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

WE SAW more of the same last week in terms of the market’s thematic drivers.

Inflation persists, the Ukraine conflict grinds on, Chinese lockdowns remain in place, parts of the crypto space are unwinding and global growth is slowing.

Market participants remain on edge as a result. The US inflation print didn’t serve as a circuit breaker. The headline number declined, but less than expected.

The S&P 500 fell 2.35% and the NASDAQ lost 2.77%. The S&P/ASX 300 was off 1.73%. The week’s falls were softened by a strong rebound on Friday.

Commodity prices have given up recent gains. Mega cap growth names in the US have also rolled over, now adding to index weakness now rather than holding things up.

The withdrawal of liquidity is making itself felt in speculative, profitless business models. Last week this manifested in the crypto market.

While details, exposures and implications are likely to be revealed in coming weeks, the issue is the potential for any second-order impact on the broader system.

US Treasury Secretary Janet Yellen said it did not count as “a real threat to financial stability”, but this needs to be watched.

The quarterly reporting season in the US shows consensus annual earnings for the S&P 500 remain intact for FY22 and FY23.

That said, the market has become a bit narrower in this regard, with energy doing a lot of the heavy lifting.

It is also notable that on the back of this reporting season, corporate activity in buybacks and capex spending is up strongly for the US.

Fed policy

The Fed continued to reinforce the expectations of a series of 50 bp hikes.

Fed Governor Powell said tackling inflation would “include some pain” as the impact of higher interest rates was felt — but that was preferable to prices continuing to rise.

The Fed was “prepared to do more” if data turned the wrong way, he added.

That said, Altanta Fed President Bostic noted that a 75bp hike was still a low probability outcome. There were signs of improvement in a number of supply chain issues, he said.

For example, trucking companies are no longer turning down business and shipping bottlenecks are easing. He sees as yet unrealised downside risks to demand from the squeeze on finances.

US Inflation

The inflation rate fell, but not as far as some hoped.

The April CPI measure rose 0.3% month-on-month, ahead of the 0.2% consensus. Core CPI (excluding food and energy) rose 0.6% month-on-month versus 0.4% expected.

Headline inflation fell from 8.5% to 8.3% and core from 6.5% to 6.2%, helped by base effects.

While we have passed the peak, price growth remains very elevated and consumer expectations conflating “peak inflation” with falling prices may cause some consternation.

Overall, it was a disappointing set of numbers, with core elements of inflation proving to be sticky.

Some details worth considering:

Used vehicle prices fell only 0.4% and new car prices rose by 1.1%.

Rents rose 0.5% and are proving very resilient.

Plane tickets rose 19%, reflecting booming demand and airlines successfully passing through fuel price increases.

Overall the number of CPI components seeing price growth remains very broad by historical standards. While inflation is starting to decline in some goods, it is just starting to pick up in services.

This is feeding through to measures of consumer sentiment, which have ticked down.

The petrol price, which is important to consumer hip pockets and inflation prints, continues to remain very high.

There are some signs of pressure in the labour market easing, with the initial unemployment claims 4-week average climbing 22,000 to 193,000 over the last month.

The EVRISI Trucking survey, historically a good measure of economic pulse, also continues to track down, which suggests softer economic growth.

Australia

At this point the implied path of rate rises in Australia is similar to the US — despite our goods and wages inflation being nowhere near the US experience.

We are seeing private sector wage growth come through in Australia, but it is well below the US and is expected to peak at 3.7% in 2024.

We are keeping an eye on the New Zealand economy, where rate increases have led to falls in house prices. The question is whether this causes an air pocket in consumer spending at some stage in the remainder of 2022.

Markets 

We saw significant dislocation in crypto markets as stable coin TerraUSD, with US$18 billion of value, lost its peg to the dollar. The events that precipitated the crash appear to be analogous to a traditional bank run in the non-digital world, coupled with a good old-fashioned short squeeze.

Sentiment wasn’t helped when crypto exchange Coinbase quarterly reported a loss of US$430 million, citing 20% fall in monthly transacting users.

Elsewhere, commodity price falls on the back of further China lockdowns and increased prospects for a European recession saw resource stocks giving back a lot of the recent gains.

Value continues to win out over growth. The mega cap tech names in the US are at last reflecting the pain felt elsewhere across the market.

The bond market stabilised and is no longer going down in lockstep with equities. US 10-year government bond yields fell 21bps. The Australian equivalent fell 7 bps.

The Australian equity market held up better, but less so than in past weeks as the resource sector saw some pressure.

Weakness across the technology, lithium, gold, base metals and REITs sectors contrasted to financial strength on the back of some recent results.

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About Jim Taylor and Pendal Focus Australian Share Fund

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

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

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

Contact a Pendal key account manager here

How can responsible investors tell if a company has a robust plan for dealing with climate change? Regnan’s head of research ALISON GEORGE offers a four-point checklist

• Investors need comfort that companies have robust climate action plans
• Regnan has a four-step checklist for analysis
• Find out more about sustainable investing leader Regnan

HOW can you tell if a company has a robust plan for dealing with climate change?

