Are global equities on the cusp of a structural change? Pendal’s SAMIR MEHTA explores the fundamentals driving bull and bear markets in the East
- China undergoing “serious” consolidation
- BYD and Tencent Music clear winners in China
- Find out more about Pendal Asian Share Fund
BUSINESSES are commercial opportunities spotted by risk-taking entrepreneurs with access to capital and other helpful resources.
Traditionally, one needs competitive “moats” to deliver sustained high Returns On Capital Employed (or ROCE). But, like much in the world, moats are no longer stable.
The internet, strident monetary actions by central banks, government policies and ideological competition have drastically modified the way that moats are built and, importantly, destroyed.
So far, we have seen momentous changes encapsulated in the mantras of:
- Deng Xiaoping and his astute strategy to “hide your strength and bide your time”
- Jeff Bezos and his simple focus on “your margin is my opportunity”
- Masayoshi Son and his grandiose declaration that “in our industry, winner takes all”
China directed its state apparatus to foster industries from scratch. Amazon became laser-focused on the long term, with nary a care for short-term losses. And Softbank handed over copious amounts of capital to one player in an industry with an explicit directive of killing competition and emerging as a winner through the carnage.
Role reversal
So, what kicked off a bull market in China around the same time as a bear market in India?
Was it just foreign investors switching from India to China, or Xi Jinping recognising the folly of his ideology and a change in heart?
Could it have been a “DeepSeek moment”? Or because (in President Trump’s world) perceived allies are worse than avowed enemies (hence India losing out from harsher tariffs)?
One can’t be sure of the exact root cause.
But let me offer a more fundamental justification: there is a significant role reversal occurring between China and India, led by the change in attitudes of management teams towards profits and ROCEs.
For decades until the pandemic, China Inc. epitomised the three mantras I referenced above.
A heady mix of abundant low-cost capital, regulatory help (including subsidies), insane hunger for scaling business, and a priority for market share over profitability defined most businesses.
Despite many ambitious talented entrepreneurs with varied opportunities, few companies achieved the haloed status that Mr Buffet might covet.
On the other hand, before the pandemic hit, India Inc. was the opposite.
Find out about
Pendal Asian Share Fund
Burdened with a high cost of capital, hindered by governmental regulations, and entrepreneurs with limited ambitions prioritising high ROCEs above all else.
Since 2021, economic growth in China slowed as a result of regulatory crackdowns, geopolitical headwinds and a bust housing market.
Venture capital investments slowed to a trickle; several businesses, including start-ups, shut down. The stock market tanked and foreign capital withdrew from China. And a deflationary slowdown prompted local investors to buy more bonds and shun equities.
Post-pandemic India was the rising star – benefitting partly from the ‘China plus one’ strategy (that is, diversify away from China to minimise risks).
A production-linked incentive scheme (tax benefits) in India encouraged large-scale incremental manufacturing. There grew a belief of achieving GDP growth of 7-8% p.a. for the next decade. If China had achieved it in the past, why not India?
India’s downdraft
Stock markets boomed and corporate earnings grew when China struggled. Equity valuations skyrocketed, trending closer to twice the mean valuations compared to the past decades. Retail investors, global asset allocators, venture capitalists and even China-focused hedge funds wanted to invest in India.
What went unnoticed, however, was a loosening of discipline by management teams under this illusory guise of assured growth.
High ROCEs in many industries attracted new entrants as conglomerates, nimble start-ups and medium-sized firms backed by venture capital attacked incumbents. A heady cocktail brewed – fueled by high equity valuations, cheap and plentiful venture capital, and unfettered ambition.
For example, the paints industry in India was a cosy oligopoly led by Asian Paints. Decades of steady growth, high margins and high ROCEs meant that even its smaller competitors thrived.
While some international companies tried to build a business in a cautious manner, struggled to break the oligopoly and gave up, Grasim (part of the Aditya Birla group) thought otherwise. The manufacturer of viscose staple fiber and chemicals invested upwards of Rs100b (US$1.25bn) in just three years, while market leader Asian Paints invested approximately Rs.97.2b over the past decade.
Another example is Zomato, which started out as a restaurant aggregator and grew into a formidable food delivery platform. Through Blinkit (which was recently acquired), Zomato expanded into quick commerce to deliver groceries and goods to consumers within 15 minutes via ‘dark stores’ or warehouses.
Swiggy (listed, venture-backed), Zepto (unlisted, venture-backed), Reliance Industries, and Flipkart (owned by Walmart) have committed several millions in investments chasing this opportunity, while other potential competitors could also enter the fray.
Elsewhere, Ultratech Cement announced its entry with a US$200 investment in manufacturing cables and wires (another oligopolistic sector). Shares of Polycab and KEI Industries promptly fell 25-30% in less than a week.
And Reliance Industries has begun expanding into carbonated soft drinks through Campa at a much cheaper price, threatening ROCEs of Pepsi bottler Varun Beverages.
I could cite many more examples, but you get the drift.
China’s updraft
In China, after years of competition, we now have serious consolidation.
For instance, in the electric vehicles space, perhaps six to eight serious competitors (of the 80-100 start-ups and brands) have survived over the past two decades.
Build Your Dreams (BYD), the clear winner, has achieved a level of scale cost and technological leadership which, in my view, is unparalleled. BYD’s ROCE has risen from a range of 7-12% pre-pandemic to 25-30% in the past three years.
In online music, Tencent Music is almost a duopoly with Netease Music (though Bytedance is still in the mix as a marginal player). Despite slashing its marketing and sales spend in recent years by 75% (compared to 2019/20), Tencent Music has continued to gain subscribers and substantially increase gross margins.
Full Truck Alliance (Uber for logistics) has come through the downturn and emerged as one of the strongest competitors matching shippers and truckers of cargo.
Its ROCE has risen from negative pre-pandemic levels to 9-11%. And if my analysis is right, it could double over the next three to five years as it gains scale and operating leverage.
Bull or bear in the East?
Capital and competition go through phases.
While I do not suggest that these changes in China are permanent, the point I do wish to make is that Indian corporate ROCEs are waning, while those for China are ascending.
Because when structural changes in industry dynamics (higher ROCEs) combines with investor disinterest (low valuation multiples), the resulting profit growth and valuation multiple expansion for Chinese stocks can surprise on the upside.
This bull market in China – in many stocks – has legs. And if the Chinese authorities provide some stimulus, or if President Trump agrees to a deal, we could take that as superfluous arguments for capital to chase what is becoming a structural pivot.
About Samir Mehta and Pendal Asian Share Fund
Samir manages Pendal’s Asian Share Fund, an actively managed portfolio of Asian shares excluding Japan and Australia. Samir is a senior fund manager at UK-based J O Hambro, which is part of Perpetual Group.
