Despite a period of strong performance, Pendal’s emerging markets team remains cautious on the outlook for Korea
- Korea experienced dramatic gains including strong performance among retail mid-caps
- But underlying economic indicators are weak, giving our team a cautious view
- Find out about Pendal Global Emerging Markets Opportunities fund
STOCK market volatility is driven by a complex mix of formal structures – such as investor mix, regulation and security availability – along with the behavioural tendencies of local and international investors.
These characteristics are often amplified in emerging markets, including Korean equities, which can be prone to big moves in price level in response to minimal fundamental news.
We feel the Korean financial landscape has several components that reinforce its position as an emerging market, despite undoubted technological prowess.
These include relative weakness in corporate governance, volatile politics (very much including last year’s attempt to impose martial law) and instruments and structures that amplify volatility such as use of complicated derivatives among retail investors.
(The latest trend is auto-callable ETFs – which hold structured products that provide income and principal return if the underlying asset meets certain conditions).
Find out about
Pendal Global Emerging Markets Opportunities Fund
Bull market benefits Korea
We are now in a global environment that looks like a broad bull market in emerging market assets.
Historically in these environments, individual emerging markets often experience violent short-term, up-and-down moves as part of a trend of the broader asset class moving higher.
That’s definitely what it looks like in Korea.
The second quarter saw MSCI Korea rise 32.7% in USD terms, with the Korean Won’s 8.9% move up against the US Dollar contributing significantly.
At a stock level there were some exceptional moves, especially in some of the mid-cap names preferred by local retail investors.
Some names in sectors as diverse as shipbuilding and ecommerce rose more than 50 per cent in the quarter.
Of course, no investor will object to being caught in assets that are shooting higher – and Pendal’s top-down country process aims to consider liquidity and sentiment as part of our analysis and allocation process.
However, to be more than just a liquidity-momentum filter, we need to pay attention to the economic fundamentals and corporate earnings that underpin these stocks.
Caution at stock level
We need to think of equities as stakes in real businesses rather than just as tradeable securities.
And at this level Korea looks far more difficult.
The stronger Won is a drag on the exporters which are the backbone of the Korean economy.
Some major exporters in the semiconductor, automotive and steel sectors have seen their forecast earnings revised lower year to date.
First-quarter GDP growth was zero year-on-year, industrial production in the year to May grew only 0.2% and purchasing-manager surveys show an expectation of economic contraction.
Corporate governance and politics remain difficult despite the appointment of a new administration in June after peaceful elections.
Meanwhile the environment for global trade remains uncertain.
Emerging markets we like better
Our security selection within Korea has been strong, allowing us to hold some of the best-performing stocks in the market, and we remain alert to opportunities here.
Overall, though, we generally prefer markets with more sensitivity to the US dollar and less exposure to global trade.
It is markets such as Brazil, Mexico and South Africa where we see more opportunity for a stronger currency leading to faster, and further, interest rate cuts.
About Pendal Global Emerging Markets Opportunities Fund
James Syme, Paul Wimborne and Ada Chan are co-managers of Pendal’s Global Emerging Markets Opportunities Fund.
The fund aims to add value through a combination of country allocation and individual stock selection.
The country allocation process is based on analysis of a country’s economic growth, monetary policy, market liquidity, currency, governance/politics and equity market valuation.
The stock selection process focuses on buying quality growth stocks at attractive valuations.
Find out more about Pendal Global Emerging Markets Opportunities Fund here
Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management.
Here are the main factors driving Australian equities this week, according to portfolio manager JIM TAYLOR. Reported by head investment specialist Chris Adams
LAST week began with genuine concerns about the risk of escalation in the Middle East, moved to risk-on mode when a ceasefire looked to be holding, and ended with renewed commentary and signs of progress around tariff negotiations.
This was interspersed with US economic data (incomes, housing and consumption) which encouraged the prospect of more imminent rate cuts – though US Federal Reserve members appear reticent to change settings in the short term.
In Australia we saw inflation data that, while not materially different from consensus, did allow the market to firm its view on the likelihood of a July rate cut.
US Treasuries strengthened, with 10-year yields dropping 10 basis points (bps) to 4.28% and 2-years falling 16bps to 3.74%.
Commodities (ex-oil and gold) had a decent week following the de-escalation of geopolitical concern and progress on tariffs.
The S&P 500 rose 3.5% for the week to finish at all-time highs, led by big tech and consumer discretionary. The S&P/ASX 300 rose 0.3%.
Trade negotiations
There were several moving parts in play on trade last week.
US Commerce Secretary Howard Lutnick said the US and China finalised a trade understanding, codifying terms agreed in Geneva in May.
He said China would deliver rare earths to the US and – once Beijing did this – Washington would remove its countermeasures.
It appears China will also take steps to address US issues with fentanyl trafficking.
Secretary Lutnick indicated 10 major trade deals could be announced by July 9, when the delay to “Liberation Day” tariffs is due to expire.
Elsewhere, there was mixed messaging from the European Union.
There is a view that the EU may lower tariffs in effort to strike a deal with US before the July 9 deadline. Though EU Commission President Ursula von der Lynden noted “all options are on the table” if discussions don’t reach a suitable conclusion.
US Treasury Secretary Scott Bessent flagged an increased level of flexibility around timing of trade deals, stating that the July 9 date was “not critical”.
He also asked Congress on Thursday to remove section 899 language from the Big Beautiful Bill – a risk discussed in our note two weeks ago – after coming to agreement with G7 partners.
On a more negative note, Friday saw President Trump announce an end to trade discussions with Canada due to the latter’s Digital Services Tax. He will inform them of the tariff rate this week.
FedSpeak
Governor Michelle Bowman – having seemingly inherited the mantle from Christopher Walker as the most dovish FOMC member – noted that “retailers seem unwilling to raise prices on essential consumer items” and that “should inflation pressures remain constrained (she) would support lowering the policy rate as soon as our next meeting”.
When asked about a July cut, Fed Chairman Powell noted that “it if turns out that inflation pressures do remain contained, then we will get to a place where we cut rates, sooner rather than later”, while explicitly noting that he was not referencing a specific month.
He cited the challenge that “there isn’t really a modern precedent” for the tariff increases and that the “the process could go on for a long time” with “effects…large or small”.
Other speakers tended to toe Powell’s “wait and see” line, despite pressure to cut from the Trump Administration.
New York Fed President John Williams said the central bank’s interest-rate stance is “entirely appropriate” as uncertainty about tariffs and inflation lingers.
“Measures of underlying inflation…are still somewhat above our 2% target. And there are signs that tariffs are affecting specific categories of goods,” he said. “We need to be vigilant in analysing the totality of the data to see how conditions evolve.”
Boston Fed President Susan Collins signalled she feels July would be too soon to cut rates.
“We’re only going to have really one more month of data before the July meeting … I expect to want to see more information than that,” she said.
San Francisco President Mary Daly said tariffs may not lead to a large or sustained inflation surge, leaving the door open for a rate cut “in the fall.”
Supplementary Leverage Ratio
In addition, the Fed confirmed via a 5-2 vote that it is intending to reduce the enhanced Supplementary Leverage Ratio (SLR) for banks (introduced post-GFC), which will reduce the capital ratio that banks must hold against US Treasuries, relative to other, higher-risk assets.
This means reduction of US $13bn in capital requirements for the largest US banks a $200bn reduction for deposit subsidiaries.
Governor Bowman – in her role as Fed Vice Chair for Supervision – stated that “this proposal takes a first step toward what I view as long overdue follow-up to review and reform what have become distorted capital requirements”.
