The door may open for the RBA to pass three cuts next year, but that may be “as good as it gets”, writes head of government bond strategies TIM HEXT

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

THE ABS released new inflation data today and – in the spirit of more information – it seems there are now more numbers to watch than before.

The most watched are the quarterly numbers – that is, the September quarter versus the June quarter.

These showed headline inflation at 0.2%, courtesy of electricity subsidies and lower fuel prices. Against the September quarter last year, prices are 2.8% higher.

Also released were the September monthly numbers.

This compares prices for September 2024 versus September 2023. Here, the news was even better, with headline prices only 2.1% higher over the year.

However, the ABS tries to strip out the noise of volatile prices by reporting trimmed mean inflation, Australia’s version of underlying inflation. The highest and lowest 15% of moves (weighted for size in the CPI basket) are excluded.

Here, the news is mixed.

Trimmed mean inflation for the quarter was 0.8% and 3.5% versus the September quarter last year.

This is heading lower, but the RBA would need to see consistent prints 0.7% or lower to feel comfortable about inflation being sustainably in its target band.

Source: CPI rose 0.2% in the September 2024 quarter | Australian Bureau of Statistics

The path ahead

So, where exactly is inflation and what path is it on? And what is the RBA reaction function?

The RBA will keep talking about services inflation being uncomfortably high. The pace of last quarter showed no improvement, stuck at 4.5%.

Services make up around two-thirds of the CPI basket, so clearly that needs to be nearer 4%. If we dig into services, the problem areas (those above 5%) remain housing, health, education and insurance.

As wage growth moderates with inflation, there is some cautious optimism that education inflation should drift back to 4%. For example, NSW teachers just signed a three-year wages agreement of 3% per year plus 1% more super.

Housing is more mixed. State government spending on infrastructure continues to create labour shortages in construction, impacting both rents and the cost of new dwellings. In this area, 5% inflation may be here to stay for a while.

Insurance premium rises should moderate but may also struggle to fall through 5%.

Health prices remain impacted by massive labour shortages and readjustment of wage levels in the care sector. Again, this is driven by government policy.

Putting it all together

When we put this together, the path for inflation looks like hitting 3% (underlying) early next year but remaining stuck around that point.

This means that the RBA will have a door open to cut rates, though it will be driven by employment markets and the size of cuts globally.

We remain optimistic that this will allow for three rate cuts next year.

However, without some external shock hitting the economy, that may be as good as it gets.

Market pricing has not budged with this number. A February rate cut is priced at a 50% chance, with a full cut not priced till May 2025.

This places the odds slightly in favour of a long-duration position, though US election fears are keeping volatility high and risk size modest.

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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.

The team won Lonsec’s Active Fixed Income Fund of the Year award in 2021 and Zenith’s Australian Fixed Interest award in 2020.

Find out more about Pendal’s fixed interest strategies here

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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

Investment conditions continue to look promising in Brazil and China. Here Pendal’s Global Emerging Markets Opportunities team explains why

• Despite local currency weakness, inflation levels are nearing targets in Brazil
• Shifts in Chinese policies result in attractive equity valuations 
• Find out more about Pendal Global Emerging Markets Opportunities Fund

SEPTEMBER and October are often monumental months in global markets and economics: for example the Asian economic crisis of late 1997 and the GFC in 2008.

This year’s start to Spring may not be quite as pivotal, but we’ve nevertheless seen unexpected and drastic changes in Brazil and China.

Brazil

Brazil’s composite Purchasing Managers Index — a measure of manufacturing industry health — was 56 in July and 52.9 in August.

A PMI above 50 indicates expansion, while below 50 indicates contraction.

Yearly retail sales were broadly up 7.2% in July.

We’ve also seen strong returns from Brazilian equities in local currency terms. The local Bovespa stock index hit a record high at the end of August.

James Syme, Paul Wimborne and Ada Chan are co-managers of Pendal Global Emerging Market Opportunities Fund

This economic strength has not come with much inflationary pressure.

Inflation was 4.2% in the year to August (according to the local IPCA consumer price index). This
compared with 4.6% at the end of 2023 and 3.7% in the year to April 2024.

The Brazilian Central Bank (BCB), has responded by moving into a more hawkish monetary stance, lifting the benchmark interest rate by 25 basis points to 10.75% in September.

This move reflects waning confidence that inflation will decline to its 3% target.

Meanwhile, the US interest rate outlook has shifted in recent months, with a sharp decline in expected future interest rates and a 0.5% cut in the US policy interest rate in September.

This has eased pressure on emerging market economies and their currencies.

Together, these developments have further enhanced our enthusiasm for Brazilian equities.

Brazil is performing better than expected, but the weakness in the currency has offset this zeal for international investors.

We believe the central bank raising rates will not significantly worsen the outlook for local equities. Instead it should substantially improve the outlook for the currency (as does the US cutting interest rates).

We continue to believe Brazil equities can deliver strong USD returns.

But we now expect a larger share of that to come from the currency relative to the local equity market.

China

China’s Politburo convened in September outside its typical April-July-December timetable.

A resulting policy statement delivered a dramatic surprise for markets.

The Politburo underlined a critical shift in priorities, including “stopping the decline in housing” and “increasing lending to white-listed projects”.

There was also a Quantitative Easing-like target to “ensure necessary fiscal expenditures” through ultra-long special sovereign bonds and local government special bonds.

The People’s Bank of China had previously announced a number of monetary policies including cuts in official interest rate cuts, bank cash reserve requirements and the outstanding mortgage rate.

The bank also announced RMB 800 billion of support for the stock market.

Crucially, alongside these measures, the Politburo provided subtle updates to its monetary policy language, replacing the word “prudent” with “forceful”, indicating the direction of cuts in policy interest rates.

The market reaction was visceral.

