensus expectations of -1.8%. Exports to the US (-18.2% yearly) and the European Union (-7%) and ASEAN (-15.9%) declined sharply.

The EU slid into technical recession with GDP for the three months to March 23 at -0.4%. The

ECB remains on track for its eighth consecutive rate rise.

Markets

Markets remained gripped by AI mania.

Last week was the biggest weekly inflow in listed technology companies in history at about $9 billion, according to market analysts EPFR. That’s about 40% more than the next biggest inflow in 2021.

The Bureau of Meteorology has announced that the El Niño-Southern Oscillation (ENSO) had shifted from “watch” to “alert.”

This means about a 70% chance of El Niño forming in 2023 — roughly three times the normal chance of an El Niño in any given year. After three years of high rainfall, the “weather ate my homework” excuse may be taken off the table for many companies. 

---

About Jim Taylor and Pendal Focus Australian Share Fund

Drawing on more than 25 years of experience investing in top-performing Australian companies and a background in accounting, Jim manages our Long/Short Fund and co-manages our Imputation Fund. He is a Chartered Accountant with membership of the Australian Institute of Chartered Accountants.

Pendal Focus Australian Share Fund is managed by Crispin Murray. The fund has beaten its benchmark in 14 years of its 18-year history (after fees), across a range of market conditions. Find out more about Pendal Focus Australian Share Fund here.

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

Contact a Pendal key account manager here

Pendal Sustainable Balanced Fund – Class G (APIR: PDL4756AU, ARSN: 637 429 237)
Pendal Sustainable Balanced Fund – Class R (APIR: BTA0122AU, ARSN: 637 429 237)
Pendal Sustainable Balanced Fund – Class Z (APIR: PDL0478AU, ARSN: 637 429 237)
Pendal Sustainable Conservative Fund (APIR: RFA0811AU, ARSN: 090 651 924)

(the ‘Funds’).

Effective 8 June 2023, some of the exclusionary screens for the Funds’ Australian fixed interest component will be changing. Broadly, the changes apply:

1. stricter screening definitions for fossil fuels by limiting the Funds’ exposure to issuers specifically involved in the exploration, extraction or refinement of coal, oil and gas; and
2. stricter gross revenue thresholds by reducing the gross revenue threshold from 10% to 5% for issuers involved in the following business activities:
   • Alcohol
   • Gaming Facilities
   • Non-controversial Weapons
   • Pornography
   • Uranium
   • Fossil Fuels.

Why are we making the changes?

The changes ensure that the Funds remain true to label and are more closely aligned with investor expectations in relation to responsible investment funds where the market is moving towards stricter exclusionary screens.

What will stay the same?

Importantly, the stricter exclusionary screens do not impact the way in which we manage the Funds. 

The Funds’ investment return objective remains unchanged.

Additionally, there is no change to the Funds’ management fee.

Funds’ exclusionary screens – Australian Fixed Interest

Effective 8 June 2023, the exclusionary screens for each Fund will be as follows:

The Fund’s Australian fixed interest investments will not invest in issuers directly involved in either of the following activities:

• tobacco production (including e-cigarettes and inhalers); or
• controversial weapons manufacture (including cluster munitions, landmines, biological or chemical weapons, nuclear weapons, depleted uranium weapons, blinding laser weapons, incendiary weapons, and/or non-detectable fragments).

The Fund’s Australian fixed interest investments will also not invest in issuers directly involved in any of the following activities, where such activities account for 5% or more of an issuer’s gross revenue:

• exploration, extraction or refinement of fossil fuels (specifically coal, oil and gas); or
• the production of alcohol; or
• manufacture or provision of gaming facilities; or
• manufacture of non-controversial weapons or armaments; or
• manufacture or distribution of pornography; or
• direct mining of uranium for the purpose of weapons manufacturing.

What do you need to do?

No action is required. You will be able to continue to invest and withdraw from the Funds.

Updated Product Disclosure Statement (PDS)

An updated PDS for each Fund issued on 8 June 2023 along with our contact details should you have any questions is now available on www.pendalgroup.com.

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

Pendal Sustainable Australian Fixed Interest Fund – Class W (APIR: PDL3438AU, ARSN: 612 664 730)

(the “Fund”)                                                                                                                   

Effective 8 June 2023, some of the Fund’s exclusionary screens will be changing. Broadly, the changes apply:

1. stricter screening definitions for fossil fuels by limiting the Fund’s exposure to issuers specifically involved in the exploration, extraction or refinement of coal, oil and gas; and
2. stricter gross revenue thresholds by reducing the gross revenue threshold from 10% to 5% for issuers involved in the following business activities:
   • Alcohol
   • Gaming Facilities
   • Non-controversial Weapons
   • Pornography
   • Uranium
   • Fossil Fuels.