Pendal Asian Share Fund aims to provide a return (before fees, costs and taxes) that exceeds the MSCI AC Asia ex Japan (Standard) Index (Net Dividends) in AUD over the medium-to-long term.
Find out about Pendal Asian Share Fund
About Pendal
Pendal, part of Perpetual Group, is a global investment management business focused on delivering superior investment returns for our clients through active management.
The Trump administration is having a major impact on the emerging markets asset class. Here, Pendal’s Global Emerging Markets Opportunities team outline the latest trends
- Mexico outperformed after US election
- We remain cautious on and underweight India
- Find out about Pendal Global Emerging Markets Opportunities fund
IT’S been four months since the election of Donald Trump confirmed a dramatic shift in US economics and foreign policy – bringing major implications for emerging markets.
The benchmark MSCI Emerging markets Index fell 1.6% in the four months between election day and March 5, underperforming global equities.
The MSCI All Country World Index (which measures both developed and emerging markets) returned 2.7% over that time and the MSCI USA gained 1.5%. (These are total returns in US dollars).
However, the headline numbers mask several major trends.
Emerging markets investors need to look deeper into the data to see which markets and sectors are winning and losing, along with more recent year-to-date trends.
High performers
The two emerging markets most exposed to the new policy environment in Washington (particularly regarding trade tariffs) outperformed in the four months after Trump’s election.
MSCI Mexico returned 3.1% and MSCI China gained 9.5%.
MSCI Brazil was down 8.5% with increased concerns about interest rate hikes. But many other traditionally higher-risk markets – including Turkey and smaller Latin American markets – were up.
The Pendal Global Emerging Markets Opportunities portfolio has been overweight Mexico, China and Brazil in the period.
Although the portfolio does not have direct exposure to the smaller Latin American markets, there is substantial economic exposure held through Brazilian consumer names.
Find out about
Pendal Global Emerging Markets Opportunities Fund
India and high-tech EMs struggle
Many markets that struggled last year have been doing well. But what about the losers?
Notably, MSCI India fell 12.2% over the four months, despite limited trade exposure to the US and a good political relationship with the new administration.
A sense that the recent economic boom in India is losing steam and high valuations may not be sustainable is leading to increased caution among Indian investors.
We remain cautious on India and heavily underweight.
Similarly, the technology growth stories that dominated headlines last year are weakening.
MSCI Taiwan was down 4.2% and MSCI Korea lost 7% (Korea had a major domestic political crisis in the period).
After a long period of outperformance, the MSCI Information Technology index underperformed, dropping 3%.
MSCI Malaysia (-4.8%) and MSCI Thailand (-18.3%) were also exposed to technology exports and underperformed.
We continue to be underweight Taiwan and Korea (and Information technology) and zero-weight Malaysia and Thailand.
Trends point to strong EM market
Looking beyond the headline numbers, the deeper trends suggest an exciting story for emerging markets.
Every Latin American market had a positive return in US dollars in the four months after Trump’s election.
MSCI Mexico gained 8.7%, MSCI Brazil was up 7.6%, while MSCI South Africa (an overweight in our portfolio) returned 9.6%.
MSCI China returned 16.4% and MSCI EM as a whole was up 4%.
Improved growth prospects in China and the historically riskier parts of the asset class attracted investor interest as uncertainty grew about where the pain of tariffs would ultimately be felt.
These positive returns stand in contrast to a negative year-to-date return from MSCI US; MSCI US Growth retreated 3.9%.
These trends are new and, so far, short term.
There is a traditional English saying, “one swallow doesn’t make a summer” – and the global economic and political environment remains volatile.
But if we were asked what an EM bull market looks like, we would say that it looks like this.
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.
The Philippines is on a growth trajectory, but looming deficits raise concerns about its sustainability. Pendal’s Emerging Markets team explains why it has zero-weighted the region
- Loose fiscal policies have left the country vulnerable
- The sustainability of growth remains low
- Find out about Pendal Global Emerging Markets Opportunities fund
INVESTORS who follow Pendal’s emerging markets process know the team believes in buying equity for growth — and emerging markets for growth.
This means we focus on the economic growth environment and how that impacts revenue and earnings growth for listed companies.
It also means we focus on the sustainability of growth.
With this in mind, some investors may find it interesting that we remain zero-weighted in the Philippines.
Throughout 2023-24, the country’s GDP growth averaged 5.6% in 2023-24, which is higher than in Indonesia at 5.1%, where we are invested.
Annualised earnings growth for those two years was 12.7% — comparable to other strong growth stories we have been invested in: the United Arab Emirates (+13.6%) and India (+12.4%).
Yet, the Philippines doesn’t make it into our investment picture. Below we explain why.
A quick recap
To explain our view, let’s take a quick trip through recent economic and political history.
Although not hit as dramatically as Indonesia or Thailand during the 1997 Asian Crisis, the Philippines still suffered a collapse in its currency and stock market.
Similar to other countries in the region, this proved to be the trigger for economic reforms that drove strong growth in the 2000s.
Despite the Global Financial Crisis, the presidencies of Gloria Macapagal-Arroyo (2001-2010) and Benigno Aquino (2010-2016) saw GDP growth average 5.4%.
Crucially, the quality of this growth was high, with account surpluses from 2004 to 2016 and a fiscal deficit of around 2% for this period.
Find out about
Pendal Global Emerging Markets Opportunities Fund
The rise of populist politics in the mid-2010s affected the Philippines, leading to the election of Rodrigo Duterte in 2016.
Though his government’s economic policies contained numerous reforms — including liberalising foreign investments — he also cut taxes while increasing government spending.
This was positive for growth (GDP growth averaged 6.6% from 2016-2019) but came with several costs.
The first was inflation. The Philippines CPI increased from 2.1% in 2016 to a peak of 6.9% in late 2018.
The second was the fiscal balance, which steadily worsened from 2017 to 2019, reaching a deficit of 3.4% of GDP that year.
The third was the current account balance. As imports were sucked in by strong domestic demand, the current account moved into deficit in 2017 and remained there til 2019.
Then COVID hit.
The global pandemic arrived with President Duterte not yet four years into his six-year term. Given the pre-pandemic focus of his government, a robust fiscal response was always the likely outcome.
The government borrowed heavily to fund pandemic relief efforts, pushing the government debt-to-GDP ratio from 39.6% in 2019 to 60.5% in 2021.
The budget deficit widened to 7.6% of GDP in 2021, up from 3.4% in 2019.
This helped turn round a deep recession in the Philippine economy and was undoubtedly crucial to many Philippine citizens.
Despite the end of the pandemic, fiscal policy settings have remained extremely loose.