Hong Kong-listed Chinese stocks rose 26% in six trading days on the Hang Seng China Enterprises Index. The Shanghai Composite Index rose 21.9% in the same period.

Consumer and property names (including the bulk of Chinese holdings in our portfolio) led the rise, including eight names that rose more than 40% between September 23 and October 2.

During a grinding slowdown in the Chinese economy since 2020, there have been previous policy-driven market spikes (including October 2022 and January 2024).

The magnitude of these recent occurrences aligns with previous episodes, but are moving at a faster clip.

What matters now is whether the new policies reverse current economic trends.

Our process involves paying close attention to emerging economic data, precisely because of turning points such as this.

Even amid these movements, we consider China’s low inflation, large trade and current account surpluses, earnings growth in parts of the equity market, and attractive equity valuations as reasons to maintain holdings in Chinese equities.

We have been overweight China since April 2024, have been rewarded for that stance in recent weeks, and continue to be on the look-out for opportunities in China.

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

James, Paul and Ada are senior fund managers at UK-based J O Hambro, which is part of Perpetual Group.
 
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

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

• Find out about Pendal Focus Australian Share fund
• Tune in: register to watch Crispin’s Beyond the Numbers webinar

THE market has been focused on the sell-off in bonds, which is tied to better US economic data as well as the possibility of a Trump win and a “Red Sweep” of Congress in the US election.

US 10-year Treasury yields rose 16 basis points (bps) and are up 45bps month-to-date.

This flowed through to equities, with the S&P 500 selling off 0.96%. Australia followed its lead, with the S&P/ASX 300 down 0.86%.

China also appears to be “on hold” pending the US election outcome.

The October politburo meeting will be held this week, but the National People’s Congress standing committee’s next meeting, from 4-8 November, is likely to provide the next indication on stimulus plans.

A string of updates from Australian companies noted slowing activity in the US (Brambles, Reece), Europe (Reliance Worldwide) and Australia (Super Retail, Metcash).

Offsetting this, we did see upgrades from Qantas and a good ResMed result.

This reinforces our view that we are at a stage in the cycle where stock-specific factors are more important. 

US economy and policy

There was little to change the prevailing view that economic growth remains solid.

Current anecdotes are distorted by the effect of recent hurricanes. Also, the upcoming election may be prompting some deferral of hiring and investment decisions. 

Weekly jobless claims continue to fall back to their prior levels, with no sign that the recent hurricane-related spike is the start of a sustained deterioration. 

The US Federal Reserve (the Fed) came under some criticism from former member Kevin Warsh, who suggested there was no data which would have justified a 50bp first cut.

Some debate has begun as to whether the Fed will pause and hold rates steady in one of the two meetings before year end.

The market is pricing in a 75% probability of a cumulative 50bp move.

We don’t see a reason for the Fed to pause in November and the market seems to agree – currently pricing only a 5% probability of no rate cut.

US election

With only nine days to go, Trump remains in better position today based on the polls, though his upward momentum has stalled in the past week.

The RCP Betting Average has him slightly ahead – but well within the margin of error – in the seven key battleground states.

Overall, he is currently a 60% chance of winning, but there is some debate as to whether betting odds can be relied on – noting that in 2016, Trump’s odds of winning were 16% on the day of the election.

Key “Trump trades” – such as a stronger USD, financials and rising bond yields – are outperforming, so the case can be made that a lot of a potential Trump win has been priced in.

Geopolitics

After waiting 25 days, the Israelis retaliated against Iran.

They appear to have targeted military sites, weapons and drone manufacturing facilities, as well as air defence.

The initial interpretation is that this was constrained enough so Iran will not be compelled to respond in an escalating way.

It may be perceived as a sign that tensions will ease for now – and may see oil prices fall.

Markets

Rising bond yields are beginning to hit technical resistance levels, and are likely to pause ahead of Friday’s payroll data and then the US election result.

The negative view on bonds is tied to the fear of inflationary effects from potential Trump policies such as tariffs and lower immigration, which may lead to a tighter labour market.

As mentioned above, much of this concern seems priced in for now.

There weren’t many relevant signals from US quarterly earnings last week. Of the Mag 7, only Tesla reported, with better-than-expected margins driving that stock higher.

Thirty per cent of the S&P 500 has reported to date. The proportion of earnings beats is in line with the historical average of 50%, while 15% have missed expectations.

Another 45% of the market reports this week, including a further five of the Mag 7.

Australia saw a rotation to defensives, such as consumer staples and telecom. Consumer discretionary underperformed on negative stock-specific news, tech was down due to the fall in Wisetech Global, and higher bond yields weighed on REITs. 

A series of trading updates suggested a slightly softer environment for a number of companies. This was often sector and region-specific, though it is clear that anyone with Europe exposure is seeing more generalised softness.

The Metcash downgrade highlighted the effects of weakening home construction, which goes to the structural challenges for building in Australia.

An upgrade from Qantas and a good result from ResMed did provide some balance.

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About Crispin Murray and the 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

PENDAL has been recognised – and awarded – at the 2024 Zenith Fund Awards

HELD annually, the Zenith Fund Awards aims to recognise the best in funds management across 24 categories and help raise the standard of funds management for the benefit of investors.

Pendal was recognised in the Multi Asset – Diversified and the Sustainable and Responsible Investments (Income) categories – the latter of which it won.

“As has been our focus in previous years, [the] awards recognise and honour excellence in funds management across all asset classes and disciplines,” said Zenith managing director Jason Huddy.

“We believe that this is fundamental to continuing to raise the standards of funds management in our industry for the ultimate benefit of investors.”