Why are we making the changes?

The changes ensure that the Fund remains true to label and is more closely aligned with investor expectations in relation to responsible investment funds where the market is moving towards stricter exclusionary screens.

What will stay the same?

Importantly, the stricter exclusionary screens do not impact the way in which we manage the Fund.

The Fund’s investment return objective remains unchanged and the Fund will continue to aim to provide a return (before fees, costs and taxes) that exceeds the Bloomberg AusBond Composite 0+Yr Index by 0.75% p.a. over rolling 3 year periods.

Additionally, there is no change to the Fund’s management fee.

Fund exclusionary screens

Effective 8 June 2023, the Fund’s exclusionary screens will be as follows:

The Fund will not invest in issuers directly involved in either of the following activities:

• tobacco production (including e-cigarettes and inhalers); or
• controversial weapons manufacture (including cluster munitions, landmines, biological or chemical weapons, nuclear weapons, depleted uranium weapons, blinding laser weapons, incendiary weapons, and/or non-detectable fragments).

The Fund will also not invest in issuers directly involved in any of the following activities, where such activities account for 5% or more of an issuer’s gross revenue:

• exploration, extraction or refinement of fossil fuels (specifically coal, oil and gas); or
• the production of alcohol; or
• manufacture or provision of gaming facilities; or
• manufacture of non-controversial weapons or armaments; or
• manufacture or distribution of pornography; or
• direct mining of uranium for the purpose of weapons manufacturing.

What do you need to do?

No action is required. You will be able to continue to invest and withdraw from the Fund.

Updated Product Disclosure Statement (PDS)

An updated PDS issued on 8 June 2023 along with our contact details should you have any questions is now available on www.pendalgroup.com.

With interest rates rising and the risk of a recession rising, it’s time to look for a safe harbour, says Pendal’s ANNA HONG 

• Rate rise risks triggering a recession
• Fixed income provides safe option

RECESSION talk increased in Australia this week after the RBA’s decision to lift rates for the 12th time in just over a year.

It means investors need to think about safer assets, argues Anna Hong, assistant portfolio manager with Pendal’s Income and Fixed Interest team. 

“That’s government bonds, cash and high-grade investment credit,” Hong explains. “But it’s important that it’s Australian fixed income and cash.” 

That’s because Australia is one of just a handful of countries to record a budget surplus this financial year and — not withstanding the threat of recession — the economy remains in very good shape, Hong says. 

“From an economic perspective, even if things go wrong, the government is in a good position to support the Australian economy.

“As a result assets within Australian shores should be safer than almost any other part of the world,” Hong says. 

The risk of recession in Australia is very real, Hong says.

While the government can tighten fiscal policy by increasing taxes, that often isn’t politically palatable.

It means much of the heavy lifting in controlling aggregate demand falls to the Reserve Bank. 

“The Reserve Bank hasn’t yet been able to reduce inflation enough with the interest rates increases they have already done,” Hong says.

“There are a lot of factors out of their control and they can only affect aggregate demand using interest rates.

“They are in a position where they almost have to break something to contain inflation, which they don’t really want to do.” 

The “something” is the economy.  It means investors should consider safer assets, she says. 

“Anything related to government — federal or state — is backstopped by the federal government and an investor will likely get their money back. 

“The RBA regards our major banks as ‘unquestionably strong’ and are well placed to weather any storms. This makes major bank credit a relatively safe place for investors.” 

“If you go into high-risk assets, even high-growth stocks, you might invest $100 today and not have $100 in six months because company outlooks can change very quickly now the risk of recession is higher.” 

---

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 A$22 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.

Contact a Pendal key account manager

Here are the main factors driving the ASX this week according to our head of equities CRISPIN MURRAY. Reported by portfolio specialist Chris Adams

• Find out about Pendal Focus Australian Share fund

US EQUITIES continue to grind higher following resolution of the debt ceiling issue and signals of economic resilience.

The market is buoyed by the possibility of resolving inflation without the Fed pushing the economy in to recession.

The S&P 500 gained 1.9% last week.