The Duterte administration was followed by the current incumbent, President Ferdinand Marcos Jr, who seeks economic stabilisation (including stabilising government debt/ GDP), and a focus on controlling inflation.
That has not returned the fiscal and current account balances to pre-COVID levels, let alone pre-Duterte levels.
The latest data points show a fiscal deficit of 5.8% of GDP and a current account deficit of 3% of GDP (both in 3Q 2024).
Inflation remains benign, as excess capacity in the economy post-COVID is being consumed. But this is fundamentally an unsustainable policy setting.
GDP growth (5.2% in 4Q 2024) remains high but is vulnerable to what will have to be either a sharp tightening of fiscal policy, real weakness in the Philippine Peso, or both.
In that light, the strong earnings growth from Philippine companies is, in our view, being juiced by twin deficits that cannot continue indefinitely.
We remain zero weight in the Philippines and prefer equity markets with growth in countries with stronger fundamentals.
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.
While there’s hope for Australia’s GDP, we may be ‘running to stand still’ unless productivity starts improving, warns Pendal’s head of government bonds TIM HEXT
- Watch now, on demand: How to prepare for rate cuts in a shifting global economy
- Browse Pendal’s fixed interest funds
IT’S been five years this week since the Covid chaos emerged.
Aftershocks have kept rolling in since then. But is the Australian economy finally starting to look more “normal”?
The latest set of Australian national accounts (see below) shows Gross Domestic Product growth at 0.6% for the December quarter, suggesting that conditions may, indeed, be moving closer to normal.
Why is that? Below are three takeaways from the latest data.
- The consumer is back, but still cautious
The consumer is finally emerging, albeit tentatively, as a positive impact on the economy.
Household consumption grew by 0.4%, contributing 0.2% to the 0.6% overall GDP growth. The contribution had been near zero over the previous year.
Consumers finally had positive real wages growth in 2024 (3.2% wage growth versus 2.5% inflation).
Consumers also spent some of the Stage 3 tax cuts since July. We estimate that around 25% was spent and 75% saved, helping the savings rate to climb to 3.8% from below 3% a year ago.
- Governments are still a large driver of GDP. Will they pull back further to make room for the consumer?
Government consumption grew by 0.7% in Q4, driven largely by the states. This is at least moderating from near 1.5% growth a quarter earlier.
Government investment also moderated but remains high at 1.8% over the quarter. Overall, the public sector contributed 0.2% to the 0.6% growth.
The government needs to keep moderating spending and investment if the re-emerging consumer is to avoid causing inflationary pressures.
In many areas of the economy, the private and public sectors compete for supply of labour, capital and goods.
- Private investment remains weak, adding to poor productivity
Private investment rose only by 0.3% in the quarter. Business investment is showing some signs of life, but dwelling investment is falling — not helped by high rates.
There are, as always, different stories in different sectors. But the overall picture is productivity continuing to flat-line.
GDP per hour worked fell again and is 1.2% lower over the year.
The focus on Australia’s poor productivity is becoming a bigger issue.
Everyone has their reasons for it and different lobby groups will shift blame, promoting their own solutions (which normally involve government hand-outs).
However, I did come across the graph below courtesy of Minack Advisors.
Put simply, as our capital-to-labour ratio has fallen, so has labour productivity.
Net investment to GDP is around the lows of the past 50 years against labour force growth at the highs (courtesy of immigration and participation).
Overall, the latest today’s national accounts report offers some hope of GDP moving back to the 2% to 2.5% the RBA is looking for.
However, unless we can start improving productivity, we will be running to stand still.
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.
Here are the main factors driving the ASX this week according to portfolio manager JIM TAYLOR. Reported by investment specialist Jonathan Choong
RECENT themes continue, with equity market rotation out of the best performers, weakness in the speculative end of the investment landscape (eg Bitcoin), and ongoing effects of policy uncertainty under Trump 2.0.
The S&P/ASX 300 fell -1.3% while the S&P 500 was off -1.0%.
KPMG chief economist Diane Swonk probably summed it up best. “We’re all sitting here trying to filter through the noise to the economic reality,” she said. “But the noise itself has its own economic consequences.”
Last week perhaps saw some early indications of this economic impact across both the consumer and business segments in the US.
- On the consumer side we saw very weak sentiment measures, spending data and a tick up in jobless claims.
- On the business front we have seen capex intentions slipping and a surge in imports as businesses look to front-run tariffs set to commence from March 4th.
The net effect was a big rally in bonds – with US ten-year yields dropping 23bps to 4.19% – which reflects increased uncertainty around growth rather than a material change in rate cut expectations.
For their part, the Fed has kept a consistent line about rates remaining on hold until some of the policy settings become clearer, but still with the prospects of some cuts at the back-end of the year.
Notwithstanding all the macro noise, the second of the two main weeks of Australian reporting season was the key driver of moves within the local market.
There were plenty of hits and misses, with increased levels of volatility around results driving some big moves within the market.
We are seeing companies place a greater focus on the language used in their releases, given the influence of systematic strategies that use earnings releases as an input.
The savage reaction to earnings misses is also driving corporate Australia to be much more proactive in cost-cutting to support earnings. They are also more constructive on share buybacks as a mechanism to support the stock in increasingly volatile times.
Macro and policy Australia
Headline January consumer price index (CPI) inflation came in at -0.2% month-on-month and up 2.5% year on year, the latter unchanged from December and a touch below consensus expectations of 2.6%.
Seasonally adjusted, it ticked up 2.7%.
The RBA’s preferred trimmed-mean measure rose from 2.7% year-on-year in December to 2.8% in January. The reading excluding volatile items was 2.9% year-on-year, up from 2.7% in December.
An increase in inflation in food (+3.3%) and clothing (+2.1%) were major contributors. So too was a reduction in the effect of electricity (-11.5% versus -17.5% in December as some subsidies start to roll off.
Key housing-related categories such as rents (+0.3% month-on-month) and new dwelling prices (-0.1% month-on-month) are showing further disinflation, which is a good sign for the Q1 CPI print.
Both the headline and trimmed-mean year-on-year CPI rates are within the RBA’s 2-3% band – as are the majority of items in the CPI basket, although the latter ratio has flat-lined in recent months.
Macro and policy US – policy uncertainty manifesting in the data
Fedspeak
The Federal Reserve Bank of Atlanta’s President Raphael Bostic said the Fed should hold interest rates where they are, at a level that continues to put downward pressure on inflation. This is in contrast to his comments a week ago when he said that another two cuts would be appropriate.
Jeffrey Schmid, President of the Kansas City Fed, noted that inflation has been just recently at a 40-year high and that “now is not the time to let down our guard,” saying that inflation risks have to be balanced with growth concerns.