It’s a complicated question, says Alison George, head of research at sustainable investing leader Regnan.

But it’s important that investors have confidence that company climate action plans are appropriate and on track.

“Investors need to have confidence that climate risks are being managed well by the companies in their portfolios,” says George.

“And it is increasingly being brought to the fore in AGM season with an increase in shareholder resolutions and now the introduction of formal ‘Say on Climate’ votes initiated by companies themselves.”

The ‘Say on Climate’ initiative calls on companies to hold an annual vote on their emissions reduction progress. Regnan provides its clients with specific voting recommendations for ASX-listed companies on their climate-related activities.

George says it’s important to be aware that climate expectations vary between companies — some sectors need to move faster, given that there are technological barriers that will make it  more difficult for other sectors to decarbonise.

But she says a broad four step approach can help investors and companies alike understand if plans are on track

1. Is the plan credible?

The first step is assessing whether a plan is credible.

This includes ensuring it comprehensively covers the most material issues for the company and is clearly disclosed with credible and current sources for the analysis undertaken.

But it also means the plan should show evidence of broader considerations of the impact of the transition to net zero, including on the capabilities of the workforce and impacts on the wider community.

2. Is it ambitious?

An ambitious plan shows clear, comprehensive targets in the short, medium and long term on all material aspects of climate change, including emissions in an organisation’s value chain and physical risks to the business of a changing climate.

Ambition should be judged within the context of the sector and with an understanding of the magnitude of the task ahead.

This recognises that some decarbonisation pathways are not yet fully known, so where they are it is reasonable to expect that net zero be achieved ahead of 2050.

3. Is it real?

It is all very well to have a plan, but it must also be activated in the real world.

This means that it must be backed by sufficient resourcing and capability, appropriate organisational structure, capex plans and effective board oversight.

But it also means the company has provided evidence of progress to date and shown that its climate plan is embedded in governance and risk processes and has informed strategy development and decision making.

This also covers companies that aim to achieve emissions reductions through divestment.

The key question becomes whether overall reductions can be achieved or reasonably expected from the divestment? Or are the emissions simply being moved elsewhere.

4. Is the company acting against change?

Finally, and most critically, look for evidence that a company is not merely paying lip-service to climate action while actually lobbying against change.

Policy is crucial to drive meaningful climate action and there is a risk that companies may undertake activities aimed at swaying public sentiment and policy outcomes.

“This is a pre-eminent question,” she says.

“For those companies where there may be a vested interest in the status quo, voting deliberations should be especially attentive to this area as a threshold requirement for endorsement of the plan.”

Regnan says it expects to see evidence that the company is not involved in activities or lobbying that would delay decarbonisation efforts. It also seeks transparent reporting of positions and evidence of effective and ongoing board governance over this issue.

The upshot?

George says a company that passes all four of these tests is likely to have a solid climate action plan.

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About Alison George

Alison George is Regnan’s head of research. She has deep experience in ESG, responsible investment and active ownership. Alison oversees Regnan’s research frameworks, processes and outputs, ensuring it remains at the forefront of industry practice and meets evolving clients needs.

A monthly insight from James Syme and Paul Wimborne, managers of Pendal’s Global Emerging Markets Opportunities Fund

INFLATION has continued to push higher in developed and emerging economies.

It certainly does not look transitory. There is a definite sense that central banks are behind the curve, which has caused significant declines in risk assets globally.

However higher global interest rates are not necessarily a negative for Emerging markets (EM) equity as an asset class.

US headline consumer price inflation in the year to March was 8.5%, a level previously seen in 1981 (when the Federal Reserve’s policy interest rate was 12%).

As the Fed slowly moves to tighten monetary policy, bonds have reacted. The 10-year UST has risen from 1.5% at the start of the year to 3.1% at the time of writing.

About three quarters of the increase is from higher real interest rates and only a quarter from higher inflation expectations.

Other developed market central banks are also slowly tightening in the face of rampant inflation data.

The Bank of England last week accepted that inflation was likely to reach double digits later this year — a level not seen in 40 years.

Emerging markets are largely countries that are dependent on capital flows.

Domestic demand economies (such as India and Turkey) require capital inflows to finance their current account deficits.

Export economies (such as Korea and Taiwan) are exposed to EM capital flows through their partial dependence on end demand from emerging markets (eg Korean companies selling to Latin American consumers); international financing of corporate borrowing in export economies (eg Brazilian companies borrowing in US dollars); and portfolio flows generally into emerging markets.

The US effect

When we talk about capital flows, we mean US dollar capital flows.

As Bank of England governor Mark Carney noted in 2019, the dollar represents the currency of choice for at least half of international trade invoices. That’s about five times greater than the US’s share in world goods imports and three times its share in world exports.