It is expected that this will free up capital for lending purposes and allow the banks to be more actively involved in buying Treasuries , especially during times of stress.
Powell noted they are trying to reduce the “disincentive to engage in low-risk activities”.
Bessent has stated that he believes this change will leads to a reduction of “tens of basis points” in US treasury yields.
This is likely only the first step that gets taken to reduce regulatory burden on the US banking system and Bowman – who was promoted last month and is now in charge of bank supervision – has made it quite clear that more changes are on the way.
“Our goal should not be to prevent banks from failing or even eliminate the risk that they will,” she said in her first speech in the new role. “Our goal should be to make banks safe to fail, meaning that they can be allowed to fail without threatening to destabilize the rest of the banking system.”
Find out about
Crispin Murray’s Pendal Focus Australian Share Fund
Australian macro and policy
There was good news on the domestic inflation front.
Headline monthly Consumer Price Index (CPI) fell 0.4% month-on-month (MoM) in May, with the annual rate easing 30bps to 2.1% year-on-year (YoY) – the lowest level since July 2021 and near the bottom of the RBA’s 2-3% target band. This was below consensus expectations of 2.4%.
Trimmed-mean Core CPI eased 40bps to 2.4% YoY, the lowest level since November 2021.
The seasonally adjusted CPI excluding fresh food, fuel and holiday travel increased 0.2% MoM versus 0.3% MoM in April.
The monthly decline in headline CPI was driven by holiday travel and accommodation prices (-7.0% MoM) following the sharp rise in April, as well as softer prices for fuel (- 2.9% MoM) and gas (-2.4% MoM).
These declines were partly offset by increases across volatile items such as electricity (+2.0% MoM) and food (+0.3% MoM).
Inflation continued to moderate across key housing components including rents (+0.3% MoM) and new dwellings, which were flat MoM.
Prices rebounded across vehicle maintenance (1.5% MoM), while insurance prices (-0.5% MoM) recorded a surprise decline.
The upshot is that estimates for Q2 CPI data – due 30 July – remain largely unchanged at 0.6% quarter-on-quarter and 2.6% YoY, while flagging risks to the downside following the May data.
Elsewhere, job vacancies rose 2.8% (or 9,500 jobs) in the three months to May 2025. This was mainly due to a 3.2% increase in private sector vacancies – public sector vacancies were up 0.6%. This indicates that the labour market remains tight.
US macro and policy
There are signs that consumer concerns about the impact of tariffs are receding.
The final June University of Michigan Consumer Sentiment Survey came in at 60.7, versus 59.8 expected and 52.2 in May.
Consumer sentiment surged 16% from May. This is its first increase in six months, but it remains below the post-US election bounce in December 2024.
Inflation expectations also receded. One-year forward expectations moderated from 6.6% in May to 5.0% in June. Five-year expectations came in from 4.2% in May to 4.0% in June.
The housing market remains weak. There were an estimated 623k new home sales in May, down from 722k in April and below the 693k expected.
At the same time the inventory of new homes is at 507k in May, which is the highest since October 2007 and up from 500k in May. This equates to 9.8 months of sales at May’s pace.
There is some recovery in existing home sales, which is taking share from new homes.
Real consumption fell 0.3% in May, versus flat expectations. This, along with negative revisions to previous data, sees consumer spending looking very weak.
That said, May’s fall was driven almost entirely by auto spending – which fell 7% post the pre-tariff surge. Spending on other durable goods remained reasonably flat at elevated levels.
Spending on services was flat in May as it has been for the quarter.
Assuming weakness in autos persists into June – and services sees some modest recovery – then Q2 consumption growth of 1.0-1.5% looks reasonable. This is better than the +0.5% seen in Q1, but well below the 3.1% average growth for FY24.
Given softness in the labour market, 2H consumption growth could be weaker again.
Nominal personal incomes fell 0.4% in May, versus +0.3% expected. The miss was driven by some anomalies in the public sector, so is not as bad as the headline suggests.
Employee compensation rose at 0.4%, which is steady. The savings rate fell from 4.9% to 4.5%. The slowdown in payrolls is likely to flow through to incomes over the remainder of 2025, slowing spending rates.
On the inflation front, the May Core Personal Consumption Expenditures deflator – the Fed’s preferred measure of inflation – increased 0.2% MoM, versus 0.1% expected, resulting in a 2.7% YoY rate, up from 2.6% in April.
The Core PCE goods measure rose 0.3%, showing some modest early pressure from tariffs. Core PCE services rose only 0.16%.
Judging by the 2018 tariff path, it is likely that the core PCE deflator increases by 0.3% to 0.4% in June and July as most companies that will pass on tariff costs do so in the first three-to-six months post implementation.
This sets the stage for the Fed to decide whether they are more concerned about an uptick of inflation – or weakness in employment – which are likely to occur simultaneously.
China macro and policy
There are signs that China is starting to see the impact of tariffs, as it looks for alternative markets to the US.
Industrial firms saw profits drop 9.1% YoY in May, versus a small increase seen in April.
Profits at industrial firms are now 1.1% lower on a January-May basis, versus 0.3% lower forecast by consensus.
Total overall industrial profits were USD379bn in January-May, more than 20% lower than the equivalent period in 2021 and 2022.
Markets
It has been interesting to note the impact of flows in Australian equities in the past eight weeks. Mutual and active funds have been net sellers, but more than offset by ETFs and passive funds.
Foreign-domiciled investors have swing from net sellers to net buyers since late-May and have been buying in more strength than local investors since then.
Financials (+1.8%) and Materials (+1.8%) led the market last week. This was offset by Energy (-4.4%) as the oil price fell. Defensive sectors Consumer Staples (-2.2%) and Utilities (-1.8%) also dragged.
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’s what the latest CPI data and state budgets say about the Australian economy, according to head of government bonds TIM HEXT
THE May year-on-year CPI series was released today.
The data showed headline prices 2.1% higher than May last year, with trimmed mean prices 2.4% higher.
Only two items have double-digit changes: Tobacco is up 11.5% and Fuel is down 10%. Electricity subsidies are still playing a role (electricity down 5.9% from May 2024), but this will turn sharply positive in July.
The Reserve Bank will not look too deeply into this data as it is consistent with its current forecast of 2.6% trimmed mean inflation.
Pleasingly, services inflation is now 3.3% year on year, the lowest since May 2022. The quarterly inflation numbers released at the end of July, which are the main focus of the RBA, should show goods prices around 1% and services around 3.5%.
Health and education will make further significant falls in services inflation difficult.
Inflation is not a reason to cut or not cut – but, when put together with ongoing sluggishness in consumption, allows the central bank to cut rates in July.
The market remains priced at 80% chance of a cut.
State budget downgrades are coming
New South Wales (NSW) and Queensland both issued budgets this week. Both highlighted a recent trend towards optimistic rather than conservative forecasting.
Budgets have always been part finance and part marketing, but not surprisingly – given the current zeitgeist and short attention spans – spin is everything.
New South Wales
For New South Wales, the general government forecast budget position is improving.
The state announced a surplus – or, more accurately, hopes of a surplus – by 2027/28. This is the operating position, which is basically cash receipts, less cash payments, less depreciation.
It does not include infrastructure that can be financed either on or off budget (through debt).
The optimism comes from the forecast growth in expenses: 2.4% a year on average for the next five years.
Now employee expenses, 40% of total, are forecast to grow at 3.7%, which is consistent with recent wage rises granted of 3.5-4% a year to many public sector employees, but not consistent with growth in the number of workers.
Even if this number turns out to be accurate, it puts a lot of pressure on the other 60% of expenses to grow by around 1%. The heavy lifting is to be done by what is called ‘Grants, Subsidies and Transfer expenses’ which make up 20% of expenses and are forecast to go backwards.