February Conference Board data
February’s Conference Board consumer confidence index fell to 98.3 from 105.3 in January. This was well below consensus expectations of 102.5 and was the weakest reading since August 2021.
Consumer confidence appears to have fallen sharply in the face of threats to impose large tariffs and to slash federal spending and employment.
The Conference Board expectations index – which is most relevant for spending growth – weakened to an eight-month low of 72.9 and is consistent with year-over-year growth in real consumption of about 2%, down markedly from 4.2% in Q4 2024.
The weakness of confidence strongly suggests that recent rapid growth in spending on durable goods mostly reflects households pre-empting tariffs.
The Fed keeps a keen eye on the Conference Board consumer inflation expectations series and may have been concerned by a further increase in median one-year ahead inflation expectations, from 4.2% in January to 4.8% in February. This is well above the 4.3% average reading from the years 2000 to 2019.
Mean inflation expectations leapt to 6.0%, from 5.2%, indicating that some individuals now expect extremely high inflation.
The key risk is contagion from these expectations into wage setting outcomes. The weakening environment for labour probably provides some weight against this – but it will be very closely watched over the next six-to-twelve months.
In this vein, the proportion of people saying that jobs are plentiful fell to 33.4% in February, from 33.9% in January, while the share saying they are hard to get increased to 16.3%, from 14.5%.
In addition, the proportion of people expecting fewer jobs to be available in twelve month’s time exceeded those expecting more jobs by 8 percentage points, the joint-largest gap since November 2013.
Other data
Real consumption expenditures fell by 0.5% in January, much weaker than the -0.1% expected. The drop was driven by the reduction in vehicle purchases, post the surge in people buying replacement autos following recent hurricanes.
Nominal personal incomes rose 0.9%, well ahead of consensus expectations of 0.4%. However this was driven by government transfers, an effect not expected to be sustained.
The Core PCE deflator rose 0.3% in January, as expected. This reduced the annual inflation rate to 2.6%, which is down from 2.9% in December and is the lowest since March 2021.
The trend here is your friend – with expectations that the path of decline toward 2% is reasonably entrenched, save for the huge caveat being how the tariffs play out.
If China gets an additional 10% and the 25% tariffs on Canada and Mexico hold then it probably impacts Core PCE by about 0.5% and keeps the number in the mid-to-high 2.0% to 3.0% range.
Elsewhere, the NFIB measure of capex intentions has seen a pullback, suggesting businesses are increasingly nervous around tariffs and inflation and reining in spending intentions.
On the employment front, weekly initial jobless claims rose to 242K, up from 220K and above the 221k consensus. Continuing claims fell to 1,862K from 1,867K, slightly below the consensus of 1,871K.
Higher jobless claims appears the result of extreme weather rather than the efforts of DOGE.
Washington, Virginia, Maryland have around 5% of the US population but 20% of the Federal government workforce and the data from these regions were marginally (~2k) above recent data points.
Find out about
Pendal Focus
Australian Share Fund
Crispin Murray,
Head of Equities
Total Federal government-dependent employment – excluding military and postal workers – probably stands at about 9.5 million workers, which is about 6% of total payrolls.
Finally, we note that the net trade balance is going to be a very large drag on US growth amid a pre-tariff surge in imports.
The goods trade deficit surged to US$153.3bn in January, miles ahead of December’s US$122.0bn deficit – which had itself been a record – and well above the US$116.6bn consensus expected.
Exports rose by 2.0% – so the blow-out is entirely the outcome of an 11.9% surge in imports.
All the major import categories rose, but around two-thirds of the surge resulted from a 32.7% increase in industrial supplies. That category is almost 70% above its October level.
This is showing up in the Atlanta Fed GDPNow measure, where expectations of Q1 GDP growth plunged from 2.3% on 19 February to -1.5% on 28 February as a result of the net export and personal consumption expenditures data.
Macro and policy rest of the world
There are reports that China is planning to inject at least US$55 billion into three of its biggest banks.
This could apparently be completed as soon as June and builds on the stimulus package unveiled in 2024.
In Europe, France is destroying its industrial base with over taxation, according to Michelin CEO Florent Menegaux.
“You’re economically killing your country when you’re imposing taxes much higher than in other countries,” he said. “Right now, the direct and indirect taxation in France is the highest in Europe. Don’t expect corporations to be able to swallow that all the time”.
Higher taxes and the drop in auto demand across Europe has forced Michelin to shut down three plants in Germany, two in France and one in Poland.
Producing in Europe is twice as expensive as in Asia. “We have to re-adapt our industrial footprint in Europe to export less because it’s not economical,” said Menegaux.
In Germany, the energy regulator is proposing a plan to require around four hundred manufacturers to adjust their operations to match real-time wind and solar supply, in order to keep the grid stable and prevent price spikes.
The plan would force companies to ramp down production during periods without wind or sunshine, and run at full throttle on breezy, bright days, which could help keep a lid on prices but would further add to company cost of production.
Reporting season
The number of companies seeing upgrades versus downgrades for out-years was pretty evenly split.
As a result of revisions, around 1% has been taken from both consensus FY25 and FY26 overall ASX200 profit expectations. Year-on-year EPS growth for the market now sits at -0.7% for FY25, then accelerating to +8.0% for FY26.
The downgrade skew was disproportionately driven by lower-than-expected earnings being factored into some larger-cap names in the Energy, Banks, Health Care and Tech sectors.
There was a step-up in stock price volatility in response to earnings results over recent periods. 40% of stocks that reported moved by more than 5% either way – a level not seen since the second half of FY2019 and well ahead of the ~25% average over reporting seasons going back to FY2007.
This is also reflected in a new high for the ratio of a stock’s earnings day move versus its thirty-day average daily move. This hit 5x, versus an average of 3x in reporting seasons back to FY2007.
Ultimately the ratio of beats to misses remained just in positive territory. 26% of companies beat consensus EPS expectations by 5% or more, versus 24% that missed.
The ASX 100 performed better than the Small Ordinaries in this regard. 23% of ASX 100 companies beat consensus EPS expectations by 5% or more – and 17% missed – while 28% of Small Industrials beat but 28% also missed. 35% of ASX 100 Resources beat and 24% missed, while 23% of Small Resources beat and 38% missed.
Dividends provided decent support; 26% of companies beat DPS by 5% or more, versus 20% that missed.
Changes to guidance were balanced. 15% of ASX 100 companies upgraded guidance, while 15% also downgraded. In Small Industrials, 12% upgraded and 12% downgraded.
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.
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
- Broader equity markets have been weak
- Market technicals don’t yet signal a more material selloff
- Find out about Pendal Focus Australian Share fund
- Tune in: register to watch Crispin’s Beyond the Numbers webinar
THERE has been some concern that the pace of policy actions in the US is creating uncertainty and deferring decisions among businesses and consumers.