This gives the US dollar a massively outsized role in the global economy.

Carney said: “Given the widespread dominance of the dollar in cross-border claims, it is not surprising that developments in the US economy, by affecting the dollar exchange rate, can have large spill-over effects to the rest of the world via asset markets… The global financial cycle is a dollar cycle.”

A tightening of US monetary policy can have a drag on emerging economies and markets.

In the 1990s the US rate-hiking cycle began in April 1994 and finished in February 1995, which marked the end of the rally in EM equity.

This was a time, however, of fixed exchange rates. That accelerated the transmission of US monetary policy into emerging economies and is a poor analogue for today’s global financial system.

In the 2000s, with floating exchange rates in most of the emerging world, the Fed’s first hike was June 2004 and the last was June 2006.

EM equities (as measured by the MSCI EM Index) peaked in October 2007, having returned more than 230 per cent in USD terms from that first hike.

This strong performance was supported by the global economy which remained strong, with consequent support for the main exports of emerging economies.

In that cycle — from the first rate hike to the cyclical peak — commodity prices (as measured by the S&P GSCI Index) trebled, while Korean exports doubled.

The economic cyclical sensitivity of emerging market equities substantially outweighs their sensitivity to risk-free rates.

The view from here

The current cycle does resemble the 2002-07 cycle in some ways, with very strong commodity prices and many key emerging economies recovering from extended downturns.

The pattern of overlooking traditional industries in favour of high-tech business is another similarity.

There are also differences — for example the strength of the Chinese economy in the 2000s and its weakness now. Overall, though, it’s important to remember that in the last extended EM bull market the Fed hiked 17 times — from 1% to 5.25% — without stopping the strong returns from EM equity as an asset class.

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About Pendal Global Emerging Markets Opportunities Fund

James Syme and Paul Wimborne are senior portfolio managers and 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 an independent, global investment management business focused on delivering superior investment returns for our clients through active management.

Contact a Pendal key account manager here

It’s not an about-face, but there are signs the relentless pace of bearish bond news may be moderating, says Pendal’s head of government bond strategies TIM HEXT

THIS WEEK there’s no sign of volatility slowing down.

But something strange happened in the past few days: equity weakness finally seemed to give bonds a slight bid.

Normally equity weakness means worries about a slowdown — which means a bid for bonds. But with high inflation as the driver they have largely been moving together this year.

So what has gone on the past few days?

Well, there have been a few very early green shoots of easing pressure on inflation. Not enough to change the narrative, but enough to question the relentless moves higher in rates.

Firstly, Friday’s US job numbers showed that Average Hourly Earnings had a modest 0.3% increase in April. The last 3 months have now had an annualised equivalent rise of 3.7% — the lowest since March 2021 and down from a 6.3% pace late last year.

Secondly, commodity prices have started to better reflect the lockdowns in China.

Thirdly, the Goldman Sachs Financial Conditions index has finally hit 99 — the level where it spent most of 2018 and 2019.

This is a lot higher than the 97 last year which triggered the Fed’s concerns of conditions being too loose at the start of 2022, as this Bloomberg graph shows:

Clearly these do not represent an about-turn, but rather a moderating of what has been a relentless pace of bearish bond news so far in 2022.

This week’s US CPI numbers will be watched closely.

With the market pricing cash rates in Australia at 2.75% by the end of this year — and 10-year bonds at 3.5% — there is a lot priced in. So any signs central banks can ease the pace of tightening will lead to a significant fall in yields.

We will keep a close eye on equities and commodities in the week ahead to see if this is just a correction or has more legs.

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About Tim Hext and Pendal’s Income & Fixed Interest boutique

Tim Hext is a Pendal portfolio manager and head of government bond strategies in our Income and Fixed Interest team.

Tim has extensive experience in banking, financial markets and funding including senior positions with NSW Treasury Corporation (TCorp), Westpac Treasury, Commonwealth Bank of Australia, Deutsche Bank, Bain & Co and Swiss Bank Corporation.

Pendal’s Income and Fixed Interest boutique is one of the most experienced and well-regarded fixed income teams in Australia.

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

Find out more about Pendal’s fixed interest strategies here

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About Pendal

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

In 2023, Pendal became part of Perpetual Limited (ASX:PPT), bringing together two of Australia’s most respected active asset management brands to create a global leader in multi-boutique asset management with autonomous, world-class investment capabilities and a growing leadership position in ESG.

Contact a Pendal key account manager

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

Find out about Crispin’s Pendal Focus Australian Share Fund
Find out about Crispin’s sustainable Pendal Horizon Fund

TIGHTENING monetary policy prompted further market falls last week.

The issue is not so much the rate hikes — which have been well flagged — but widespread scepticism that central banks can tame inflation without causing recession.