To view the full list of 2024 winners, visit the events page

Here are the main factors driving the ASX this week, according to Pendal portfolio manager PETE DAVIDSON. Reported by investment specialist Chris Adams

• Find out about Pendal Focus Australian Share fund
• Crispin Murray: Five key questions for 2024 (and how we’re going so far)

WITH global monetary policy (ex-Australia) easing and more fiscal stimulus from China, it appears as if the economic and market cycle will hold or possibly even re-accelerate.

Equity markets are optimistic as we approach year-end, rebounding from the August correction which was driven by some weaker US data points and the Yen carry-trade unwind.

This increased level of confidence saw the S&P 500 rise 0.87% and the S&P/ASX 300 rise 0.81% last week. The latter is up more than 8% since the start of July on a total return basis.

This optimism has been partly fuelled by positive economic surprises, especially since early September. Most prominent are the latest employment reports in the US and Australia, which suggest labour market concerns were overdone.

Betting odds are pointing to a Trump victory and the market seems more comfortable with this outcome.

This looks set to be the closest election in US history.

Harris is picking up the college-educated and female vote, while Trump is gaining amongst non-college educated males and minorities. Gold may spike if there is post-election uncertainty.

High valuations and already bullish sentiment pose risks to the market. However, there is no clear catalyst for a downside move and the global rate cycle (ex-Australia) is helping.

US macro and policy

On the whole, stronger US data is pointing to a soft or even no-landing scenario. 

Retail sales data suggests the US consumer is still looking good, the Fed is now cutting, and the fact that monetary policy is becoming less restrictive is helpful.

Interestingly, the savings rate has been revised up to 4.8%, which supports a stronger consumer.

That said, bank credit is tight and most data doesn’t reflect what is happening in the small business economy, where there are anecdotes of pressure.

The housing market is also soft.

The US labour market is interesting. Businesses have been pulling back from hiring activity over the past year to cut costs, despite GPD growth. This has also been reflected in falling aggregate hours worked.

With fewer people quitting their jobs, it is plausible that a slowdown in the labour market will be seen in the form of layoffs this cycle, which does feed into the risk of recession.  

China macro and policy

China appears to be shifting gear with a set of new policies from late September to support its economy and property market.

The measures include bank reserve requirement ratio cuts, capital injections to banks, as well as moves to support local government debt restructuring and boost the capital market.

There have been additional policies focused on supporting and stabilising the property market, including funding to reduce the inventory of unfinished and unsold housing stocks.

These measures appear targeted at easing specific pressure points, such as local government balance sheets and unsold housing.

Thus far, there has been no large consumer-related fiscal package. But at least there is some movement at the station.

Markets are anticipating additional stimulus packages for housing and the economy. This can’t hurt the Aussie resources sector.

However, there is the risk that a US tariff package could take as much as 2% off growth.

Beijing is watching the US Presidential Election closely and, if tariffs look likely, may implement more fiscal and monetary in response.

Europe macro and policy

The labour market in Europe (EU) remains tight, despite very low GDP growth.

Consumer spending is tilting towards the labour-intensive services sector.

The German economy remains weak – as does its manufacturing sector, even relative to the rest of the EU. Yet, its unemployment rate is only 0.5% above the cycle low and labour costs continue to rise at a pace inconsistent with sustained 2% inflation.

One factor is the bloc’s severe energy pricing disadvantage, with the European Commission estimating that industrial power prices in the EU are 158% higher than in the US, while industrial gas prices are 345% higher.

Australia macro and policy

Australia’s GDP growth remains positive but muted, not helped by the fact that it is one of the few places in the world where financial conditions (as measured by the Goldman Sachs Financial Condition Index) have increased over the past twelve months – and markedly so.

The labour market remains in decent shape, though growth in government jobs in areas like education and healthcare are a key factor.

The yield curve shows that confidence around rate cuts is waxing and waning – with expectations of cuts ticking down in the past week.

Further rate cuts overseas might assist. Some indicators are pointing to higher unemployment, which might also make the outlook for rate cuts more likely.

Housing finance approvals are rising in Australia, even though the RBA has not yet started to ease policy.

However, the strongest growth is in approvals for either owner-occupiers or investors to buy established dwellings. Finance approvals for the construction of new dwellings remain weak.

Markets

The outlook for FY25 ASX earnings remains muted, due largely to the resources and banking sectors. Industrials are expected to be provide some positive offset.

Meanwhile, investor sentiment is strong – with a benign outlook for inflation and growing confidence in a soft-landing. 

So the market seems quite happy to overlook near-term earnings and is prepared to pay high valuations for banks, if not for resources. 

We are into AGM season; most companies are simply affirming previous guidance.

Some notable improvers on AGM Day were AMP (better flows), Evolution Mining (a beat in production, Red Lake going better) and Bank of Queensland (low impairments).

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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

Here’s what the latest jobs data means for markets, according to Pendal’s head of government bond strategies TIM HEXT

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

THE Australian job market continued showing strong resilience in September.

Jobs increased by 64,000, of which 51,000 were full time.

Labour supply also showed strong growth.

A record participation rate of 67.2% and strong population growth drove growth in labour supply, only slightly below jobs growth. As a result, unemployment was steady at 4.1% (though it fell from 4.14% to 4.07% before rounding).

This continues an impressive run for jobs, despite an economy growing at only 1%.

Job growth this year has been averaging almost 40,000 a month – above longer-term averages nearer 25,000.

As population growth moderates, the RBA will be hoping job growth moderates with it to stop labour markets getting tighter rather than looser.

Next week, we get the quarterly break down of jobs by sector.

If the trend of the past few years is to continue, the majority of growth will be in the Construction sector and the Health and Social Assistance sector. This is all driven by state and Federal Government spending, which is independent of interest rates.

Until the governments get their infrastructure and NDIS spending under control, something that will not happen near term, unemployment will stay reasonably low.

Attention will then turn to where full employment is.