We will look under the hood on this one as it is very unusual to see these go backwards absent any policy announcements.
Overall, this is a treading-water budget and will leave Standard and Poors (S&P) somewhat in limbo on its negative outlook for the AA+ rating. If the government was to deliver on 2.4% expense growth, then the AA+ would stay, but there is likely to be some cynicism around this number.
Negative outlooks are not supposed to be permanent and are usually resolved one way or the other within two years. The negative outlook was put on in November last year so I suspect it stays for at least the next year.
Queensland
The shambles of the Queensland mid-year fiscal update (MYFER) in January have now been uncovered as another cynical exercise in making everything look as bad as possible and then blaming on the outgoing government.
CEOs do it all the time, but you would hope for better from an elected government – particularly a government department calculating the numbers.
So how do we look at this budget?
The new LNP government are heralding it as a $6.6 billion improvement over three years from the MYEFR, driven by its responsible management. This is the chart in their budget papers.
But it is, in fact, a deterioration of around $21bn from the last budget.
No charts for that one. No doubt the previous Labour government was, as usual, too optimistic (see above in NSW) but the shock/horror revisions in January went from Pollyanna to Cassandra in one move.
Now, after the MYEFR, the new government probably hoped Queensland would be downgraded by S&P – the thought is to get it out of the way and easily blame it on the last crew. In fact, the forecast debt revisions in January were even more spectacular than the budget revisions, clearly blowing Queensland way below the AA+ thresholds.
However, S&P didn’t play ball – merely putting Queensland on negative outlook in February and putting the onus on the new government to fix it.
Well, in our humble view, the government has not done enough to “fix it”.
By our calculations, it will still see Queensland trickle down to AA – even if not blowing down. Put another way, the new government is more fiscally responsible than the old one, but not enough to keep the AA+ rating.
Anyway, for those still reading, we think the Australian state ratings with S&P will look something like this by year’s end. Note: S&P does not rate the Northern Territory.
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
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 OLIVER RENTON. Reported by portfolio specialist Chris Adams
- Find out about Pendal Focus Australian Share Fund
- Latest webinar: Big opportunities in small companies – watch on demand
WHILE geopolitical headlines are dominating, they have not yet driven major shifts in markets.
The S&P 500 was off 0.1% last week, while the ASX 300 was down 0.5%. There were only small moves in currencies and bond yields. Oil was up 3.7% and gold was down 1.8%.
So far, markets have largely shrugged off the Middle East conflict but with the US officially joining in active combat over the weekend, that might change. The next move from Iran will be critical.
We have seen some risk premium come into the oil price, though physical flows have been largely unaffected. Action to close the Strait of Hormuz – through which roughly 20% of the world’s oil trade flows – could change that too.
Central banks globally are looking to cut rates to stimulate somewhat anaemic outlooks – the extent to which an inflationary oil price shock may alter this mechanism seems to be the main implication markets are focused on.
Elsewhere, the US FOMC meeting was – as expected – uneventful. There was little meaningful news flow on tariffs, but some weaker data on the US housing market.
We are entering a period with strong seasonal effects in market and tax-loss selling ahead of the end of financial year so there may be some unusual moves over coming weeks.
US macro and policy
FOMC
The Fed unanimously voted to keep rates in the 4.25-4.5% range and is leaving its options open, stating that uncertainty about the economic outlook “has diminished but remains elevated” and that “the Committee is attentive to the risks to both sides of its dual mandate”.
In his press conference, Chairman Powell said that there might be some small cracks in the US labour market – and all but four of 19 participants noted that the outlook for unemployment was more uncertain than usual – but that the Committee was not concerned at this point.
He also noted that current settings were moderately restrictive and well positioned to be able to manage the risks and uncertainties they face.
Most members are also seeing the inflation outlook as unusually uncertain, with the risks skewed to the upside. Powell emphasised the importance of keeping longer-term inflation expectations well anchored to ensure that a one-time, tariff-induced increase in the price level does not become an ongoing inflation problem.
Other macro data
Headline retail sales were -0.9% in May, versus -0.6% expected, with net revisions to previous months of -0.3%. However, “control” retail sales, which exclude the most volatile items, rose 0.4%, slightly ahead of +0.3% consensus expectations, with net revisions of +0.2%.
Sales ex-autos dipped by 0.1% versus +0.3% expected. Net revisions were -0.2%.
Industrial production fell by 0.2% in May, versus flat expectations.
The National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI) builder confidence in the newly built single-family home market was 32 in June, down from 34 in May.
This index has only been lower twice since 2012 – in December 2022 (when it hit 31) and in April 2020 when it slumped from 40 to 30 at the start of the pandemic.
Housing starts fell 9.8% (versus -0.8% expected) in May to an annualised rate of 1.26 million homes, which is the slowest pace since the pandemic. Initial jobless claims are spiking, but this is a usual trend at this point in the year. Employment in the US remains a major watch-point.
Global macro and policy
The UK Consumer Price Index (CPI) eased, rising at 0.2% month-on-month and 3.4% year-on-year.
Bank of England kept rates at 4.25% as expected, though more committee members than anticipated had voted for a cut.
The Eurozone CPI was 0% month-on-month and up 1.9% year-on-year.
The Bank of Japan also kept rates unchanged and reported a reduction in Japanese government bond purchases of ¥200B each quarter, starting from April 2026.
In China, it is worth noting that while the month-on-month shift in newly built home prices remains negative, it has improved sharply from this time last year. If this flips back to positive, it could see a swift improvement in China consumer confidence, such as we saw in late 2022/early 2023.
Macro and policy Australia
The Australian unemployment rate remained steady at 4.1%. Underemployment at 5.9% fell to a new cycle low. Hours worked rose 1.3% in the month.
The number of employed people fell 2,500 for the month after rising 89,000 in April.
Despite this volatility in month-to-month data, the underlying pace of employment growth remains solid. The employment to population ratio remains around record highs of 64.3%.
Markets
Oil markets remain watchful on the Israel-Iran conflict and the risk of a wider and more prolonged conflagration.
Physical flows remain uninterrupted thus far, although Iran has indicated the possibility of closing the Strait of Hormuz.
Find out about
Crispin Murray’s Pendal Focus Australian Share Fund
The price has risen more than 20% in June, but the level itself (Brent crude US$77/bbl) is not stretched versus where it has been trading previously – there is further risk should the conflict escalate and affect physical flows.
We note on underlying fundamentals that global crude oil inventories are low, China’s oil demand has improved somewhat sequentially, and OPEC+ members also appear to be complying with production targets.
Turning to equities, there are a number of interesting observations:
- Historically, S&P 500 selloffs in response to geopolitical volatility going back to the Second World War have been a median of 17 days with a median of 16 days to recover.
- Bloomberg reported that the number of conversations about “reshoring” in the S&P 500 earnings season spiked to 60 (and to 193 in the small company Russell 3000). For the S&P 500, most of the conversations were in the healthcare, industrial and utility sectors.
- There are some signs of softer sentiment, with the AAII net Bullish verses Bearish sentiment indicator shifting back into negative territory after briefly swinging positive.
- Positioning also remains cautious, with cyclicals versus defensives exposure having plunged in April to historically low levels.
- Despite narratives to the contrary, foreign inflows to US stocks are annualising at the second largest year ever, behind 2024.
- Next-twelve month earnings estimates for the S&P 500 have hit an all-time high, regaining ground lost after the initially tariff announcements.
- Retail buying of the US market slowed from the extremely high levels of March and April, but still remains strong at US$23bn inflows.