Inflation is presented as a material issue. But in the same breath central banks are saying rates only need to get back to neutral levels to contain it.

The market is concerned that the goal of a “soft landing” is wishful thinking.

Negative sentiment was compounded by the Bank of England warning of recession as they increased rates, raising the risk of stagflation. China’s reiteration of Covid-zero adherence also weighed last week, as did weaker US productivity data and the need to rebuild oil reserves.

The positive correlation between equities and bonds continued.

US 10-year Treasury bond yields rose 19bps, breaking through 3%. Meanwhile the S&P 500 failed to maintain a mid-week bounce, finishing the week down 0.2%. It is now off about 11% since March 29 and down 13.1% for the calendar year to date.

Growth continues to do worse. The NASDAQ is given up 17% since Mar 29 and 22.2% year to date.

The S&P/ASX 300 could no longer maintain its previous disconnection, falling 3.2% for the week as REITs joined growth stocks in underperforming under the weight of higher bond yields.

Resource stocks also declined as commodity prices weakened on concerns over future demand.

Confidence in the RBA’s inflation credentials appears low — 10-year yields rose 35bps to 3.47%, versus 1.6% at the start of the year.

We continue to remain cautious on markets in the near term.

Economics and policy

The US Fed raised rates 50bp and indicated moves of the same size at the next two meetings, with 25bp per meeting likely thereafter.

Chair Powell said a 75bp move would not be necessary. This initially reassured markets. But it was later viewed as an unnecessary constraint on the Fed’s ability to react to inflation, and bond yields continued to sell off.

Powell continues to soothe market concerns, saying he can bring inflation back to target without causing a recession. He noted the risk of recession was below what the market was pricing. He was also non-committal on the need to raise rates above the neutral level, which he puts at 2-3%.  

However, the market is far more sceptical.  There is a view – reflected in comments from recently retired Fed member Richard Clarida – that rates need to go well above neutral to reduce inflation.

Clarida estimates at least 3.5%. Others are saying 4%.

The way to think about policy is that financial conditions need to tighten to a level which brings growth materially below the trend of 2%.

Based on historic relationships this requires equities to fall further, higher rates, wider credit spreads and a stronger US dollar.

This is all consistent with weaker markets. As long as it remains orderly we are unlikely to see the Fed intervene.  

Another way to think about this paradox is that unemployment is probably running 50bp below sustainable levels.

To dampen wage inflation unemployment needs to increase by at least that amount, which history indicates is consistent with a recession.

The latest employment data was broadly neutral.

Payrolls were a touch better than expected at 428,000 new jobs versus 380,000 expected. However the previous two months were revised down 39,000, offsetting the gap. Average hours worked were +0.3% vs expectations of 0.4%. All this signals the rate of expansion in jobs is slowing.

The household survey saw a significant drop in jobs (-353,000) — but this needed to be -559,000 to be considered statistically significant.

The participation rate also declined, reversing positive signs of people returning to work in the last couple of months.

All up, none of this shifts the dial for the Fed in terms of resolving the fundamental problem of too few people available for each vacancy.

There are signs that inflationary pressures are beginning to moderate. Average hourly earnings are plateauing, some commodity prices (including copper) have stalled and money supply growth has decelerated.

This is not enough to dampen fears around the level of required tightening.

The market is also mindful of:

• Higher oil prices
• A stronger dollar
• Higher nominal yields
• High mortgage rates
• Tighter policy

All this suggests markets will remain under pressure in the near term.

Market outlook

The positive correlation between bonds and equities remains, which encourages portfolio de-risking.

Looking at technical indicators, there is a lot of focus on sentiment being at levels consistent with a market low.

However we counsel caution on this view, since flows into the equity market have remained strong. This suggests we have not yet seen the capitulation on equities – particularly on the retail side – which could signal a true trough in sentiment. 

We may need to see the FAANGs roll over for this to occur – and there are signs that this may be in train.

Australia participated in the sell-off. This was partly due to concern over the impact of slowing growth on commodity prices. The big move in bond yields also weighed on REITs and the growth names. Energy is remaining defensive, with oil prices proving resilient.

There has been large sector divergence across the ASX300 in the calendar year to date.

From the best-performed to the worst:

• Energy: Positive fundamentals, making it the most defensive
• Consumer staples: Supported by predictability and lack of cyclicality
• Financials: Becoming less defensive in the past two weeks, probably as the market has started to focus on the prospect of a domestic economic slowdown
• Property: The break-out in Australian bond yields has turned this sector from defensive to under pressure in last two weeks.
• Healthcare: Has lagged due to growth characteristics, but becoming more defensive recently
• Discretionary: Has been under pressure due to cyclical concerns and the unwind of Covid benefits
• Tech: Remains the weakest

Last week we saw some bank half-yearly results and a number of company updates.

The bank results were reasonable, but cost pressures seem to be emerging as an offset to the benefit of higher rates. The issue going forward is that they are domestic cyclicals.