This was reinforced by slight weakness in the University of Michigan Consumer Confidence Survey and the US Purchasing Manager’s Index (PMI) last week, as well as guidance from Walmart, which was 8% below consensus expectations.
Walmart pointed to currency headwinds, some pressure from mix shift as consumers “trade down” to cheaper items, and “geopolitical uncertainties” (also code for tariffs). The stock fell 9%.
Broader equity markets were also weaker, though there was no specific catalyst. The S&P 500 fell 1.6% and the S&P/ASX 300 was off 2.8%.
There was interesting rotation within the market, with a big unwind in momentum stocks such as Apollo (-7%), Citi (-6%), Goldman Sachs (-5%), Tesla (-18%) and Palantir (-15%) late in week.
The US Dollar is the other signal to watch; there is a building view that we may have seen the peak in the Dollar Trade-Weighted Index (DXY) for now and have reached “peak US exceptionalism”.
Market technicals look reasonable and are not yet signalling a more material selloff.
Liquidity also remains good, so our current read is that this is more consolidation and rotation as the earnings growth between growth and value converges.
This view is also reinforced by credit spreads remaining tight, as well as strong performance in European (Euro Stoxx 50 up 4% month-to-date) and Asian stock markets (Hang Seng up 16% and KOSPI up 5% month-to-date).
This would be consistent with a turn in the USD.
Australia saw its first rate cut (25 basis points (bps) to 4.1%) since November 2020, ending a 33-month up-cycle. However, the RBA’s message was that the market was too optimistic in expecting three cuts this year.
That hawkish message meant the cut offered no support to the market, while a series of disappointing updates from the banks helped drive the ASX lower.
We have had just over 50% of companies by number reporting.
So far, the results are okay, with nothing suggesting any particular thematic issue. Stock-specifics are the main drivers of reaction.
We also saw M&A activity with the CoStar bid for Domain (DHG).
Australia
The RBA cut its benchmark rate 25bps to 4.1%, the first change since November 2023.
This was seen as a hawkish cut, as the RBA Governor talked down the prospect of further cuts in the next few months – specifically noting that the market’s expectation for three rate cuts in 2025 looks unrealistic.
Governor Bullock did note that the policy was restrictive – though we observe that most corporate trends suggest the underlying economic environment is marginally improving.
When asked about the catalyst for another cut, Governor Bullock noted that she is looking for:
- reduced concerns on an upside surprise in inflation
- easing in wages growth
- disinflation in services
- a sustained reduction in housing inflation
- improvement in the supply side.
The market only marginally shifted down expectations for future rate cuts.
The updated RBA inflation outlook envisages inflation falling into its target range earlier than before, but the expected trough in inflation is now higher at 2.7% versus 2.5% previously.
The forecast for inflation in December 2026 was also increased 20bps.
Pendal Focus Australian Share Fund
Now rated at the highest level by Lonsec, Morningstar and Zenith
US
There was not much in the way of data last week.
Minutes from the Federal Reserve’s most recent meeting reinforced a more cautious outlook for rate cuts.
The University of Michigan Consumer Confidence Survey deteriorated, with the Headline index falling to 64.7 from 71.7 in January.
The consumer expectations component, which is most relevant for spending growth, fell from 69.5 to 64.0.
We do note that the survey measures responses by political affiliation and that the fall has been driven by Democrat and Independent voters, while Republican voters were unchanged.
This survey may signal a weaker consumer, but we wouldn’t read too much into it at this point as other surveys we follow are showing some signs of improvement in February.
Flash PMIs for February were slightly soft. Manufacturing was better at 51.6 versus 51.2 in January, however, Services fell to 49.7 from 52.9.
Overall, the composite PMI fell to a 17-month low.
We may potentially be seeing the impact of Federal job cuts and concerns on tariffs affecting sentiment and deferring employment decisions.
Markets
We saw a material selloff in the US late last week, triggered by Walmart’s guidance being below market, and reinforced by softer consumer confidence data. But the price actions seemed too severe to be explained away by just that, suggesting positioning has become very crowded.
We are seeing selling in tech and consumer discretionary with rotation into cyclicals.
The overall market has been resilient despite all the noise on tariffs, DeepSeek and higher CPI.
Breadth has deteriorated, which suggests less fire power for the market to rise, but this has not fallen to concerning levels (63% of S&P 500 stocks are above their 200-day moving average).
Sentiment indicators such as futures positioning, put/call ratios and bull/bear ratios are relatively balanced now, which is an improvement from the extended positions at the start of the year.
ETF flows remain strong and in their 90th percentile versus history, but are narrowly focused into specific sectors.
Credit spreads are still low and now correcting, which is supportive for equities and highlights that liquidity is fine and there are no fears building around economic deterioration.
There is lots of focus on regarding the US Dollar and talk of a “Mar-a-Lago Accord” – akin to the Plaza Accord from the 1980s – designed to weaken the dollar to help support growth.
This would support liquidity and be broadly positive for markets.
It is clearly apparent that the Yen is strengthening.
Japanese economic growth and inflation data has improved, and this may be correlated with some of the other momentum trades as the Yen has been a funding source.
It also may be a signal that the US 10-year bond yield may be heading lower – there has been strong correlation between them and the Yen in recent years.
From a portfolio perspective, it is important to watch market rotation as an emerging theme, as momentum and growth stocks have been such big market drivers in the last 15 months.
Regions outside the US are beginning to perform better, and lead indicators on European growth are improving (e.g. performance of cyclical versus defensive stocks).
There are also signs of life in China, where the two-year bond yield has begun to move higher.
There has also been a large run in Chinese tech names, triggered first by DeepSeek and subsequently President Xi having a public meeting with key tech entrepreneurs.
There is a view this could be a catalyst for improved sentiment in China.
The key “Two Sessions” annual policy meeting of the National People’s Congress and Chinese People’s Political Consultative Conference will be closely watched in the first week of March.
We remain positive on overall on the market’s direction.
However, the rotation is giving us confidence that we may see some of the more extreme valuation premiums that have characterised the market in the last 12 months unwind.
Australian equities
The S&P/ASX 300 was down 2.8%, due to a combination of the broader global selloff, the hawkish statement from the RBA, negative earnings updates from the banks, an overhang from the Goodman Group capital raise, and a portfolio basket-trade selling Australia.
Financials (-6.9%) – specifically banks (-9.4%) – was the weakest sector as margins trends were worse than expected at National Australia Bank, Westpac, and Bendigo & Adelaide Bank.
Given their extended valuations, this triggered a selloff in the sector – similar to that seen during the late September Chinese stimulus and the August Yen carry trade unwind.