In global equities, we sawsolar names lower following the release of the US Senate’s draft of the “Big, beautiful bill” that retained the phasing out of solar, wind, and energy credits by 2028.
Residential construction company Lennar noted it continues to see softness in the housing market due to affordability challenges and a decline in consumer confidence.
Payment stocks like Mastercard, Visa and PayPal came under pressure after passage of the Genius Act in the Senate, which establishes a pro-growth regulatory framework for crypto stablecoins and Coinbase’s launched a new stablecoin-based payments platform.
Global recruitment firm Hays issued a profit warning ahead of its FY25 close, noting activity levels have softened in the June quarter, with broad-based weakness in permanent roles globally reflecting low levels of client and candidate confidence as a result of macroeconomic uncertainty. They noted that temporary employment and contracting activity continues to be more resilient.
Australian equities
In Australia, Resources (-2.5%) was the weakest sector, though there was strength in Energy (+5.5%), while Materials (-4.2%) was the weakest GOCS sector.
Technology (+1.4%) and Industrials (+1.0%) were both solid.flow out of the Government review into supermarkets.
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 an independent, 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 here.
Contact a Pendal key account manager here.
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’s what the latest employment data means for the market, according to Pendal’s head of government bond strategies TIM HEXT
THE latest employment data was released today.
Headline employment was slightly weak, with a loss of 2,500 jobs – payback from the very high 87,000 increase in April.
Given volatility from month to month, we look at a three-month rolling average, which remains at around 35,000 jobs – enough to soak up new job entrants.
More importantly, the unemployment rate remains stuck at 4.1%, which the same result for every month so far this year.
Stability like this is almost unheard of.
Currently, any sharp move in jobs is matched by a similar decent move in the participation rate – again showing the limitations of the survey.
The good news for the job market is that full-time job growth is exceeding part-time growth.
This means less spare capacity in the labour market, as some of the 25% of part-time workers who say they are seeking more hours looks like they are finding them through full-time jobs.
This reduces underemployment and, in turn, what is called the underutilisation rate (unemployment plus underemployment).
The underutilisation rate now sits at 9.9%. This is the lowest since early 2023 and almost 1% lower than early 2024, highlighting a healthy job market. If we look back a decade, it is almost 4% below pre-Covid levels.
Our base case
We are less than three weeks away from the RBA’s July decision.
The RBA has forecast unemployment to be at 4.2% by the end of June. This data on its own would indicate no cut. In fact, unemployment is still below its estimate of full employment.
However, weaker consumption data since the May cut and the fact that the RBA looked closely at doing 0.5% in May means our team favours a July rate cut.
Right now, the market is pricing an 80% chance of a cut.
We do not expect it to move far from here pre-July, absent global events. Terminal cash is still priced at 3% by March 2026.
We still like duration despite market pricing. While optimists cling to the hope that we will make it through July without tariffs disrupting markets again, it is not something we think is a base case.
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
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 Pendal’s head of equities CRISPIN MURRAY. Reported by portfolio specialist Chris Adams
DESPITE a 12 per cent rise in the oil price following rising geopolitical tensions between Israel and Iran, equity markets ended close to flat last week.
Markets had been higher prior to the Friday attack, as US-China tariff tensions eased and benign May US inflation figures helped bond yields lower.
The S&P 500 and the NASDAQ fell -0.4% and -0.6%, respectively, while the S&P/ASX 300 closed up +0.3% as equities consolidated following strong performance over the quarter to-date.
The US economy is proving more resilient than many feared, giving the market confidence it can cope with the impact of tariffs.
However, early signs of a slowdown are appearing and most economists anticipate Q4 2025 GDP growth falling to a 1%-2% range.
We believe equity markets remain well supported, but are likely to consolidate over the northern summer as we wait on trade deals and clarity on the economic effect of tariffs.
In Australia, the market was led by energy and gold stocks last week, with REITs also outperforming. Tech names – particularly the strong recent performers – did start to retrace.
We see three key issues for markets in the near term and will look at each in turn:
- rising geopolitical tensions
- tariffs and the US economy
- concern over the US budget deficit and implications for bond yields.
Issue 1: The impact of rising geopolitical tensions
Israel’s attack on Iran triggered a 12% rise in oil prices which, in turn, saw equities sell off and bond yields fall.
There seem to be two catalysts for the attack.
One was the International Atomic Energy Agency (IAEA) announcing earlier in the week that Iran had violated its commitment under the Nuclear Non-Proliferation Treaty. The other was upcoming US-Iran nuclear talks, with Israel potentially concerned over the outcome.
The attacks have therefore been positioned as pre-emptive action to prevent Iran achieving nuclear strike capability.
The likelihood, reinforced by the Israeli rhetoric, is that there will be a series of ongoing strikes given the perceived damage to Iran’s nuclear program is limited so far. Iranian retaliatory strikes may also be a catalyst for escalation.
For financial markets, the focus is initially on the risk to the oil market.
Oil jumped 8% on Friday to US$75 on the news and is now 25% above its Liberation Day lows.
A lot of the move reflected short-covering given previously weak sentiment towards oil.
The key question is whether this will be sustained and if it’s the first part of a bigger move or if it will reverse quickly.
The threat to oil supply comes from two sources:
- Disruption to Iranian oil as a result of infrastructure damage or tighter US sanctions on supply. Iran supplies around two million barrels per day – around 2% of the global market.
- Iran blockading the Strait of Hormuz, through which around 20% of global oil production flows.
There is clearly risk of the first scenario, though this may be limited. The US has indicated it does not want to see oil prices higher as it wants to avoid any inflationary shocks exacerbating the impact of tariffs. It would be reasonable to assume Israel understands this and – as with previous attacks – will avoid oil export-related infrastructure.
We also note around 75% of Iranian oil is believed to go to China, so the prospect of US sanctions will be tied to their broader bilateral discussions.
It also seems very unlikely that Iran would close the Strait of Hormuz given the largest impact would be on China, which is one of Iran’s key supporters. China receives roughly 57% of the oil transported through the Strait.
A blockade would also have a dire impact on Iran’s economy at a vulnerable time. Should Iran try this, it is believed that a military response would unlock the blockage within weeks/months.
The other issue to keep in mind is there remains an estimated five million barrels per day of excess capacity in oil markets, which would be available to partially offset any disruption, albeit with some lags.
The outlook for oil outside of this geopolitical risk is muted, with a slowing global economy and supply growth from both Saudi and non-OPEC nations.
For example, in its baseline view Goldman Sachs forecasts prices falling into the US$50 range. It suggests that prices could peak to near US$90 in the short term in the scenario that Iranian production drops by 90%, with OPEC offsetting half.
At this point we don’t expect a sustained oil price rally; history indicates geopolitical-relate spikes in oil are often short-lived and peak occurs very close to the event.
Issue 2: Tariffs and the US economy
Tariff news flow was better last week following the call between Presidents Trump and Xi and an agreement to lift Beijing’s restrictions on exporting critical minerals and magnets, in exchange for the US loosening controls relating to semis, aircraft parts and Chinese students in the US.
Overall, we are back to the original Geneva deal timeline, which we expect to lead to an agreement announced in September and implemented in October.
Separately, we saw the Court of Appeals extend approval to continue use of the tariffs linked to the International Emergency Economic Powers Act (IEEPA) to the end of July while it considers the case.
As a reminder, if it upholds the Court of International Trade’s block on using this measure to impose tariffs, the Administration will appeal to the Supreme court.