We do not expect a major bust in the housing market. A softer outlook is likely to weigh on sentiment but corporate updates were generally positive.

But the market is increasingly looking through the near term and focusing on the reality that the RBA — like the Fed — needs to engineer a material economic slowdown which will not be good for cyclical earnings.

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About Crispin Murray and Pendal Focus Australian Share Fund

Crispin Murray is Pendal’s Head of Equities. He has more than 27 years of investment experience and leads one of the largest equities teams in Australia. Crispin’s Pendal Focus Australian Share Fund has beaten the benchmark in 12 years of its 16-year history (after fees), across a range of market conditions.

Pendal is 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  

Contact a Pendal key account manager

The RBA’s credibility has taken a hit, but it can now get on with normalising policy like most other developed market central banks, says Pendal’s TIM HEXT

TODAY’S RBA announcement indicates rates are headed back to neutral (at least) and stagflation has arrived.

The RBA has finally capitulated on what was obvious to everyone else – inflation isn’t going to behave and the time for accommodative monetary policy has long passed.

Other central banks got the memo late last year but the RBA clung to the idea that inflation was temporary and would behave itself.

Now its forecasts are for headline inflation at 6% this year, underlying at 4.75% and only/maybe falling back to 3% by mid-2024.

That last forecast assumes they have tightened rates back to neutral.

The Reserve is now wary of giving too much guidance. But it’s trying to make up for lost ground, assuring everyone it will do “what is necessary to ensure that inflation in Australia returns to target over time”.

This is a little short of “whatever it takes”. But it opens the possibility of tight monetary policy (above 2.5%). The market certainly thinks so as cash rates in the market for 2024 nudge above 3.5%.  

This should concern not only bond holders, but holders of all financial assets as the RBA seems to be no longer separating supply-led and demand-led inflation.

Given its lack of ability to control supply-led inflation, it sounds like the RBA is prepared to hit demand harder than previously thought… Not that different to the US Federal Reserve after all.

The RBA also confirmed it will not be reinvesting maturing bonds — and not selling any of its holdings.

This glide path to a smaller balance sheet can be called Quantitative Tightening (QT) — but is largely what everyone expected and really is a sideshow.

The RBA will feel relieved that what must have been a constant stress of being so far behind the market is now over.

Their credibility has taken a big hit. But they can now get on with normalising policy, just like every other developed market central bank (okay, except the Bank of Japan).

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About Tim Hext and Pendal’s Income & Fixed Interest boutique

Tim Hext is a Pendal portfolio manager and head of government bond strategies in our Income and Fixed Interest team.

Tim has extensive experience in banking, financial markets and funding including senior positions with NSW Treasury Corporation (TCorp), Westpac Treasury, Commonwealth Bank of Australia, Deutsche Bank, Bain & Co and Swiss Bank Corporation.

Pendal’s Income and Fixed Interest boutique is one of the most experienced and well-regarded fixed income teams in Australia.

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

Find out more about Pendal’s fixed interest strategies here

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About Pendal

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

In 2023, Pendal became part of Perpetual Limited (ASX:PPT), bringing together two of Australia’s most respected active asset management brands to create a global leader in multi-boutique asset management with autonomous, world-class investment capabilities and a growing leadership position in ESG.

Contact a Pendal key account manager

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

Find out about Crispin’s Pendal Focus Australian Share Fund
Find out about Crispin’s sustainable Pendal Horizon Fund

US equity markets continue to fall and have now erased the March rebound, breaking through to new lows.

The S&P 500 fell 3.3% last week and is now down 12.9% for the calendar year to date. The NASDAQ was off 3.9% and has lost 21% for the year.

The S&P/ASX 300 continues to display more resilience — down 0.8% for the week but still up 1.2% for the year. It has now reversed almost all its underperformance of the US market since the start of the pandemic.

The expected hit to resources occurred on Tuesday, but hope of Chinese stimulus led to much of that unwinding through the week.

Four issues are weighing on markets:

1. The pace and scale of central bank tightening, with the Fed due to meet this week
2. The impact of China’s lockdowns on supply chains and economic growth
3. The effect of the Ukraine war on growth and energy supply
4. The emerging headwind of cost inflation to corporate earnings

While some economic data released last week looks a bit soft, it is unlikely to change the Fed’s current course of back-to-back 50bp rate hikes.

There was some improvement in sentiment on China following comments from President Xi around supporting growth via stimulus.

We saw Russia turn off gas supply to Bulgaria and Poland, raising concerns over an escalation. There was some speculation over the weekend that the EU may start refusing Russian oil in May.

An ugly inflation print in Australia means this month’s RBA meeting is now “live” in terms of a rate hike.

A 2% drop in the Australian dollar as the US dollar continues to rise adds to the RBA’s conundrum regarding inflation.