Fed governor Philip Jefferson (tipped to be the next Fed vice-chair), indicated that the rate-setting Federal Open Market Committee would hold rates steady in June despite higher CPI and a strong labour market.

Though he was quick to note this should not be seen as a signal that rates have peaked.

Australian equity market returns were more muted, with the S&P/ASX 300 essentially flat at -0.07% last week.

Here, the market was focused on wage increases from the Fair Work Commission, which at the margin pushed the odds of a rate rise tomorrow a bit higher.

There were also rumours of potential economic stimulus from Beijing late in the week.

Global bonds rallied early in the week helped by softer European inflation, Fed signals and a previously oversold position. Though stronger employment data saw the week’s rally reverse by half.

Equity investors remain cautiously positioned in aggregate. Many have been caught out by the recent upswing and the shift to catch up is helping underpin the rally.

The S&P 500 has broken through the 4200 resistance level, which represents the high of February and a 50% retracement of the 2022 bear market.

It is now testing 4300, which was the high of last August.

Market bulls argue that successfully breaching resistance at 4300 will see the market rise to 4600.

Bears counter that a weaking economy will ultimately see the market fail to breach 4300 and sell off. 

While recent conditions have been positive, we are mindful that the range of potential outcomes for the economy and markets remains very wide by historical standards. 

This reflects the combination of:

1. The scale of rate hikes
2. Economic distortions created by the pandemic
3. A range of structural themes such as energy transition, artificial intelligence and rising geopolitical fissures

These factors all remain in play and demand careful management of portfolio risk.

The interplay of these issues is manifesting in a series of contradictions:         

1. Continued resilient economic growth despite a rise in rates and inverted yield curves
2. Strong equity market performance despite broad-based expectations of a recession
3. Divergent equity performance between big tech and the balance of the market
4. Continued strength in services while manufacturing remains weak
5. Rising house prices despite a continued increase in mortgage rates
6. Stubborn inflation despite falling commodity prices
7. Subdued recovery in China post re-opening

The implication of these contradictions is that circumstances and conditions can change quickly.

This emphasises a need to manage thematic and macro risk carefully in our portfolio construction.

US debt ceiling

The debt ceiling has been resolved in a far more bipartisan and benign way than most in the market expected.

The deal’s impact is relatively limited in the near term, with US$30 billion of additional spending cuts in FY24 equivalent to only 0.1% of GDP.

This is only half the effect of resumed student loan payments, with the payment “pause” expected to lapse and drive a more material fiscal headwind. 

The deal also achieved minimal reform on environmental permitting.

This deal slaps some patches on key issues for two years. Both sides are betting they will be better placed to get their preferred outcomes then.

The more interesting point is that the market was positioned bearishly, expecting a far more damaging and protracted negotiation.

A rotation to less defensive exposure can help underpin the equity market at these levels.

The liquidity impact is also important to remember. Treasury needs to fund about US$500 billion in spending in the next couple of months, which may check any rally in bonds as new supply comes to the market.

US jobs and economic data

US non-farm payrolls for May rose 339k, well ahead of 195k expected. There were also net revisions of +93k to previous months.

Payroll growth is running at +2.8% year-on-year.

This is still too strong for the Fed’s comfort in regard to inflation.

It also indicates there is no imminent sign of recession despite the banking crisis, which to date has had no discernible impact on the economy.

That said, the picture is complex and there were a number of mitigating data points to offset too bearish a read on the data:

1. The Household Survey, another measure of jobs growth, saw a drop of 310k jobs. This gap has been widening for some time, but this is one of the biggest divergences in recent times. The reason is causing debate. But a shift from self-employment to working as a paid employee seems to be playing a role. The key point is that both sides of the argument around jobs growth can draw something from this month’s data. 
2. The unemployment rate rose from 3.4% to 3.7%, due to the drop in the Household Survey. This is the highest rate since October.
3. There is a rise on permanent unemployed, as opposes to temporary layoffs. This is seen historically as a lead indicator of recession. 
4. Average weekly hours worked fell to 34.3 and has now fallen in three of last four months. This suggests employers are cutting back hours rather than laying off workers.
5. Average hourly earnings growth slowed to 0.3% month-on-month and 4.3% year-on-year which compares to 6.4% annualised at the start of the year

Employment, hours worked and average hourly earnings combined provide a proxy for income — which has slowed to +0.2% monthly for May, but is still high at 6.2% year-on-year.