The key question for the US is whether the tariff impact is now kicking in and how much that will affect the economy. There are three components that will determine this:
- The unwind of the “front loading” which boosted demand ahead of tariffs. The debate here is to what extend consumers held back on other spending to buy big-ticket items such as autos ahead of tariffs – there is evidence that this occurred, with incomes strong and savings rates rising. This would suggest consumers are managing their budgets carefully and there may not be as sharp an unwind as some expect. This unwind may be felt more in countries exporting to the US (notably the EU) where production and exports rose to get ahead of tariffs.
- The impact of the effective tax increase. Fear here has diminished but is still live. As mentioned above, incomes and jobs have held up and corporate anecdotes indicate demand remains okay. The flow-through of pricing from tariffs has not yet been that evident. It will come through – though how quickly will be important to watch. The other issue to watch is to what extent this is absorbed in corporate margins and affects business investment.
- The impact on sentiment. The effect of tariffs is estimated to be 1.0% to 1.5% off US GDP. How quickly this flows through is important – if this is a more extended period i.e. 9-12 months rather than 3-6, there is likely to be less risk of sentiment effects compounding the first order impact.
On inflation, the May Consumer Price Index (CPI) data was positive, with headline 0.08% month-on-month, versus 0.26% expected, and core 0.13% versus 0.27% expected.
It is estimated that tariffs added 4 basis points (bps) to the month’s CPI.
There is some debate over seasonal adjustments understating inflation, however, the key message for now is that the flow-through of tariffs is taking time and this may help with the sentiment effects.
Both goods and services inflation were below expectations and the “super core” measure was also benign, signalling around 2.5% annual inflation.
Tariffs should start flowing through into prices, with a survey indicating 31% of service firms and 45% of manufacturers intend to pass on tariffs in full. The bulk of the effects should be felt within six months, though existing inventories may delay some effects.
Inflation of 2.5% is not low enough for the Fed to feel comfortable about easing, particularly given the expectations that tariffs will lead inflation to the high 3% range by year end.
The Fed’s goal will be below-trend GDP growth, which will reduce the risks of inflation becoming embedded in the economy.
It appears as though that is happening, with the real data beginning to soften – such as initial and continuing jobless claims creeping higher. This is consistent with a deceleration rather than a more abrupt slowing.
The market continues to price in two more rate cuts in the US this year.
Issue 3: US deficit concerns and implications for bond yields
The third big issue for markets has been the rising fear of US debt sustainability, manifesting itself in higher long-bond yields.
The outlook here has improved, with some of the concerns flagged when the House version of the Big Beautiful Budget bill came out appearing overstated.
With slowing growth and benign inflation, bond yields have remained in their three-year range.
Yields declined last week, despite the increase in oil prices, and auctions for both 10-year and 30-year bonds were well supported.
Pendal Focus Australian Share Fund
Now rated at the highest level by Lonsec, Morningstar and Zenith
One trigger for concerns on bonds was the rise in Japanese 30-year bond yields. These too have come off, partly on expectations of supply being constrained but also as immediate selling pressures abated. This has flowed through into the US 30-year yields as well.
The final factor reducing fears of fiscal sustainability is that tariffs are generating good revenues for the government – an incremental US$55bn so far and an indicative run rate of $200bn per annum.
This, alongside the more resilient economy, has helped raise overall federal government revenues.
Section 899
Outside of these three key issues, we are also watching the issue of Section 899.
This relates to a provision in the budget Bill creating a new section 899 of the tax code, which would raise taxes on many forms of passive and active business income for foreign investors and corporates in the US.
This is a complex issue, but to summarise, the goal is not to create a blanket tax – rather, it aims to force other countries to rescind taxes on US companies.
The tax would scale over four years, to potentially 41% on US earnings of overseas companies.
Theoretically, this could impact several Australian companies including Macquarie Group, CSL, ResMed, Bramble and Aristocrat Leisure.
Australia does charge a Diverted Profit Tax (DPT) and has an Undertaxed Profits Rule (UTPR), as does the UK and much of the EU. Should the US deem these to be discriminatory, then the Section 899 tax may apply.
It also targets passive income which may include bond coupons.
The likelihood at this point is that these taxes will not have material impact.
Firstly, the Bill is likely to be changed by the Senate – notably, the passive income component may run the risk of deterring foreign investors into US bonds, which is untenable given the deficit.
The corporate taxes will probably remain, albeit with time for negotiations to gain an exemption.
However, this is an issue we need to keep a close eye on as while probability remains low, potential materiality (in its current form) is high.
Markets
Equity markets remain in good shape technically but are now consolidating, having returned to prior highs in a short period.
As highlighted in recent weeks, earnings revisions and Mag 7 strength has supported the recovery in US equities. Sentiment remains subdued, which is supportive, while credit spreads are also near their lows.
Technical support levels are around 3-5% below current levels
Gold is at an interesting level. It has been consolidating following the recent strong run and remains well supported – the question is whether it breaks through the $3,500/ounce high.
Gold miners are now performing better than physical gold, reflecting growing belief in the sustainability of higher prices.
Australia
The local market saw subdued moves last week as the S&P/ASX 300 consolidates after a 9.3% run quarter-to-date and is now at the top end of its historic PE range.
We did see rotation last week. Energy (+6.3%) led on the rising oil price, gold stocks were also up on geopolitical concerns and REITs (+2.5%) outperformed as Aussie bond yields continuing to fall and approach their lows for the year at 4.15% (Australian government 10-year yield).
Technology (-0.7%) pulled back, notably stocks which ran hard in May such as Life 360 (360, -5.4%) and technology One (TNE, -4.2%)
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.
Emerging markets seem to be entering an extended period of rate-cutting, which should support their economies and equity markets. Pendal EM portfolio manager JAMES SYME explains
- Find out about Pendal Global Emerging Markets Opportunities fund
Uncertainty remains high in financial markets among participants and policy makers.
This uncertainty is driven by global trade policy and how it will affect growth, inflation and ultimately interest rate decisions (and market expectations of those decisions). The International Monetary Fund now believes today’s tariff-driven environment is more challenging than the COVID era.
“[Early in the pandemic] central banks everywhere were moving in the same direction in the sense of easing monetary policy very quickly,” IMF deputy Gita Gopinath said last week.
“But this time around the shock has differential effects.”
Looking at previous cycles in emerging markets – especially considering the impact of a weaker US dollar and incoming capital flows – Pendal’s EM team believes emerging markets are mostly in an extended period of cutting policy interest rates.
We believe this will be supportive of emerging economies and emerging equity markets.
Emerging markets cutting rates
Last year we saw rate cuts in many advanced economies as the 2022 inflation surge eased.
But this year global central banks have been more cautious, either in their statements or the speed or extent of rate cuts.
Why? Because volatility in trade policy creates significant uncertainty about growth and inflation.
Find out about
Pendal Global Emerging Markets Opportunities Fund
In the emerging world, however, most central banks have continued cutting rates.
The 19 independent central banks in the MSCI Emerging Market Index members (Greece uses the Euro and the four Arabian Gulf nations have USD pegs) have delivered 24 policy rate cuts and only four hikes in the first five months of 2025.
(Of those hikes, three were in Brazil where economic growth remains very strong, and the other was in Turkey after three big cuts.)
A clear pattern
There is a clear pattern here.
GDP growth forecasts for 2025 and 2026 have been revised lower in emerging Asia (and sharply lower in developed markets) but have held largely steady in EMEA and Latin America.
Many of the central banks on hold are in emerging Asia – China, Taiwan, Malaysia – despite this region’s more-challenging growth outlook.
We believe this is because those countries – with their export-based economic development models and big current account surpluses – have been less sensitive to the strong US dollar in recent years, and have been able to keep interest rates lower than the current account deficit countries.