Markets

There are signs of stress building in markets. But we are also seeing weak sentiment and some pockets that look to be oversold.

This is a critical juncture in terms of which way markets break. We remain cautious in the near term.

Key areas of concern include:

1. Dislocations in foreign exchange markets. The Japanese yen and Chinese yuan continue to fall, while the euro is now also testing downside support levels against the US dollar. The last time it traded at parity was 2002.
   The yen has already broken down to 20 years lows. Such US dollar strength can be a problem for markets since it complicates the ability to contain inflation outside the US. It also leads to potentially significant capital outflows and puts a lot of strain on emerging markets, particularly those with US dollar denominated debt. Markets tend to be more volatile when currencies are not stable.
2. Credit markets continue to deteriorate as the US high yield credit default swap index moves higher. It has more room to go as the economy slows.  
3. The correlation between bonds and equities appear to have reversed.  Correlation has been low post-GFC, where bonds offered protection against equity sell-offs. It is now high, making it harder for investors to hedge portfolios.
   This has an impact on the amount of money investors can deploy in equities – as does recent high levels of volatility. This means lower liquidity, exacerbating the likely effect of quantitative tightening. 

US earnings

At a headline level the season looks good so far (about 55% of the market has reported).

Aggregate earnings per share (eps) for the year are up 9% versus an expected 5%. There are more beats than usual.

However a lot of the momentum is driven by the energy sector. Stripping it out, eps growth falls to 3%, which is a material deceleration.

The market was hoping decent earnings from Meta, Apple and Microsoft would improve sentiment towards technology — but it was not enough to hold the sector up.

Amazon disappointed after logistic and fuel costs were US$2 billion higher than expected. It wore also US$4 billion of internal costs relating to sub-optimal staff issues and excess capacity in fulfilment.

While Amazon sees no signs of a slow-down in consumer demand, it could still come later in the year.

This result highlights the emphasis that will now be placed on cost. This may be the first warning sign of a weaker labour market.

The other issue to watch is that Amazon alone represents 10-11% of total US private non-residential construction activity, and that share has doubled since 2015. They also represent 25% of US warehouse construction. So clearly any signs of slower capex spending may also affect other sectors.

Buy-backs will start to kick again soon which should support the market.

China

Concerns over Chinese growth continue to mount. However last week we saw more confidence in the policy response from Beijing.

The Politburo’s April 29 meeting emphasised keeping the epidemic contained and the economy on track.

These twin goals are clearly contradictory — but the message is China will strive for its growth target.

This may indicate they would accept falling short, given the extenuating circumstances. But it also suggests they will take action to try to get close, which likely means substantial infrastructure stimulus.

Chinese stocks and resources stocks performed well in response.

Beijing is facing a myriad of issues: the effect of lockdowns on consumer demand, supply chain disruption, a weak housing market, high household debt, slowing global growth and a currency appreciating against competitors.

The question is whether policy measures will be effective in dealing with these issues.

Projects have lagged, there are constraints on labour and materials and cost inflation is high. There is a risk the infrastructure lever won’t work this time.

European gas

Russia turned off the gas to Bulgaria and Poland raising the risk of more broad-based disruption.

The move looks carefully considered as a signal. Both countries only import small amounts and have alternative sources of supply, so the economic impact is likely to be limited.  It does demonstrate that the risks to supply disruption are higher than the market is pricing.

There is speculation the Europeans may begin to restrict Russian oil imports, having found some alternative sources.

This would probably underpin oil prices if it occurs, which have been under pressure from Chinese lockdowns.

Macro data

Last week we saw:

1. Eurozone inflation came in higher than expected at 7.5% year-on-year. Core inflation was 3.5% — the highest level in 20 years. Expectations around EU rate hikes have been brought forward from September to as soon as July.
2. Headline quarterly US GDP growth was weak. Though this reflected the previous inventory build unwinding and high net exports, so it’s not yet a sign of consumer weakness.
3. US PCE indicators of inflation were a bit lower than expected, coming in at +0.3% month-on-month and 5.2% year-on-year. This is a result of some goods disinflation, softer health care inflation and a decline in financial services and insurance costs. Ultimately, the policy goal is 2% inflation, so this is not likely to shift the Fed’s current hawkish stance.
4. The US employment cost index rose to new cycle highs in Q1. Other, more temporal measures have already signalled this. But the need to contain the flow-on effects of wage inflation are driving the need to raise rates materially. Private sector wages and salaries were up 5% year-on-year.
5. Australian inflation was worse than expected, rising 2.1% quarter-on-quarter and 5.1% year-on-year. The trimmed mean (the RBA’s preferred measure) was up 1.4% quarter-on-quarter versus an expected 1.2% — and is at its highest level since 1990. It was up 3.7% year-on-year versus the 3% expected by the RBA and 3.4% consensus. This is the highest level since 2009. Housing construction was up 13.7% year-on-year and was a key driver. Food inflation is running at 4.3% year-on-year and rents are starting to rise.