This was more fundamentally driven, with margin trends worse than expected and slightly lower capital ratios, which will limit the degree of capital returns.
The Commonwealth Bank buyback kicks in this week, which may put a floor under the sector short term.
Industrials (-3.3%) was also weak, which is partly tied to the RBA statement.
We are just over the halfway mark of company reporting and earnings beats and misses thus far suggest a benign earnings season.
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.
Local investors appear to be driving renewed interest in China stocks, argues Pendal’s SAMIR MEHTA
Chinese companies are buying back shares
Valuations are cheap
Find out more about Pendal Asian Share Fund
WHEN asked about President Trump’s first few weeks in office, David Axelrod – former adviser to Barack Obama – said: “I think he will get credit in the short term for being a whirling dervish of activity. The question is, what does that activity produce?”
The Whirling Dervishes, according to Wikipedia, are most famously associated with the Mevlevi Order of Sufism – a mystical branch of Islam, which emphasises inner spirituality and direct personal experience of the Divine, often using poetry, music, and bodily movement as pathways to God.
Ironies abound.
I am fully aware that commenting on geopolitics is above my pay grade. We stock-pickers normally eschew commenting on macroeconomics or geopolitics.
But the investment landscape has changed since the 2008 Global Financial Crisis — and continues to rapidly evolve — so we need to adapt our process, even if at the margins.
Most of us were forced to incorporate the effects of actions by central banks or government-directed economic policies or geopolitical convulsions. There are pivotal moments when these factors (rather than specific stock attributes) influence – and even alter – investing landscapes.
Since President Trump’s inauguration, the flurry of executive actions and foreign policy initiatives are nothing less than spectacular.
Find out about
Pendal Asian Share Fund
The Paris Agreement on climate change and principles of ESG are now by the wayside.
Free trade and globalisation are fettered by tariffs and transactional diplomacy.
Speeches by US vice-president JD Vance and defence secretary Pete Hegseth have rudely shaken European complacency.
Now President Trump has escalated a war of words with Ukraine’s President Volodymyr Zelensky, calling him a “dictator” and deepening a rift between the two leaders.
Europe is being dragged by the scruff of its proverbial neck from adolescence into adulthood. In fact, Europe might be weaned away from US security guarantees.
Trump even talked about inviting Russia back into the G8. Suddenly, Russia might be investible again.
And China, perceived as the arch-enemy, is no longer so different from allies like Canada and Mexico.
That begs the question: will the US Government tear up the restrictions of investing in Russia and China?
I wouldn’t bet on it, but then again, I wouldn’t have expected Europe’s current plight either.
Change of heart for China?
Meanwhile, Chinese President Xi met with private sector executives, including Jack Ma (who was famously cut down to size in November 2021) and Liang Wenfeng (the founder of DeepSeek).
Optics matter in China. Is this a change in heart by President Xi towards technology and the private sector? Or is it that state-directed spending on projects of national importance (chips and AI) have failed to deliver?
Ironically, China’s lead in AI was established by the founder of a hedge fund without much help from the government at all.
A stealth bull market in China has crept up on us. In my opinion, local Chinese investors will most likely drive this market.
Bond yields are close to 1%, there is some stability in the property markets, and deflation might have temporarily plateaued.
Sporadic stimulus measures are helping at the margin. Now, scores of companies are trading with dividend yields north of 5%, with business models that are only marginally cyclical.
Loads of companies are buying back shares and valuations are still cheap.
From here, it seems all signs point to revisiting Asian equities as an asset class.
About Samir Mehta and Pendal Asian Share Fund
Samir manages Pendal’s Asian Share Fund, an actively managed portfolio of Asian shares excluding Japan and Australia. Samir is a senior fund manager at UK-based J O Hambro, which is part of Perpetual Group.
Pendal Asian Share Fund aims to provide a return (before fees, costs and taxes) that exceeds the MSCI AC Asia ex Japan (Standard) Index (Net Dividends) in AUD over the medium-to-long term.
Find out about Pendal Asian Share Fund
About Pendal
Pendal, part of Perpetual Group, is a global investment management business focused on delivering superior investment returns for our clients through active management.
Pendal’s emerging markets team explores the latest developments in India and explains why the team remains underweight in the region
- High risk of India shifting into a down-cycle
- Pendal remains heavily underweight India in emerging markets portfolio
- Find out more about Pendal Global Emerging Markets Opportunities Fund
MOST emerging markets — particularly those with weaker export bases and greater dependence on external capital flows — go through multi-year positive and negative cycles.
In the up-cycle, incoming capital flows strengthen the currency and depress bond yields, facilitating lower policy interest rates. This drives growth, attracting more capital inflows.
In the down-cycle, outgoing capital flows weaken the currency and raise bond yields, driving policy interest rates higher. This weakens growth and encourages greater capital outflows.
There are many factors to consider in these cycles. But a core component is that in the upcycle, central banks do not need to defend the exchange rate.
India cuts rates, but currency remains weak
In February, the Reserve Bank of India cut its benchmark “repo rate” by 0.25 percentage points to 6.25%, marking the first policy interest rate cut in nearly five years.
(Repo stands for “repurchase agreement” and refers to the cost of borrowing. When banks need money they can sell government securities to the RBI with an agreement to repurchase them at a future date. The repo rate is the interest rate the banks pay on this transaction.)
The RBI’s move signalled a shift towards supporting economic growth amid declining inflation, which stood at 4.3% in January.
However, the decision came against a backdrop of geopolitical tensions, global monetary policy divergence, and volatile financial markets.
India’s appointment of a growth-focused governor, Sanjay Malhotra, was seen as a sign of prioritising expansion over inflation control.
But concerns remained regarding the exchange rate.
The Indian Rupee experienced significant volatility, reaching an all-time low of 87.95 against the US dollar before rallying in mid-February due to aggressive intervention by the RBI.
The RBI reportedly sold around $US6 billion of foreign exchange reserves to stabilise the currency, which gave the Rupee a one-day lift.
But foreign investors have continued withdrawing from domestic markets, with net sales amounting to nearly $10 billion so far this year.
Policy-easing by the RBI has encouraged speculative pressure on the Rupee, making it one of the EM universe’s weakest-performing currencies this year.
This contrasts with currencies such as the Brazilian Real, Colombian and Chilean Pesos and South African Rand, which have all strengthened against the US dollar this year.
Decline in foreign exchange reserves raises concerns
The RBI’s intervention raised another major concern: the decline in India’s foreign exchange reserves.
Reserves fell from a peak of $700 billion in September to about $631 billion by the end of January.
This depletion raises concerns about India’s ability to manage external shocks in the face of capital outflows, rising import costs, and weakening investor sentiment.