For example, Taiwan had a 2024 current account surplus of 14.1% of GDP.
Its central bank has been on hold at 2% for more than a year despite CPI inflation in the first five months of 2025 averaging 2.2%.
By comparison, South Africa ran a 2024 current account deficit of 0.7% of GDP.
Its CPI inflation averaged 3.1% in the first four months of 2025 – but the central bank started the year with policy rates at 7.75% and has been able to cut rates twice so far this year.
What it means for investors
In terms of portfolio positioning, we expect global investor concerns about US trade and economic policy to continue driving capital flows into emerging markets.
We think this will be supportive of currencies, allowing stronger growth, lower inflation and faster/further rate cuts.
This, we believe, is the principal trigger of a positive feedback loop we’ve seen in emerging economies in previous up-cycles.
We prefer domestic-demand-driven emerging markets, with historically weaker current account balances and the ability to cut rates from higher real levels.
We remain constructive on the asset class, and overweight Mexico, Indonesia, South Africa and Brazil.
About Pendal Global Emerging Markets Opportunities Fund
James Syme, Paul Wimborne and Ada Chan are co-managers of Pendal’s Global Emerging Markets Opportunities Fund.
The fund aims to add value through a combination of country allocation and individual stock selection.
The country allocation process is based on analysis of a country’s economic growth, monetary policy, market liquidity, currency, governance/politics and equity market valuation.
The stock selection process focuses on buying quality growth stocks at attractive valuations.
Find out more about Pendal Global Emerging Markets Opportunities Fund here
Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management.
Here are the main factors driving the ASX this week according to Pendal investment analyst ANTHONY MORAN. Reported by portfolio specialist Chris Adams
ROBUST employment and income growth in the US have been the lynchpin supporting markets at peak valuation levels – and the data didn’t disappoint last week.
Stronger-than-expected US payrolls on Friday saw US equities and bond yields both rising to close out the week.
The S&P 500 finished up 1.5%, the NASDAQ was up 2.2%, while the S&P/ASX 300 rose 1.0%.
Otherwise, there was little news on the macro and market front – with the media focused on President Trump and Elon Musk’s social media feud, which serves as an important reminder that a lot can change in six months.
The commodities picture was mixed, with cyclical exposures oil (Brent crude +4.0%) and copper (+3.8%) both rebounding, along with gold (+1.0%). Iron ore fell -3.5%.
US macro
May’s payroll data showed 139k new jobs, which was slightly ahead of the 126k expected by consensus and consistent with a slowing but still growing economy.
Average hourly earnings came in at +0.4% MoM, ahead of consensus at +0.3%.
This stronger hard data saw a spike in bond yields on Friday night, coming in as a bit of a surprise after softer economic survey data earlier in the week.
This softer data included the US Manufacturing Purchasing Manager’s Index (PMI) coming in at 48.5 versus 49.5 expected and the May ISM Services Index coming in at 49.9 versus 52.2 expected.
The Manufacturing PMI miss was primarily driven by de-stocking after the pre-tariff inventory build-up. This trend can also be seen in consumer data, with US auto sales down 9% month-on-month in May after a pull forward of purchases to beat tariffs earlier in the year.
The weakness in the ISM Services Index could provide a deflationary impulse to partly offset tariff impacts on goods inflation.
Elsewhere, the Fed’s “Beige Book” – a regular review of economic conditions – warned of a slight decline in economic activity.
Initial jobless claims also ticked up during the week, confirming a rising trend. However, seasonal adjustments made a big impact, so this is not yet a clear signal.
Commentary around inflation in many of the data releases was more hawkish – in the Services ISM, the price component spiked 3.6pts to 68.7 and the Beige Book noted: “There were widespread reports of contacts expecting costs and prices to rise at a faster rate going forward. A few Districts described these expected cost increases as strong, significant, or substantial.”
There was a partial offset to this from the Congressional Budget Office, which scored the current Budget Bill as a little less stimulatory than expected, which slightly eased longer term inflation fears.
The deficit-expanding impact of the Budget Bill is ostensibly the catalyst for Musk and Trump’s high-profile feud.
The takeaway is that data suggests the US economy is incrementally slowing – but this is not a big surprise and it suggests decelerating growth, not recession.
This incremental slowing is negative for stocks that are at the pointy end of economic weakness (e.g. US consumer-exposed stocks) but is unlikely to be enough to drag down the broader market materially.
The US economy is expected to reach trough growth in the December quarter.
Tariffs
There wasn’t a huge amount of news flow on tariffs last week, though anxiety is building as we get closer to the end of the tariff suspension period on 9 July.
Trump demanded the best offers from major economic partners by last Wednesday.
The biggest news was the phone call between Trump and China’s President Xi, but there were no real details apart from Trump being invited to Beijing.
The market still expects a Japan trade deal soon and the G7 Leader’s Summit from 15-17 June is seen as a possible confirmation point for deals.
Sentiment around tariffs looks set to remain volatile, with anxiety continuing to grow in the absence of news flow.
Australia macro
March quarter GDP was softer than expected at +0.2% quarter-on-quarter versus consensus at +0.4%. This is a marked slowdown versus the December quarter and a decline in per capita terms.
We have been expecting resilient economic growth in Australia on the back of rising real disposable incomes, an expansionary Federal Budget and interest rate cuts.
There were some unusual distortions in the March quarter from extreme weather events, which should reverse.
But we also saw a rare decline in public spending – driven by lower state government spending – and softer household consumption (+0.4% versus +0.7% in the December quarter).
Pendal Focus Australian Share Fund
Now rated at the highest level by Lonsec, Morningstar and Zenith
Notably, real household income growth was good at +1.7% quarter-on-quarter, but this was offset by a rise in the savings rate, which rose to 5.2% in the quarter and is normalising towards historical trends.
The Fair Work Commission announced a 3.5% increase in the minimum wage, which equates to growth in real wages with CPI running in the high-2% range. It comes on top of the 0.5% superannuation increase.
However, the growth in real wages won’t be a support to GDP growth if the savings rate keeps rising.
Of more concern for the longer-term economic outlook, productivity growth was flat during the quarter and unit labour costs were +0.9% (or +5.1% year-on-year).
This suggests there is little downside from here for the inflation rate – so while the RBA still intends to cut rates on the basis that monetary policy is tight, this may reduce the number of cuts.
We still expect a base case of resilient Australian GDP growth to play out, with some of the drivers in the March quarter softness to be temporary.
But the savings rate – potentially driven by global macro uncertainty and weather events (i.e. relief payments) – is worth watching as a risk.
We also need to wary of a labour cost-driven bounce back in the CPI that limits rate cuts.
Rest-of-the world macro
Eurozone preliminary CPI was softer at +1.9% year-on-year versus 2.0% expected, being helped by a stronger euro and lower energy costs.
This was below the ECB’s target and saw the central bank cut interest rates by a further 25bps on Thursday night.
Rates are now back to 2% and the ECB has signalled that it is nearing the end of the cutting cycle, albeit with downside risks and uncertainty ahead.
Tariffs are hitting the Chinese economy, with the Caixin Manufacturing PMI surprisingly down 2.1 points to 48.3 versus 50.7 expected. This is the lowest reading since October 2022.
China still needs to step up its stimulus, particularly in support of the consumer, to offset these impacts.
Markets
It was a good week for the Mag7 (ex-Tesla), with the AI narrative regaining some momentum, as:
- Taiwan’s TSMC spoke favourably about AI-linked demand.
- Meta struck a 20-year deal with Constellation Energy for nuclear power to support AI operations.