This is expected to lead to faster and earlier rate moves in Australia.

Two-year rates are now expected to hit 3%, which is among the highest in developed nations. This is surprising given the degree of household debt and variable mortgages.

This highlights the challenge that the economy needs to be slowed quickly. If rates don’t get high it will only be because the economy is weak.

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About Crispin Murray and Pendal Focus Australian Share Fund

Crispin Murray is Pendal’s Head of Equities. He has more than 27 years of investment experience and leads one of the largest equities teams in Australia. Crispin’s Pendal Focus Australian Share Fund has beaten the benchmark in 12 years of its 16-year history (after fees), across a range of market conditions.

Pendal is 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  

Contact a Pendal key account manager

A monthly insight from James Syme and Paul Wimborne, managers of Pendal’s Global Emerging Markets Opportunities Fund

FOLLOWING the initial shock of the Russian invasion of Ukraine, it is becoming possible to focus on the secondary effects around the world.

These substantially result from the disruptions to the supply of many commodities.

Although highly volatile, prices of many basic commodities have moved very sharply since the start of the year.

Compared to the end of 2021, the Brent crude oil price is (at the time of writing) up 30%, wheat futures are up 38%, while and urea prices are up significantly (after doubling in the fourth quarter).

Other major Russian export commodities have also risen, but for the world’s poorest countries the trinity of fuel, food and fertilizer is absolutely key.

Many of these countries are significant importers of these products, subsidise them to their populations or have large weights of these in their inflation baskets.

This means sharp price rises stress the fiscal and current account balances. They also increase inflation and reduce the ability of consumers to purchase other goods and services.

Some of these effects are being seen in major frontier countries, whose equity markets are too small to be in the mainstream emerging market equity asset class.

Pakistan

For example, in Pakistan — which was recently demoted from the MSCI EM Index — a developing political crisis (where the opposition are seeking to bring down the government through a vote of no confidence) coincides with the need to renew a $6 billion debt with the IMF.

Without IMF funding Pakistan will almost certainly face a balance of payments crisis, as foreign exchange reserves have fallen recently to just two months of import cover.

The ramping price of imports has pushed inflation to 12.7% in the year to March, accompanied by a sharp fall in the Pakistani rupee.

Sri Lanka

Meanwhile, Sri Lanka’s poor agricultural policies — combined with the collapse of tourism after Covid — have created a weak starting point from which to deal with soaring prices.

Widespread street protests over severe shortages of food and power, and rampant price inflation led to the resignation of all the ministers in the government cabinet, and of the central bank governor.

In a sign of the depth of the crisis, the new finance minister then resigned after less than 24 hours in post.

Sri Lanka faces soaring inflation (18.7% in the year to March) and a probable sovereign debt default in July.

Mainstream EM markets

Three mainstream emerging markets are potentially exposed to these kinds of risks: Egypt, India and Indonesia.

Egypt is the most exposed of the three. Russia and Ukraine are major wheat exporters. Wheat is a particularly high component of Middle East and North African diets — and Egypt imports over 60% of its wheat.

Inflation has been pushing higher in recent months (to 8.8% in the year to February). Policymakers have begun to react, devaluing the Egyptian pound by 15%, hiking interest rates and imposing price controls on bread.

While these steps are likely to help — and Egypt is a net oil exporter — the non-oil component of the economy is already showing stress, with PMIs declining sharply.

The risk is a repeat of the political unrest that led to the overthrow of the Mubarak government during the Arab Spring in 2011.

There are, so far, no signs of unrest, but Egypt must be carefully monitored in the months ahead.

India

India has historically had vulnerabilities, both as a major importer, but also as a major subsidiser of these commodities.

India’s current account deficit will weaken with oil prices above $100/barrel — and inflationary pressures are showing. But India is in a much better position than in previous periods of commodity price inflation.

Firstly, the reforms to the subsidy regime have essentially removed the risk to the fiscal balance.

Diesel subsidies were removed in 2014, while direct LPG subsidies were replaced with cash transfers to poorer citizens, and fertilizer subsidies have been substantially reduced in recent years.

Secondly, India has in recent years become a major producer of wheat, even becoming a small exporter, while a series of rich harvests have allowed the government’s wheat reserves to reach 21 million tons against a targeted level of 7.5 million tons.

The economic reforms the government has driven have absolutely moved India onto a safer and more sustainable footing, and the country should feel the benefit of this in coming months.

Indonesia

The other major emerging market to have had historical problems with fuel subsidies is Indonesia. Indonesia also had problems in the mid-2000s from the fiscal effects of fuel price subsidies.

In 2004-5, newly elected president Yudhoyono faced a budget crisis, as spending on fossil fuel subsidies for gasoline, diesel and kerosene had reached $8bn.

The government was forced to trim fuel subsidies to alleviate the budget deficit, but this both lifted inflation and hit growth.