As we covered off in our Australian Quarterly, the RBA believes it is nearer 4.5% unemployment. We think this too high. The US Federal Reserve revealed recently that it believes it is nearer 4% for the US economy.

Globally, we see the trend for lower inflation but strong employment being repeated across most developed markets.

The theme underlying this is relief on inflation as supply chains fully normalise, as well as strength in employment driven by big-spending governments.

Bond markets have moderated rate cut expectations this month.

What’s next?

After today’s employment numbers, a February rate cut of 0.25% has gone from 100% chance to only 75%. Anything lower than 50% gets our attention as a good risk-reward trade given our view of a likely cut.

Markets will range trade for now, but the next important data in Australia is Q3 CPI, which is due on 30 October.

This should be market-friendly (our forecast is headline 0.1% and underlying 0.7%) and see the RBA revise down its future inflation expectations in its early November Monetary Policy Statement.

This will leave the door wide open for a rate cut in February.

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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.

The team won Lonsec’s Active Fixed Income Fund of the Year award in 2021 and Zenith’s Australian Fixed Interest award in 2020.

Find out more about Pendal’s fixed interest strategies here

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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

Investors looking to fund nature repair often lack high-quality opportunities. But a proposal to restore national parks in Victoria could be just the thing, say MURRAY ACKMAN and DAVID LINDENMAYER

• $224m green bond to fund forest regeneration and regional investment
• ANU monitoring and oversight
• Why bonds, why now? Pendal’s income and fixed interest experts explain
• Browse Pendal’s fixed interest funds

A PROPOSED green bond offers the opportunity to unlock hundreds of millions in private capital to support the expansion of national parks in Victoria’s central highlands, including a “Great Forest National Park“.

The park is under consideration by the Victorian government as a possible use for public land in Gippsland and North-East Victoria previously allocated to timber harvesting.

No decision has yet been made. But advocates say the national park would attract an extra 379,000 visitors annually, add more than $42.5 million to the local economy every year.

It could also support 750 direct and indirect jobs in environmentally sensitive industries such as invasive species management and ecotourism.

Carbon stock gains from improved protection and avoiding logging is estimated at 55.4 million tonnes. The proposed regeneration of 18,000 hectares of regenerated mountain ash forest would sequester 202,500 tonnes of CO2 by 2035.

Some 214 billion litres of water would be added to the catchment each year, enhancing water yields and supply for more than five million people in Melbourne.

Jacinta Allan’s state government has this year overseen the end of logging in Victoria’s state forests and the closure of state-owned forestry business VicForests.

But decades of logging have left behind some 15,000 hectares of unregenerated forest that now requires extensive restoration, says world-leading forestry expert Professor David Lindenmayer.

Lindenmayer proposes an Australian-first $224 million green bond that would fund the forest’s restoration using private capital.

“The giant mountain ash forest outside of Melbourne produces almost all the water for the city,” says Lindenmayer, who has spent more than 40 years studying Australia’s forests.

“It is the most carbon-dense forest in the world.

“In any other city on the planet, there would be an amazing national park right next door to the city. But as a consequence of 60-70 years of intensive logging operations, the forest in many places is degraded.

“It’s still beautiful – but it’s now an endangered ecosystem. There’s a lot of work to be done to put the forest back together again and a lot of thinking to be done about true nature repair.

“How do you bring investment into a place like this?

“How do you rejuvenate the forest, create ecotourism opportunities, assist First Nations people to work on country, and bring Victorians to a place that many don’t even know exists?”

How a green bond could help

The term ‘green bond’ is used to describe a bond issued to raise finance for projects that have a positive impact on the environment, says Murray Ackman, a senior ESG and impact analyst at responsible investing leader Regnan and asset manager Pendal.

The Victorian government has an established track record of issuing green bonds, with the first issued in July 2016, while the federal Albanese government issued its first green bond in June this year.

“From an investor perspective, everyone’s talking about nature repair and biodiversity but there are generally no investable opportunities,” says Ackman.

“So, for us, the exciting thing about this Victorian green bond is that world experts and leaders in academia have come together to propose a viable, exciting, and reliable way to invest in nature repair.”

As longstanding investors in these types of bonds, Pendal’s Income and Fixed Interest team hopes to increase supply in high-quality bonds which have the potential to bring about significant impact.

Investing in nature

Green bonds issued by state governments could attract significant investment for restoration of biodiversity at scale, says Ackman.

Some three billion hectares of agricultural land is degraded globally, impacting close to half the world’s population – with more than US$14 trillion of investment required for restoration.

“For investors, having external monitoring for nature repair is exciting. Nature repair is slow and there is expenditure you need to do each year for the life of the bond.”

Strong demand for green bonds could create an opportunity for investors, says Ackman

“These types of bonds tend to price close to the ordinary curve, though there is often increased demand, so slightly beneficial pricing for the issuer.

“We have also noticed quality green, social and sustainability bonds have heightened demand in the secondary market and tend to outperform.“

Expert monitoring

Ackman says a key feature of the proposed Victorian green bond is the external, expert monitoring provided by Lindenmayer’s team at ANU.

“It is not unusual for a government to issue a use-of-proceeds bond – but the appeal of this one for investors is the government signing up for measured nature repair and reporting every 12 months,” he says.

Lindenmayer says the Victorian opportunity is unique because it is founded on four decades of research collected by his team that provides a robust baseline for monitoring forest regeneration.

“Our background data goes back 42 years in these forests – we’ve monitored the forest, the plants, the animals, the carbon, all those kinds of things. So, there’s an unparalleled baseline against which to compare.

“Investors can have confidence that this is properly monitored and reported – whether it is 2000 new nest boxes or replanting 500 hectares of forest every year it will be carefully monitored so that the people investing in the bond will see what’s been done.