- The Wall Street Journal reported that Meta aims to have AI tools in place by the end of 2026 that would allow complete automation of the entire advertising process (including creating ads) – technology that could significantly disrupt traditional ad agencies.
- A report from private investment firm Bond Capital talked about the AI market growing to $244bn by 2025 and to $1.01 trillion by 2031.
In recent weeks, we’ve talked about how markets – despite trading at full valuations – seem well supported by technical drivers such as liquidity and slowing, but relatively resilient, economic growth.
This remains the case, but by some measures markets look like they have the potential to be more volatile.
Both long and short leverage is at a very elevated level historically. This leaves the net position balanced, but suggests the potential for outsized moves if there is a momentum shift as one side’s leverage is unwound.
There is a parallel of this in Merrill Lynch’s Bull & Bear Indicator, which is reading neutral, but under-the-hood components are sharply polarised with hedge fund and long-only positioning very bearish and credit market technical and equity market breadth very bullish.
So there is some potential for a pick-up in volatility, with tariff deadlines and deals a potential catalyst.
Another concern is that markets will underperform as hard data continues to slow in coming months. This risk is highlighted by the index of US Cyclicals versus Defensives pricing in economic growth well above current economic consensus.
This is clearly going to be a risk, but Goldman Sachs notes that in past recessions the market has rallied with the recovery in soft economic data, which leads the hard data.
We have already seen the weakness in the soft data and there are some signs of a rebound (e.g. consumer confidence recently rebounded 12.3pts to 98).
Also, the Cyclical versus Defensive reading may be exaggerated by the Healthcare sector – which is being challenged by government policy concerns – and tariffs hitting some normally defensive Consumer Staples.
More sector-neutral measures of economic sensitivity, like the High Operating Leverage versus Low Operating Leverage stocks index from Goldman Sachs, show High Operating Leverage stocks operating at a level more consistent with a recession.
The upshot is it seems more likely that trade policy, rather than the economic data, will be the main driver of potential volatility in coming weeks.
Australian market and stocks
The Australian market rose during the week, following the offshore lead – with banks and REITs leading the charge and defensives and resources underperforming, with iron ore declining and dragging down the latter.
About Anthony Moran
Anthony Moran is an analyst with over 15 years of experience covering a range of Australian and international sectors. His sector coverage has included Australian Industrials and Energy, Building Materials, Capital Goods, Engineering & Construction, Transport, Telcos, REITs, Utilities and Infrastructure.
He has previously worked as an equity analyst for AllianceBernstein and Macquarie Group, spending a further two years as a management consultant at Port Jackson Partners and two years as an institutional research sales executive with Deutsche Bank.
Anthony is a CFA Charterholder and holds bachelor’s degrees in Commerce and Law from the University of Sydney.
Cash rates finishing the year at 3.1% seems like a good bet, writes Pendal’s head of government bonds TIM HEXT. Here’s why
THE GDP numbers for Q1 2025 were released today.
In volume terms, the economy grew by 0.2%. This leaves the annual rate at 1.3%.
Against population growth of 0.4%, we are once again back to the negative GDP per capita growth story seen over most of the past two years.
There was some dampening in mining and tourism from poor weather in Queensland and Western Australia, but the result will be a disappointment to the government and – more importantly – the RBA.
This is supposed to be the year that the primarily government-led growth of the past few years gives way for a resurgent private sector.
After all, tax cuts, rate cuts and positive real wages leave households with more cash to spend.
Public demand fell 0.4% in the quarter, led by a 2% fall in public investment. While we doubt it is the start of bigger falls, it will continue to taper off.
Private investment rose 0.7%, led by buildings and construction.
So far so good, in terms of following the script.
However, we the consumer are yet to come to the party. Household spending rose 0.4% but only really on essential items, partly offsetting reduced government subsidies.
It seems we are saving our income boost more than spending it – with the household savings rate rising to 5.2%, the highest since the pandemic.
It seems unlikely that this will change anytime soon as the trade wars won’t exactly fill consumers with confidence.
A couple of other points to note.
There were still no productivity gains, with productivity being flat for the quarter and actually 1% lower over the year.
Also disappointing was the lack of consumer growth in NSW and Victoria, where consumers should have responded more positively to income gains.
Cash rate implications
GDP always lags data, but the weaker trend is unlikely to change a lot in the current quarter.
Overall, the RBA was expecting growth to be at 1.8% by the end of June. This forecast only came out two weeks ago. Q2 last year was 0.2%, so the central bank would need to see a 0.7% result for Q2 this year.
While we expect growth to continue to pick up, it is likely GDP will be closer to 1.5% by the end of June and below the RBA’s 2025 forecast of 2.1% by year-end.
We were expecting the RBA to hold off till August to cut rates, in line with its quarterly CPI cycle.
However, recent consumer data (retail sales, household spending, and GDP) now suggests the RBA will cut in July to give the consumer a further boost to pick up their spending.
Cash rates finishing the year at 3.1%, or around their estimate of neutral, seems like a good bet.
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
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 Pendal’s head of equities CRISPIN MURRAY. Reported by portfolio specialist Chris Adams
FALLING bond yields, decent earnings from Nvidia and a US court ruling against some of the Trump Administration’s tariffs combined to support equity markets last week.
The latter ruling is under appeal and tariffs will remain in place through that process. However, there is a perception that this may reduce the Trump Administration’s bargaining power and possibly lead to a lower tariff outcome.
There are other mechanisms for applying tariffs (detailed later in this note), so this process is unlikely to make a major difference to the ultimate tariff rate, in our view. The key issue remains whether we see negotiated outcomes that help reduce the end tariff rate.
The rally in bonds diffused some of the concerns that the rise in long-dated bond yields would derail equity markets.
At the same time, Nvidia’s outlook was constructive, and underpinned the recovery in AI and technology stocks last week.
The S&P 500 rose 1.9% and finished up 6.3% for May. The ASX 300 was up 0.9% and 4.2%, respectively. Both markets are now up over the year: 1.1% for the S&P 500 and 4.9% for the ASX 300.
Growth stocks, some domestic cyclicals and a recovery in the energy sector helped Australian equities last week.
Impact of the tariff ruling
Our first observation is that the timing of the US Court of International Trade (CIT) ruling caught the market by surprise – it was not expected this soon.
The second observation is that the CIT, while not well known, is held in high regard by legal experts, with a specific remit and technical framework and specialised jurisdiction over civil disputes related to US customs and international trade laws.
It found no legal defence for the Trump Administration’s implementation of the 10% reciprocal tariffs – and those levied on Mexico, Canada and China with regard to fentanyl and border security – under the International Emergency Economic Powers Act (IEEPA). The Court issued a permanent injunction blocking enforcement of the tariffs.
The government immediately appealed the decision and the US Court of Appeals ruled that the tariffs could remain in place while that process plays out.
Pendal Focus Australian Share Fund
Now rated at the highest level by Lonsec, Morningstar and Zenith
The legal consensus is leaning to the view that the Appeal court will uphold the CIT ruling, which would then see the matter go to the Supreme Court, which may not rule until after their summer recess.
In reviewing this matter, the Supreme Court will be mindful that over-ruling the CIT could call previous rulings and cases relating to intellectual property and other matters into question, prompting further consequences.
Also, when the Supreme Court ruled on upholding the TikTok ban in January, it cited two previous IEEPA cases which emphasised that the President can’t assert authority on the basis of national emergencies that aren’t genuine and extraordinary – and that the impact of the remedy must be proportional to the threat.
So, there is a reasonable chance this may prevent the Trump Administration from using the IEEPA path. However, there are other paths that the Administration can take:
- While the Appeal is pending, these tariffs can remain in place.