The US Job Openings and Labor Turnover Survey (JOLTS) came in stronger than expected in April. Job openings increased 358k to 10.1m, pushing the ratio of openings to unemployed back up to 1.8.

This has been regarded as a lead indicator of any loosening in the labour market which could alleviate wage pressures — but it continues to hold up more than expected.

One more helpful signal was a decline in the “Quits” rate (a proxy for employee confidence in finding a job) which could signal a decline in the employment cost index.

US monthly job layoff data has also plateaued after rising in late 2022 and early 2023. 

The May ISM manufacturing index (a survey of purchasing managers at US manufacturing firms), dipped to 46.9 from 47.1.

The decline was due to fewer new orders, which fell 3.1 points to 42.6 as inventories fell for the fifth straight month (by 0.5 points to 45.8).

This is now in-line with the Covid low and highlights that manufacturing remains soft.

It also gave a clear indication that inflationary pressures in goods are easing and should help reduce overall inflation further.

Our current conclusion from all this is that the US economy is holding up better than most thought. It seems clear that most companies remain reluctant to lay-off works at scale.

This underpins income growth, which helps to hold up the economy.

There is also evidence that inflationary pressures are falling, which means the potential for wage growth to normalise without a dramatic increase in unemployment remains a viable option. This is constructive for markets.

The bear case is contingent on an accelerated economic downturn affecting earnings. There remains little evidence yet that this is set to happen.

Expectations around rates are shifting as a result, with less easing now priced in for the end of the year.

Rest of the world

Eurozone HICP Inflation data came in weaker than expected, prompting a more moderate outlook for rate hikes and providing support for bonds.

Friday saw some chatter about a policy reboot and more economic stimulus from Beijing.

This remains speculation for the moment, but did help sentiment in the resource sector, which had been very weak.

Australia

We saw the long-awaited Fair Work Commission wage recommendations last week.

The outcome is a 5.75% increase in award wages, which benefits 20.5% of workers. There is also an 8.65% increase for the national minimum wage, which affects 0.7% of all workers.

There is an additional 4% of workers on enterprise bargaining agreements and individual agreements tied to this.

So the net effect of all this is about a quarter of the workforce getting an average wage increase of 5.8%, versus 4.6% last year.

This was broadly in line with expectations, though there is a view the Reserve Bank may have baked a little less into its figures, which therefore raises the odds of a rate rise on Tuesday.

This will also flow through into the September quarter wage price index, which is likely to accelerate to a rate over 4% annualised.

At a corporate level, the greatest impact will be felt by supermarkets and retail. Even though the outcome was close to expectations, these sectors underperformed for the week.

One specific issue that may lead to sustained high inflation is the rise in unit labour costs (ULCs), which historically have had a strong link to services inflation.

The RBA is focused here, concerned that productivity remains low and therefore the impact of wage increases may prove more inflationary.

ULC data will be updated for the March quarter with next week’s GDP data.

To date they have been high, reflecting the ability of Australian workers to grow overall wage income well above the level implied by the wage price index, once bonuses, role changes and the extra income from additional jobs is factored in.

All these factors allow households to supplement income and explains the resilience in the economy.

The growing number of hours worked is reducing GDP per hour worked, implying reduced productivity.

 

---

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

Emerging markets can offer diversification and stronger growth, but it’s important to take a country-by-country approach, argues Pendal’s JAMES SYME

• Find out about Pendal Global Emerging Markets Opportunities fund
• Watch a short Emerging Markets overview webinar with James Syme

AS AN asset class, the emerging markets are 24 countries across Latin America, eastern and southern Europe, Africa and Asia that — often contrary to popular belief — are largely well-run democracies with successful economies and large, growing middle classes.

EMs often deliver higher returns than developed markets, though performance sometimes comes at the cost of higher volatility.

“One of the attractors for Australian investors is that emerging markets offer some diversification,” says Syme, who co-manages Pendal Global Emerging Markets Opportunities fund.

“The risks they have are different to the risks in developed markets and there are periods when they can outperform developed markets.

“So for Australian investors who are making an international allocation, having some emerging markets can help diversify some of that risk.

“These are also markets that have generally stronger trend growth rates, so the fundamental growth opportunity you’re buying is often stronger in the emerging world than in the developed world.”

Syme was speaking at a Pendal on-demand webinar, Get ready for emerging markets to re-emerge.

He says there is a common misconception that emerging markets countries are dysfunctional, war torn or burdened with significant health or security issues.