“There will be independent data collected to show what’s happening and what the biodiversity dividend from the investments will be. How many more golden whistlers? How many more greater gliders? How many more tonnes of carbon?

“All those things will be reported so it cannot be greenwashed.”

New jobs, tourism benefits

Victoria is the most land-cleared and degraded state in Australia, making it a fitting place to launch a green bond project like this, says Lindenmayer.

“This is a bond that will give life to the regions. It is estimated the GFNP will attract an extra 379,000 visitors annually, add more than $42.5 million to the local economy every year and support at least 750 direct and indirect jobs.

“The Great Forest National Park is a fantastic place – an extraordinary environment so close to Melbourne with so many things going for it.

“The best people in finance and investment are seeing an extraordinary opportunity.

“It just needs the state government to step up.”

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

• Find out about Pendal Focus Australian Share fund
• Tune in: register to watch Crispin’s Beyond the Numbers webinar

EQUITY markets remain in good shape with the US Federal Reserve’s put option, combined with China’s stimulus, reducing downside economic risk and supporting market liquidity.

Last week’s US inflation data was a bit stronger than expected, leading to a rise in bond yields and a stronger US dollar.

However, equities continued to rise as the narrative of a soft landing remained on track.

The current debate on rates is more about how far below 4 per cent they will go, rather than whether we will see a series of cuts in the next few meetings.

The S&P/ASX 300 rose 0.83% last week and the S&P 500 was up 1.13% in the US.

Equity market gains have come despite the CBOE Volatility Index (the “VIX”) rising above 20, after hovering between 10 and 15 for most of the past year.

This reflects the upcoming US election, which the market sees as unpredictable, though not necessarily a negative.

China’s updates on stimulus have lacked detail and indicate the initial market reaction was overstated. This led to a retracement in commodities and Chinese equities.

US earnings have just started with good results from Wells Fargo and JP Morgan.

The Australian market was quiet last week.

We saw Arcadian Lithium (LTM) agree to a takeover offer from Rio Tinto (RIO), but the bid is quite unique in nature and unlikely to herald a wave of M&A in the sector.

US soft landing watch

US September CPI data was slightly stronger than expected.

The headline figure rose +0.18% month-on-month and 2.4% year-on-year which is a three-year low.

However, core CPI rose 0.31% monthly, taking the yearly gain to 3.3% (up from 3.2% in the previous month).

• Core goods rose +0.17% – the most since May 2023, though it’s still down 1.2% on a three-month annualised basis.
• Core services (excluding rent and owner’s equivalent rent, ie “super-core”) were up 0.4% monthly – the highest since April. Medical care, apparel, auto insurance and airfares drove the increase.

The market’s reaction was muted; the numbers have been surprising on the downside for some time, so there was room for slightly higher numbers.

In addition, the Fed is saying it’s comfortable with the trend and not focused on these “super core” measures.

The upshot was bond yields continuing to move higher. It also reinforced the view that the next two moves by the Fed should be 25bp cuts. 

Jobless claims have become the most-tracked weekly indicator as the market watches for signs of economic deterioration.

Concerns here had subsided. The data spiked higher last week, though this was tied to hurricanes Helene and Milton as well as US port strikes, so shouldn’t be interpreted as a concerning signal.

It does highlight that we are set for a couple of months of messy data because of the two hurricanes.

In aggregate the US economy looks to be holding up well. The Atlanta GDPNow indicator is running at 3.2% for Q3, well above consensus of 2% growth.

China stimulus watch

A meeting of China’s policy-implementation body, the National Development and Reform Commission, disappointed a market craving a big, headline stimulus announcement.

The only number mentioned was RMB200 billion, versus hopes of RMB3 trillion-plus.

It was more water pistol than bazooka.

This should have been expected given the commission’s role is to implement certain policies rather than determine them.

This was interpreted as a signal that the Chinese government saw reaction to the stimulus as overly dramatic and was looking to cool expectations and speculative activity.

An extreme example was Hong Kong-listed, Chinese residential property developer Vanke, which rose 360% from HKD3.90 to about HKD14 in two weeks, before retracing to HKD7.31.

On Saturday, the more-important Ministry of Finance outlined its plans, flagging:

• No near-term plans for additional central government bond issuance (though the National People’s Congress could choose to do this later in the month).

• RMB400 billion additional local government bond issuance which utilises the gap between debt ceiling and debt outstanding.

• A big one-off increase in debt quota to enable the swap of local government debt. No specific number was given, but last year they did RMB2.2 trillion. It could be above RMB3 trillion, supporting financial stability and helping overall economic activity by enabling local governments to pay wages and maintain services.

• RMB 2.3 trillion available for use by the end of 2024, from bonds already issued but unused under the existing target. The target is unchanged – the key question is whether it can all be used.

• Local governments will be able to use proceeds of their special bond issuance to buy unsold apartments and convert them to affordable housing to help address excess housing inventory.

• Injection of tier-one capital into state-owned banks. There was no specific number, but around RMB 1 trillion is expected.

• Indications the 2025 fiscal deficit could be more than 3% GDP, supporting more spending next year.

The market’s reaction will be interesting. Key points to note include:

• There is no “bazooka-stimulus” headline number, especially compared with the reaction to the GFC which was cumulatively the equivalent of about RMB 20 trillion today in terms of proportion of the GDP. So there is no short-term upside surprise. Bulls could choose to point to the use of existing funds and remaining bond issuance to conclude around RMB 3 trillion of stimulus. But this looks like a degree of re-badging – not new funds – so we remain hostage to how this money will actually be spent.

• The policy is designed to reduce tail risks and prevent the doom loop of local governments continuing to cut back on spending.

• No direct boost to consumer spending. This is negative.