- If suspended, then the President has authority to impose tariffs up to 15% for 150 days to address trade deficits, under section 122 of the Trade Act of 1974. This could be applied within days/weeks.
- The Administration could launch investigations to lay groundwork for new permanent tariffs under Sections 232 and 301 of the same Act. While more time consuming, they can be expedited and probably undertaken during the 150-day period while Section 122 tariffs are in place.
- There is an existing Section 301 tariff already in place on China, which can be used to increase tariffs.
So, while the CIT ruling notionally takes average tariff rates down from 14% to 6%, at this point we would still work on the premise that tariffs end up in the 14 to 18% range.
The other issue to watch is the bilateral negotiations between the US and other countries. Treasury Secretary Bessent noted that two are close to agreement and that two more are proceeding but are more complicated.
So, we could find that the bulk of trade is covered off by bilateral deals by the time the legal process is over.
There was further negative news over the weekend, as President Trump announced that steel and aluminium tariffs would be raised from 25% to 50%.
It is unclear if this will be followed through; this may be Trump trying to re-assert his credentials in response to the surge in TACO (“Trump Always Chickens Out”) memes.
We also note a deterioration in the tone of discussions between China and the US, with both sides accusing the other of breaking the spirit of the recent Geneva agreement.
The upshot, in our view, is that tariffs are an important part of the Trump Administration’s five-pronged strategy to re-industrialise the US economy – the other four being tax cuts, deregulation, cheap energy and a lower US dollar.
As a result, we should assume they find a way to apply them.
However, there is a risk that the legal wrangling weakens their bargaining position and delays the signing of bilateral trade deals.
“Big beautiful” budget bill process
There was nothing much new last week. As the bill marinates, there is an increasing sense that Congress will look to roll back some of the measures given the concerns over the fiscal deficit.
This could make it harder to reach final approval, which may mean it is not in place by mid-August when the debt ceiling needs to be lifted.
As it stands, the Bill does front-end stimulus measures – such as a US$4k tax breaks for retirees, no tax on tips, and increased tax credits and a baby bonus for people having children.
These would kick in around April next year and Goldman Sachs estimates this could add 1% to GDP in H1 2026.
This would coincide with the German fiscal stimulus, and potentially affects the duration and scale of the current monetary easing cycle.
Growth and inflation outlook
The Core Personal Consumption Expenditures (PCE) deflator – a measure of inflation – was helpful, coming in at 0.12% for April which was in line with consensus. It was 2.5% year-on-year, with services inflation decelerating.
This is likely to be the low point in inflation, however, with the spike from tariffs set to hit from late May through to October. Annualised inflation over those months may reach 6%.
In this case, the PCE could rise to 3.5% year-on-year by the end of 2025, versus a Fed target of 2%.
That said, this is a wildcard given no one knows how large the tariffs will ultimately be – and how much of the impact companies will pass through.
It is important to remember that this is a one-off impact – and the Fed has historically said it does not see tax-driven inflationary impulses as a reason to react as it is transitory.
Given greater slack in the labour market, there is less reason to expect this to trigger an inflation spiral.
There are also offsetting factors with the hit to GDP later this year – estimated to be from 1.0% to 1.5% – leading to slower services inflation, offsetting the traded goods inflation.
Elsewhere, real disposable income rose 0.7% in April after rising 0.5% in March, highlighting that there is still good support for consumers. The savings rate has risen from 4.3% to 4.9%, reflecting a more muted rise in consumption in April (up 0.1% month-on-month).
The conclusion is that the US consumer remains in decent shape to absorb the impact of tariffs.
The Atlanta Fed GDPNow is signalling Q2 2025 growth of 3.8% and we are now seeing Wall Street beginning to follow; JP Morgan lifted its forecast to 4% – a lot of this is the unwind of the negative trade impact of Q1.
The average growth for H1 2025 will therefore come in at around 2%, which is probably the right signal for the run-rate going into the tariff shock and which should pull growth down to around 1% by Q4.
The most important read on the US economy is jobs as this drives income. Interestingly, it is also important for the equities market, with the strength of 401K inflows providing important liquidity.
There is a small sign of deterioration here as continuing claims are ticking up and have hit a cycle high. Payroll data is out this Friday.
Markets
The US market reacted well to the Nvidia result, which saw revenues up 12% quarter-on-quarter, beating consensus by 2%.
The important message was that shipments are picking up as supply chain constraints ease and demand remains good, which will help drive gross margin expansion.
It suggests there are no signs of weakness in the market for its graphic processing unit (CPU) chips, reinforcing the message from data centre hyperscalers (the largest users of data centre capacity such as Amazon, Microsoft and Google, among others) that capex is holding up.
There is also more focus now on the application layer for AI – for example, AI assistants on mobile phones – which will provide more confidence that the investment being undertaken can begin to be monetised.
This completes the earnings season for the Mag 7, which has proven to be one of the best in terms of revisions.
This, combined with a large underweight in tech among US hedge and long-only funds, helps explain why the market has been supported by the tech sector.
Australia
The S&P/ASX 300 returned 4.2% in May, driven by Technology (+18.8%).
Energy (+8.7%) and Small Resources (+10.1%) also outperformed on reduced concern over the risk of recession. Financials (+5.1%) did well, driven more by the insurers and market sensitives rather than the banks.
Defensive sectors such as Utilities (+0.3%) and Consumer Staples (+1.2%) lagged, having done well in April, while Health Care (+1.4%) was also weak on lingering concern over tariffs.
Large-cap Resources (+3.1%) also underperformed, with the outlook for iron ore seen as more subdued.
May also saw a mini-reporting season, which went reasonably well.
Results from Life360 (360, +51.9%) and Technology One (TNE, +36.8%) led the market higher, while the rest of the tech sector followed the US lead – with WiseTech (WTC) +21.1% and Xero (XRO) +12.2% on a good result.
Domestic cyclicals such as Qantas (QAN, +19.9%), Nine Entertainment (NEC, +12.9%) and Seek (SEK, +14.1%) also outperformed, helped by the RBA’s 25bps interest rate cut and its positive signalling on future cuts, as well as Labor’s election win which underpins government spending.
Industrials generally did better – notably Dyno Nobel (DNL, +18.1%) and Orica (ORI, +15.7%) on decent results supported by capital management.
Banks (+4.4%) were in line with benchmark, but this hid a more material divergence – with Commonwealth Bank (CBA) +5.6% and National Australia Bank (NAB) +5.2%, while ANZ (ANZ) was -2.8% and Westpac (WBC) was -0.9%.
Aggregate bank valuations remain at extreme levels, with the sector trading at almost four standard deviations above long-term price-to-earnings (P/E) and price-to-pre-provision-profit levels.
However, the bulk of this is now the CBA premium over the rest of the big four banks – this has reached record levels at 13 P/E points (23x versus 15x for the other “Big Three”) and is the best representation of the distorting effects of index weights.
Overall, the S&P/ASX 200 has returned to the top end of its historical valuation band at around 18x, which limits the valuation-driven upside from here and means the market will be earnings driven.
The positive here is that FY26 earnings-per-share growth is currently expected to be 6.9%, with resources finally no longer being a headwind.
The current valuation rating does make the market vulnerable to a deterioration in earnings. This looks unlikely in the next few months, however, given the solid economic outlook and supportive fiscal and monetary policy.
Inflation this month was broadly in line with expectations, while retail sales was a bit soft (-0.1% month-on-month, possibly tied to the election) which helps underpin expectations for RBA cuts.
The July meeting remains live for a cut, with the market at 60% probability, with two more cuts expected by year end.
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.