The broader economic outlook suggests slowing growth.
India’s GDP growth fell to 5.4% in the September quarter – a seven-quarter low and well below initial RBI estimates.
Weak consumer demand, sluggish private investment, and reduced government spending have contributed to the downturn.
Inflation peaked at 6.2% in October 2024 (driven by rising food prices), but lower interest rates may not be sufficient to revive growth without stronger demand.
Risk of a down-cycle
India is not yet definitively in a down-cycle.
The bond yield curve has barely moved, for example, and currency weakness is not yet driving higher forward inflation expectations.
However, the local-currency equity index peaked at about the same time as foreign exchange reserves, and a poor fourth quarter for equities has been followed by further weakness.
We believe most Indian assets are too expensive to provide a backstop to weakness and the risk of an extended down-cycle is high.
We remain heavily underweight India in our portfolio and defensively positioned where we do have exposure.
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.
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
A decent US earnings season, bond-yield resilience in the face of higher inflation and continued positive retail investor flows are supporting equity markets.
The S&P 500 gained 1.5% last week, while the S&P/ASX 300 was up 0.5%.
There was limited new developments on tariffs, but we did see building expectations of a potential Ukraine deal post Trump’s unilateral call with Putin.
This remains a complex issue, and even if something was to happen, it will take time.
The market’s breadth is narrowing, which is a concern. Seasonals also turn less favourable from here. However, the underlying liquidity environment appears supportive.
The market has also held up in the face of the first wave of negative headlines on tariffs and there is no evidence of a technical breakdown.
So overall, we believe the market remains in a gradual up-trend.
Australian reporting season has swung into action. Overall, the results so far suggest the economy is holding up – with some small positive signs, notably from Commonwealth Bank and JB Hi-Fi.
Victoria remains the standout weakest state, but everywhere else is performing well.
There are some early signs that some of the higher P/E names are not delivering sufficient upside surprise to sustain their outperformance.
US inflation and economy watch
The key focus for the US economy is the interplay between policy growth and inflation, and how that will affect interest rates this year.
The case for a June rate cut from the Fed relies on Core Personal Consumption Expenditures (PCE) growth being below 2.5%, employment not being too hot, and policy (i.e. tariffs and deportations) not being worse than is currently expected.
Last week’s CPI data for January was poor. In summary:
- Headline CPI was up 0.47% month-on-month versus 0.30% expected. It was 3.0% year-on-year versus 2.9% expected.
- Core CPI was 0.45% month-on-month versus 0.3% expected, and 3.26% year-on-year versus 3.1% expected.
Higher numbers for used cars and airfares drove the surprise – combined, they added 8 basis points (bps) to Core CPI. Communications and insurance prices were also higher, having been soft in recent months.
The market’s initial reaction was negative, with bond yields backing up 10bps. However, the reaction moderated through the week and bonds recovered because:
- There is a belief that the seasonal adjustments fail to take fully into consideration the concentration of annual price increase put through in January – that is, it overstates inflation now, then understates it later in the year. Higher communications and insurance prices indicate this.
- Some of the beat was driven by “volatile” components (e.g. used cars and airfares), which are not included in the Core PCE – the Fed’s favoured inflation measure. Used car prices appear to be moderating already, based off auction data.
- Federal Reserve Chair Jerome Powell’s comments, which signalled he was taking a muted reaction to the data point.
- Other measures of inflation look to be easing.
- The Producer Price Index (PPI) and import price data was okay – and the combination of these and CPI allows the market to market an accurate estimate of the core PCE data. Using this, the Core PCE is forecast to come in at 0.26-0.29% month-on-month (implying 2.5% to 2.6% year-on-year) versus 2.81% in December and closing in on the Fed’s target inflation of 2.5%. Consensus has Core PCE falling to 2.5% by midyear.
The market is pricing in a 40% chance of a June cut and 50% by July’s meeting. The current implied probabilities for year’s end are 22% no cut, 39% one cut and 39% of two-or-more cuts.date, breaking through technical resistance levels.
Pendal Focus Australian Share Fund
Now rated at the highest level by Lonsec, Morningstar and Zenith
US retail sales – implies the US consumer may be softening
January’s headline retail sales came in at -0.9% versus -0.3% expected (-0.4% versus +0.3% expected, excluding autos).
Again, the market is not reading this as a fundamental shift in trend given some mitigating factors:
- cold weather and the LA fires
- strong holiday season sales, which may have been pulled forward
- auto sales affected by low inventories.
It does highlight that the prior 4%+ 3-month-on-3-month annualised run rate in consumer spending was not sustainable and we may be falling back to around a 2% run rate.
This slowing consumer also affected the Atlanta Fed’s GDPNow Q1 2025 outlook, dragging it from 2.9% on 7 February to 2.3% on 14 February. This is now back in the consensus range.
Tariff watch
There were limited new signals last week from the US.
The market focus is on the meaning of “reciprocal tariffs”, with the White House instigating a study on this issue which may not report back till 1 April.
This was taken as a small positive as it is an alternative to “across the board tariffs” and will take time to prepare.
We should still expect other tariff announcements in the next few weeks, with potential targets being critical imports (e.g. pharmaceuticals and semiconductors) to incentivise a shift to domestic supply, and autos which would effectively be targeting Europe.
China appears to have been spared the expected tariffs so far.
There are plans for a meeting between Presidents Trump and Xi, which may help defer this matter, but the issue remains volatile and an increase in the current 10% tariff is still possible.
Australia
The RBA meets on Tuesday and the market continues to price a high probability of a 25bp cut to 4.1%.
Should it cut, the RBA may frame it in cautious terms – a “hawkish cut” – as the risk of a policy mistake is high given that underlying inflation (once adjusted for the one-off subsidies) remains relatively high and the economy seems to be in good shape (with the exception of Victoria).
In this vein, Commonwealth Bank (CBA) updated its customer analysis in last week’s result.
According to the analysis, essential spending is slowing as a result of falling inflation – allowing younger age cohorts to spend more on discretionary items and to start saving again. It also suggests that disposable income is recovering.
The other risk for the RBA is the currency, which is already helping to ease financial conditions and – should it fall further – would add to inflationary pressure.
The last thing the RBA will want to do is look to have eased prematurely and run the risk of needing to reverse course in the future.
Markets
US earnings season is around 80% completed and is positive, with reasonable upgrades, and is on track for 13% year-on-year EPS growth.
While strong, we are now entering a deceleration phase, with consensus bottom-up forecasts suggesting EPS growth drops back to mid-to-high single-digit growth in coming quarters.
However, this is driven by the slowing of Mag7 earnings growth; the rest of the market is expected to accelerate. The remaining 493 companies in the S&P 500 are estimated to have delivered 4% earnings growth in 2024, increasing to 15% in 2025 and 17% in 2026.