These measures may help prop up the equity market. But it’s unclear if this is sufficient to support commodity markets, which need to see real demand stimulated in the short term.

China’s Politburo and National People’s Congress both meet in late October. The latter would need to approve any policy requiring higher deficit spending.

One final observation: Beijing may be holding something in reserve against the risk of a Trump victory in the US election and the risk of material tariff increases.

US election watch

With barely three weeks to go, Trump gained some momentum in the betting odds last week, moving to a 54% chance of a win (according to RCP Betting Average) versus 46% for Harris.

This is his biggest lead since Harris entered the race.

The seven key battleground states (assuming Minnesota goes Democrat) are Arizona, Nevada, Wisconsin, Michigan, Pennsylvania, North Carolina and Georgia.

Most recent polls have Trump in front in all but Wisconsin, though with a very fine margin.

Market volatility has picked up, but the forward curve has this falling back post-election. To date, this has not impacted equities and is supported by credit spreads staying low.

The most likely election outcome is a Democrat or Republican presidential win without sweeping both the House and Congress – and hence being constrained in what they can achieve.

The main difference in market impact relates to bonds, with Trump’s threat of higher tariffs and less immigration potentially leading to higher inflation in late 2025, and therefore to higher yields.

This may have limited impact on equities as it could be seen to come with higher growth.

Oil watch

The latest expectation is that the US will seek to limit Iran’s ability to export oil with sanctions (and a crack-down on attempts to break them).

Saudi Arabia may step up to increase production to fill the supply gap, allowing them to re-take share and ensure oil prices don’t run up into the year’s end.

These measures may encourage Israel to avoid escalation, but the response still waits to be seen.

Markets

Despite geopolitical uncertainty, the outlook for equities is positive. Inflation is under control, economic growth is solid, financial conditions are easing and corporate earnings are growing.

Initial US results out last Friday were well received in the financial sector with JP Morgan (+4.4%), BlackRock (+3.6%) and Wells Fargo (+5.6%) all beating consensus.

The US market is seeing leadership from industrials, consumer discretionary and financial stocks and less reliance on the Magnificent 7 tech stocks, which is a positive signal.

It is also worth noting the US software index broke to new highs having been range-bound for the whole year.

Australia reflected these themes last week with banks beginning to bounce after a recent fall. The slower trajectory of rate cuts helps them.

Tech also had a good week, as did industrials.

From a portfolio perspective we tend to be overweight technology and industrials and we have added to discretionary exposure.

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About Crispin Murray and the 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

Here are the main factors driving the ASX this week, according to analyst and portfolio manager ELISE McKAY. Reported by investment specialist JONATHAN CHOONG

• Labour market data “noisier than usual”
• Geopolitical risks surge on Middle East tensions
• One demand: tune into Crispin Murray’s Beyond the Numbers webinar
• Find out about Pendal Focus Australian Share fund

DESPITE the relatively flat index performance belying underlying trends, it was a volatile period last week.

In Australia, the ASX 300 experienced a modest decline of 0.75%, which masked significant sectoral movements. The energy sector surged by 6.75%, driven by geopolitical tensions and rising oil prices, while consumer discretionary fell by 2.5%.

Globally, the resolution of the East Coast Ports strike was swift, yet geopolitical risks remain heightened – particularly with the Israel-Iran conflict.

Energy markets swiftly adjusted to geopolitical risks, though sustained higher oil prices are uncertain due to excess supply and global players’ preference for stable pricing.

Anticipation is also building around China’s imminent announcement of additional fiscal stimulus.

Macro data was relatively quiet, with the standout being a stronger-than-expected jobs report on Friday. This bolstered US markets, which rallied on optimism that the Federal Reserve will achieve a soft landing.

Jobs data supports a likely 25 basis point (bp) cut rather than a 50bp cut in November, with the possibility of a larger cut in December if necessary.

Bond markets quickly priced in these expectations.

Economic data

Jobs

Friday’s robust jobs report challenges the prevailing narrative of a gradually softening labour market and contradicts other indicators, such as hiring and quits rates, which point to upcoming weakness.

Markets traded up strongly on bets that the Fed will achieve a soft landing.

September payrolls surged by 254k, significantly exceeding the consensus estimate of 150k growth, with an additional upward revision to previous months.

Consequently, the three-month average for private sector job creation has risen to a mild 145k, which further indicates a soft landing.

After peaking at 4.25% in July, the unemployment rate has fallen to 4.05% over the past two months – defying expectations for it to remain flat.

Labour market data is noisier than usual, with October expected to be another mixed month due to the impact of strikes and Hurricane Helene.

Business response rates for the first estimate haven fallen to 62%, down from September 2023 and below the 77% average of the 2010s. Typically, compliance reaches 90-95% by the third estimate.

Given the breadth of other indicators pointing to a softening labour market, it is worth questioning whether the strength seen in the September 2024 jobs report is an outlier, rather than a true read of a goldilocks-type scenario.

Other data:

• JOLTs data for August 2024 shows the hiring rate slowing to 3.3% and the quits rate falling to just 1.9%.
• The employment subcomponent of Services ISM is in contraction territory. 
• The NFIB small business survey has net 15% of firms with plans to hire, which is indicative of a softer labour market.
• A modest increase in initial jobless claims, albeit still at generally low levels. 

Wages

Average hourly earnings accelerated to an annualised 4% year-on-year (YoY) in September 2024, up from a low of 3.4% in July 2024. 

Again, this data can be lumpy so it remains to be seen whether this is an uptrend that can be sustained. The JOLTS quits rate suggests the trend should move lower.  

ISM survey data

The Services ISM data surprisingly jumped to 54.9 in September 2024, driven by strength in new orders and business activity. At the same time, however, the employment index was weaker and fell into contractionary territory. 