“But they’re generally not that different from us — they just haven’t progressed as far down the path of economic development.

“It’s important to understand that while they’re never the perfect investment opportunity, they are usually not excessively risky or chaotic.”

Origins of Emerging Markets investing

Emerging markets stocks were once difficult to access and generally ignored by foreign investors.

In the 1980s, a World Bank push to promote the asset class encouraged investment and helped finance development.

Since then, the asset class has undergone significant changes.

“The history of emerging markets as an asset class is one of booms, slowdowns and recoveries. It’s important to be positioned in individual countries that offer the better opportunities,” says Syme.

“For example, the size of China has changed beyond recognition. It was about the size of Poland when it originally came in, and now it’s by far the largest market in the asset class.

“There’s also been markets like Argentina that seem to promise a lot but struggle in the longer term.

“And Greece has been an interesting story — promoted to be a developed market, but subsequently had the crisis in 2011 and came back to us.”

Pendal’s emerging markets team employs a country-by-country approach, emphasizing a comprehensive understanding of the economic and political conditions of each individual market.

This approach allows the team to navigate the mixed fortunes of emerging markets.

“It’s a very technical, consistent approach based on getting a clear-eyed view of what’s happening in the economy, principally through the data releases that come out,” says Syme.

“You buy emerging markets for growth, and you buy equities for growth, and so what’s happening the growth environment is a core consideration.

“Right now, we see a number of key emerging markets that have over the last five or seven years had slowdowns in their economies, but we’re now seeing very clear signs of strong acceleration.”

Syme names India, Mexico and Indonesia as the stand-out performers, but cautions that past winners like South Korea and Taiwan are facing a slowdown in their key export markets.

And China? “We have a neutral position. There clearly is going to be a rebound in the Chinese economy because of post COVID opening and because the most unfriendly policies that the administration was pursuing have eased off.

“But without a real estate recovery, it’s hard to see how China can get the economy back to where it was in 2015-16.”

---

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

Despite higher-than-expected monthly data, the outlook for inflation should be mildly friendly over the next few months, says Pendal’s TIM HEXT

• Why bonds, why now? Pendal’s income and fixed interest experts explain
• Browse Pendal’s fixed interest funds

IF forecasting inflation was already complicated, the move to monthly numbers last year added further complexity.

The latest monthly Consumer Price Index from the Bureau of Statistics — which compares prices in April 2023 and April 2022 — shows an annual rise of 6.8%, versus an expected 6.4%.

On the surface this should worry the Reserve Bank and markets — and increase the chance of another rate hike in June.

But under the hood, the May number looks like it will be closer to 5.5%, which means the RBA should be able to hang on till August and reassess then.

How can we tell? This is where it gets a little complicated.

The monthly inflation numbers are published as year-on-year outcomes, and you must back-solve to gain a sense of the monthly pace.

In this case, monthly was up 0.7% versus an expected 0.4%.

There is no underlying inflation data yet.

Also, for now only half of items are updated every month. (Another 10% are updated annually (council rates, health, education) and the remaining 40% are updated quarterly, spread across the three months).

This will change in the future. The Bureau has been given extra resources and funding to introduce an accurate monthly series, similar to other countries.

Impact of subsidies

The other detail inflation forecasters need to stay on top of is the impact of subsidies, which exploded in scope and breadth with Covid and energy shocks.

CPI measures the price a consumer pays, so a subsidy will reduce that.

But a rebate does not reduce the headline price, and is not counted.

These subsidies appear and disappear regularly now and must be kept track of.

The Morrison government’s HomeBuilder scheme was the big one in 2021 and 2022, but now it’s all about utility prices.

The subsidy detail for this April number — which the ABS reminded us of — is that in April 2022 the Morrison government cut fuel excise in half as prices surged post the Ukraine invasion.

This relief was removed in October. This means that — despite falls in the price of crude oil — the price we are paying at the pump is higher than this time last year.

Beyond fuel, there were modest upside surprises across clothing, furnishings, food and holiday travel.

These would be uncomfortable for the RBA, though not likely enough to warrant another rise in June.

However, with the market pricing in only a 35 per cent chance of a hike, these are not odds we will take on.

What it means for investors

The implication for bonds is muted.

As mentioned, the outlook for inflation here and in the US should be mildly friendly over the next few months.

Beyond that time will tell. Risk markets should come under some moderate pressure, though, as it’s a reminder of the long and hard road ahead.

---

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.

Contact a Pendal key account manager