We have already seen Mag7 earnings revisions stall.
While the market remains very full value in the US, liquidity remains supportive given the following factors:
- On 21 January, the US hit its debt ceiling and cannot issue net new debt. Instead, it must fund itself by drawing down on the general account, which is effectively QE. This is likely to continue through to midyear. This has meant the market has reloaded with liquidity in the calendar year-to-date.
- US retail ETF flows remain strong. This year has seen three of the largest daily retail ETF inflows on record. Seasonal trends in ETF flows will get less supportive – January and February are typically two of the strongest months – but still remain okay.
- US corporates are now entering their buyback window. Goldman Sachs expects US$1.2T of buybacks this year. The daily flows doubles when window opens from $3b/day to $7b.
Overall, while the market is at high valuations and there are material policy risks, the liquidity that has fuelled it remains supportive.
Australian equities
Industrial and consumer stocks led the market’s small rise last week, mainly as a function of results coming through.
Healthcare was the weakest sector on the back of Cochlear’s downgrade and CSL being softer.
CBA appears to have done enough for now to maintain its high premium, however, other popular names saw muted reactions to decent results – indicating positioning may be getting tired.
Resources have been outperforming this month, up 2.1% versus a 0.5% gain in the S&P/ASX 300. There has been a lot of news flow:
- Tariffs on aluminium and steel (though the aluminium impact has been muted so far, this is going to be inflationary in the US).
- A record gold price.
- Cyclone disruption in iron ore.
- In lithium, volatility continues, with CATL restarting its large lepidolite operation in China – which you can either read as positive in terms of being in response to market demand, or negative in terms of additional supply. The mine previously accounted for about 10% of China supply, or 3-4% of global supply.
- China lending growth was strong in January, which is a constructive lead indicator.
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.
A gradual rate cut path over 2025 should support economic growth, meaning investors should think carefully about fixed-income positioning. Pendal’s TIM HEXT and ANZ’s ADAM BOYTON explain in a new webinar
- Bonds help protect portfolio returns
- Browse Pendal’s fixed interest funds
- Watch now, on demand: Preparing for rate cuts in a shifting global economy
THE Australian economy is strongly placed as cost-of-living pressures recede and market expectations grow for a lower-rates environment – setting the stage for an economic rebound from last year’s tougher conditions.
That was the message from Pendal’s head of government bond strategies, Tim Hext, and ANZ’s head of Australian economics, Adam Boyton, at a Pendal webinar How to prepare for rate cuts in a shifting global economy.
The webinar took place ahead of this week’s Reserve Bank meeting which is expected to start a rate-cutting cycle.
A second cut is expected within the next six months. But Hext and Boyton see the pace of interest rate reductions as gradual due to underlying economic strength.
“The economy isn’t necessarily screaming out for a rate cut the way you typically see when the Reserve Bank starts easing,” says Boyton.
ANZ expects a second 25-basis-point cut in August. Hext says it could come as soon as May.
“We’re looking for just those two rate cuts,” says Boyton. “The reason being that the economy isn’t collapsing, there are signs of the consumer recovering, the labour market has performed remarkably well over the past 12 months … and inflation has eased more than expected.”
Labour market resilience and RBA caution
One factor behind the RBA’s cautious approach is the remarkable strength of the labour market.
“My best assessment is that full employment in Australia is probably between 3.75 and 4 per cent – so you’re close-ish to it. The most recent published thoughts from the RBA are a bit higher,” says Boyton.
Boyton says employment is being supported by jobs growth in health care, social assistance, public administration, and safety, and there is also evidence that the private sector is picking up as the stage 3 tax cuts wash through.
“This story of a resilient labour market is probably one that will play through for most of this year,” he continues.
“Either way, this is a really interesting cycle. We could end this economic cycle with the peak in the unemployment rate not very far at all away from full employment.
“To me, that says a couple of things – firstly, it’s great news for Australians.
“Secondly, it tells me that this is probably going to be a pretty cautious easing cycle from the Reserve Bank.
“If the unemployment rate is 5 per cent or 6 per cent you can cut much more aggressively, because you’re not going to be stoking inflation with a tight labour market.”
Falling inflation and household incomes
Further buoying the economic outlook is the fall in inflation itself – an often-overlooked factor in the economic outlook that plays an important role supporting household incomes and lifting consumer spending as real-wages improve.
“Inflation is an insidious tax on everyone – you go backwards, even if you get a wage increase, in a period of high inflation,” says Boyton.
“The fact that inflation has come down so much is really helpful for household incomes. Prices aren’t going back to where they were – but what it does mean is the wage increase you get this year isn’t going to be eroded by inflation. That will change the dynamic.”
Productivity challenges and Australia’s economic model
But while the near-term outlook is stable, Australia still faces longer-term headwinds, says Hext.
“We talk about the three Ps – population, productivity, and participation,” says Hext.
“Participation is looking good. Population is looking generally good, as it always does in Australia. But productivity has looked pretty bad for quite some time. It’s been going nowhere for almost a decade.”
Productivity means getting more output from existing resources and has been the key driver of economic growth from the industrial revolution to the IT boom of the 1990s, says Hext.
But the poor recent performance puts Australia in sharp contrast to the US economy, which has seen a very strong 10 per cent lift in productivity over the last seven years.
Hext says part of the explanation for Australia’s poor performance is a drift away from being a US-style, dynamic economy to a more government-centric, European-style economy.
“We’ve made some deliberate choices in the last five years in Australia – partly to strengthen our health care system, the NDIS, education. But there is a productivity cost to that which we’re now bearing the brunt of.
“We hear a lot about US exceptionalism – that term is used for very good reason.”
Investment implications
Hext says investors need to remember that when cash rates come down, floating rate investment returns come down – “it’s a mathematical formula”. That means lower returns on investments like term deposits and cash.
“But with bonds, you’re fixing your return – if you buy something with a yield of 6 per cent, you’re earning that 6 per cent for the life of that security. The comparison to me does look compelling.
“Would you be coming out of other asset classes, like growth assets, at this point in the cycle? I think it’s a bit early for that. Equities look to me quite fully valued, but I don’t see any major sort of trouble brewing there.”
He says bonds can also act as an insurance policy in a portfolio.
“The final thing you’ve got to remember is, as much as Adam and I sit here pontificating about the next 12 months, there’s going to be something coming from left field.
“And what bonds do, by locking in your return, is if there is a crisis that comes that none of us are seeing at the moment, that’s going to provide you insurance as your growth assets collapse.
“The way I like to say it is you’re almost getting free insurance and you’re getting a decent return.
“The two together is quite powerful.”
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.