This has now joined the employment data for Manufacturing, which is in recessionary territory at 43.9. Note that the Manufacturing ISM data remained flat at 47.2 in September this year. 

Oil

Geopolitical risks have surged following an escalation in the Middle East, pushing Brent crude oil prices up by 8% last week to $78 per barrel (/bbl). Discussions between the Biden administration and Israel regarding potential strikes on Iranian oil facilities have heightened these concerns.

Putting Iran’s oil market into perspective, the country produces approximately 3.5 million barrels per day (mb/d), with around 50% exported primarily to China despite US and EU sanctions.

The remaining production is consumed domestically, with Iran being self-sufficient in refined products such as gasoline, diesel, and jet fuel.

Iran also controls the strategic Strait of Hormuz, a vital shipping route where about 17% of global oil production and 19% of global LNG supply pass through.

China is another key player and the world’s largest crude oil importer. Not only is it Iran’s main client, but 40-50% of its imports originate in the Persian Gulf and must pass through the Strait of Hormuz to get to China. 

The market is focused on three hypothetical scenarios:

1. Damage to Iranian oil infrastructure could affect downstream assets (such as refineries), midstream assets (like pipelines and terminals) and upstream assets (including production fields). An attack on refinery assets would be less impactful than on midstream or upstream assets.
2. Tightening enforcement of sanctions.
3. Broader disruption of regional oil supplies via (a) regional trade routes, (b) attacks on oil infrastructure outside Iran, or (c) interruption of trade through the strait of Hormuz. 

On the first scenario, it seems politically unlikely that President Biden would support a strike on Iranian oil facilities given the potential for higher oil prices and the impact on the upcoming election.

However, even if such a strike were to occur – with or without US support – the medium-term impact on oil prices might be muted due to excess capacity in the market.

The third scenario, particularly the closure of the Strait of Hormuz, would be the most disruptive, though it is considered unlikely due to its importance to Iranian exports and global trade.

Globally, this excess capacity is estimated at approximately 6 mb/d against a global market size of around 100 mb/d. For instance, Saudi Arabia is currently producing 9 mb/d versus a capacity of 12 mb/d, while other OPEC members such as the UAE also have excess capacity (estimated at around 1 mb/d).

Even if there was an attack targeting Iran’s oil production, OPEC has historically acted quickly to mitigate disruptions – typically offsetting 80% of lost production within two quarters. 

Goldman Sachs (GS) has estimated the impact of two hypothetical scenarios relative to a baseline forecast for $77/bbl on average in Q424 and $76/bbl average in 2025.

Scenario 1: A 2 mb/d disruption for six months could see Brent crude temporarily peak at $90 per barrel if OPEC quickly offsets the shortfall and reach the mid-$90s in 2025 without OPEC intervention.

Scenario 2: A persistent 1 mb/d disruption, possibly due to tighter sanctions, could push Brent to the mid-$80s if OPEC gradually offsets the shortfall, and to the mid-$90s in 2025 without an OPEC offset.

Given the current oil price of $78/bbl, the impact on inflation and economic growth appears limited at this stage.

Oil prices would need to exceed $100/bbl to have a meaningful impact on inflation. Academic research finds that a 10% shock to oil prices translates to an increase of about 7bps to core inflation. 

Australia

Retail sales for August 2024 surpassed expectations, rising by 0.7% month-on-month (MoM) and 3.1% YoY – the fastest since May 2023 and ahead of expectations. 

The strength was broad-based except for household goods spending, which has declined for the past two months. 

This stronger trend should continue over the coming months as tax cuts come through and are eventually spent. 

Eurozone inflation

In Europe, inflation has dipped below the target for the first time in three years, reaching 1.8% compared to the 2% target.

Inflation is cooling all around the world, maintaining the momentum of the worldwide rate-cutting cycle.

The European Central Bank (ECB) is expected to cut later this month.

The US Federal Reserve’s decisive 50bp cut last month provided global thought leadership and created room for other countries to ease more without further depreciating their currencies. 

China

China took a break for Golden Week, which is a week-long break in celebration of the National Day. This holiday was first introduced in 2000 as a way of stimulating China’s economy by encouraging domestic tourism, travel to visit family, and general consumption. 

As the nation returns from this break, the government is expected to announce further fiscal stimulus at a press conference to further boost the consumer and support economic growth. 

Morgan Stanley anticipates a RMB2 trillion package, with potential announcements as early as today. The support could span local government financing, infrastructure capex, bank capitalisation, and consumption/social benefits.

As highlighted by Jack Gabb in last week’s equities note, while more substantial support (up to RMB10 trillion) is needed, this move is a step in the right direction.

Australian markets

Despite the market declining by 0.75% for the week, sector dispersion was notable.

The energy sector surged by 6.75% due to geopolitical risks driving oil prices higher, while consumer discretionary fell by 2.5%.

Santos (STO) and Woodside (WDS) were the top performers, moving in lockstep with the 8% rise in oil prices.

Reflecting on September, the ASX 200 achieved a 3% total return, highlighted by the rotation of resources into banks reversing. 

Small-cap stocks also recovered some of their year-to-date underperformance relative to large and mid-cap stocks.

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About Elise McKay and Pendal Australian share funds

Elise is an investment analyst and portfolio manager with Pendal’s Australian equities team. Elise previously worked as an investment analyst for US fund manager Cartica where she covered a variety of emerging market companies.

She has also worked in investment banking and corporate finance at JP Morgan and Ernst & Young.

Pendal Horizon Sustainable Australian Share Fund is a concentrated portfolio aligned with the transition to a more sustainable, future economy.

Pendal Focus Australian Share Fund is a high-conviction equity fund with a 16-year track record of strong performance in a range of market conditions. The Fund is rated at the highest level by Lonsec, Morningstar and Zenith.

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

Here’s what you need to know about the latest stimulus announcements in China, according to Pendal’s head of income strategies Amy Xie Patrick

• China allocating RMB2trn to “big bazooka” stimulus
• Issues can be fixed, but China needs to spend more
• Why bonds, why now? Pendal’s income and fixed interest experts explain
• Browse Pendal’s fixed interest funds

THE final week of September was an eventful one in Beijing.

China’s central bank, the People’s Bank of China (PBoC), kicked off proceedings by lowering a key policy rate by 0.20% and reducing the required reserve ratios (RRR) for large banks by 0.50%.

This was swiftly followed by announcements of a slew of other stimulus plans and measures aimed at lifting China’s ailing economy.

Since then, there has been much talk of China’s “big bazooka” stimulus.

Some think that policymakers have made a commitment to do “whatever it takes” to rescue growth. With China on holiday this week for National Day (国庆节) and Golden Week (黄金周), this article explores whether this stimulus will be a silver bullet or simply a handful of mood-boosters.

This time is different

There are several key differences between this slew of measures and what we’ve witnessed over the past two years of “policy incrementalism” from Beijing.

The measures are broad and more coordinated, addressing everything from financial system stability to the longer-term demographic crisis.

They have also been communicated with a greater tone of urgency and determination, strategically timed to boost sentiment during the current week-long national holiday.

Most importantly, there is finally a willingness to directly address the struggles faced by Chinese households as a result of the property crisis.

The bursting of the Chinese property bubble is akin to the Global Financial Crisis (GFC) for the world’s second-largest economy.

In fact, had the rest of the world followed the same fiscal austerity as China in the wake of Covid, this crisis would have developed its own acronym by now. We would be blaming that acronym for a global recession.

When such a crucial driver of growth and wealth creation suddenly shuts off, it leaves holes in balance sheets and chasms in sentiment.

The private sector will focus on balance sheet repair as its priority, which means no amount of making borrowing cheaper and more available can stimulate activity during this phase. As a result, the government must spend and invest to plug the hole.

China’s issues can be fixed…

At the heart of China’s economic struggles are three key ailments.

Firstly, as already discussed, the economy needs to recover from the property crisis. This process takes time, and the first job of authorities during this time is to make sure the crisis doesn’t take down the entire system.

The interest rate and RRR cuts announced in late September help to ensure that the banking system has plenty of liquidity.

The capital injection programs are to ensure that troubled but important banks do not infect the rest of the system with their problems. Very similar actions were taken in the US after the collapse of Lehman Brothers in 2008.

The next job is to stabilise prices in the housing market. The supply-demand imbalance of China’s real estate market is due to both oversupply (from over-building) and insufficient demand (partly due to lack of affordability).

Second is a lack of a social safety net, which results in households saving far too much. This has only been exacerbated by the negative wealth effect of the housing bubble bursting.

Fiscal measures that make childcare, health and retirement more accessible and affordable will naturally bring down saving and encourage more spending, thus naturally transitioning the economic engine from investment to consumption.

Lastly, an unprecedented demographic crisis looms large, thanks to the one-child policies introduced in the late-1970s. While this policy was officially abolished in 2016, birth rates have failed to rise meaningfully in China due to the social infrastructure having been rewired for over a generation to cater to one-child families.

Add to this that many Gen Z-only children with hard-earned degrees can only find Meituan bike delivery jobs, it’s quickly obvious that birth rates won’t turn around by themselves.

All three problems are intertwined and can be solved with appropriate incentives and policies.

A stronger system of social safety nets, including cheap and affordable childcare, coupled with free homes for families willing to have more children would go a long way to tackling these fundamental issues.

…but they’ll need to spend a lot more

The newest set of stimulus measures circle up to RMB2trn for fiscal measures directly targeted at households and consumers. Measures include monthly cash subsidies to families who are willing to have more than one child.

While it’s a step in the right direction, the quantum of funds earmarked for these measures is not going to be nearly enough.

In addition, there are likely to be significant hurdles to implementation, all while the market awaits eagerly for signs that this “bazooka” stimulus is making a meaningful difference to China’s economic trajectory.

Incentivising parents (who are only children themselves) to have more than one child is going to be costly business – so is establishing a larger and more equitable social safety net for the masses.

While RMB2trn is not small, it is at least five times too small to be of long-lasting consequence.

Rather than a silver bullet, the latest slew of Chinese stimulus plans are about providing a floor under market prices and sentiment. Mood-boosters are nice, but the economy needs more than just sugar hits if Beijing wants a better and more sustainable growth trajectory.

Implications for portfolio positioning

Since there are significant departures in the latest wave of stimulus announcements, Chinese assets have responded dramatically – with the CSI300 equity index up nearly 30% over the past week.

Bear in mind that with the almost halving of the value of this market since its peak in 2021, the recovery may still have legs in the near term.

There is also speculation that the significance of China’s stimulus could lead to global reflation. I don’t yet buy into this argument.

As mentioned earlier, these measures are a step in the right direction, but lacking in details and firepower. The medium-term risk to markets is a slow path to implementation, resulting in little to no change in Chinese data over the next few months.

It is also notable that despite the rally of onshore Chinese assets, broader asset classes have yet to buy into the idea of reflation. Oil, for example, had continued its slide until geopolitical developments in the Middle East caused a temporary price surge.

In short, this round of Chinese stimulus is good news for investors who are directly involved in Chinese assets. But our portfolios are reluctant to get sucked in to “China-adjacent” positions.

Our income strategies welcome the buoyed sentiment to risky assets but are not relying on a quick translation from rhetoric to Chinese data to justify our exposures to equities and emerging markets.

The uneven spread of market reactions to this latest news from China also serves as a healthy reminder that dislocations and uncertainties naturally grow when the global economic cycle slows.