Subsequently, though, fuel subsidies have been first reformed and then, under current president Widodo, removed.

Additionally, inflation in Indonesia is very benign, reaching just 2.6% to March, so commodity price pressures are far more manageable.

Emerging markets are generally countries with macro-economic vulnerabilities, but the examples of India and Indonesia show that good planning and effective economic reform can limit these vulnerabilities.

While frontier equity markets and some of the major emerging market sovereign debt issuers may face a difficult 2022, emerging equity markets look to have lower secondary risks from the conflict in Ukraine.

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About Pendal Global Emerging Markets Opportunities Fund

James Syme and Paul Wimborne are senior portfolio managers and 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 an independent, global investment management business focused on delivering superior investment returns for our clients through active management.

Contact a Pendal key account manager here

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

Find out about Crispin’s Pendal Focus Australian Share Fund
Find out about Crispin’s sustainable Pendal Horizon Fund

FIVE factors combined to drag down equity and bond markets last week, while commodity prices also fell:

1. Further signals of aggressive Fed tightening, which saw US two-year government bond yields rise 21bps
2. Concerns over Chinese economic growth with the Shanghai stock market and yuan both falling sharply
3. Fears that supply chain problems will re-emerge as a result of Chinese lockdowns
4. Some fear of a slowing US economy
5. Selective US earnings disappointments – primarily from Netflix and Alcoa.

The combination of factors meant technology and cyclical sectors were both affected.

The S&P 500 fell 2.7% last week and is now down 10% year to date. The NASDAQ lost 3.8% last week and is down 17.8% for the year.

The S&P/ASX 300 (-0.7%) held up better, but the futures market suggests that effect will be lagged into this week. It is up 1.8% for the year.

Market paradoxes

Several paradoxes are facing the market, complicating portfolio positioning:

• US growth is strong and earnings revisions positive — but the market is pricing in a slowdown as the mechanism for the Fed to reduce inflation
• Measures of investor sentiment are negative — but flows into equity markets remain strong
• There are signs inflation may be peaking — but bond yields continue to rise
• Lockdowns are seeing sentiment towards Chinese growth sour — but commodities and resources have been strong.

We remain wary of the near-term outlook in this environment.

As mentioned in previous weeks, the tighter financial conditions needed to tame inflation require equity markets to remain flat at best.

Meanwhile we are seeing the twin headwinds of uncertainty over Chinese growth and the market’s need to deal with what is likely to be back-to-back 50bp rate hikes in the US.

US inflation and rates

A number of signs suggest US inflation has peaked:

• Statistically we will see the biggest months of inflation growth in 2021 – April, May and June – rolling off the annual figures
• Commodity prices are rolling over off recent peaks
• The US dollar continues to rise
• There are signs of supply chain pressures easing in the US. Shipping rates for freight and containers have begun to fall. There is also evidence of less pressure in US trucking systems.
• Employment participation rates are creeping higher. There’s an argument the impact of inflation and running down of savings is slowly encouraging people back into the job market.
• Company wage surveys have begun to ease. This reflects less pressure to raise wages, which have already been materially re-based. 
• Company pricing power surveys are stalling, albeit at historically high levels

We can conclude that at this point inflation is unlikely to get worse. But before declaring victory on inflation it’s important to note three things:

1. The labour market remains very tight, so some wage pressure is likely to remain
2. Supply chain issues could be about to flare up as a result of lockdowns in China
3. The US economy remains strong, though there is a shift in demand to services. Coincident indicators are robust.  Continuing unemployment claims are at 50-year lows, bank lending is rising 7% year-on-year and house prices remain strong.

Key question

The key question is: if inflation rates have peaked, where do they fall back to? This comes down to two unpredictable factors:

1. At what point will the Fed tolerate inflation in order to avoid a recession?
2. The Fed’s ability to control the economy

The Fed maintains a hawkish message.

Federal Open Market Committee member James Bullard mentioned the potential need for a 75bp hike in some remarks last week. Again, there was talk of an “expeditious” need to get back to neutral.

At this point we think back-to-back 50bp hikes are more likely — with the potential for a third — as well as a start of quantitative tightening.

The market continues to price in further acceleration of rate hikes. The consensus is now 2.75% by the end of 2022, versus 2.5% previously.

It’s been a long time since markets have had to face such a rapid tightening cycle. There is still a question over the degree to which this is priced in. This underpins our near-term caution.

There is also a view that Fed tightening cycles will continue until something “breaks” — such as the 2016 collapse in oil prices, the 2012 Eurozone Crisis or the Russia/Long Term capital management crisis in 1998.

This is also making some in the market cautious.

China

There has been a rapid deterioration in sentiment towards the Chinese economic outlook due to a combination of:

• Lockdowns choking demand and supply chains
• Currency appreciation relative to competitors
• Global slowdown
• Weak consumer confidence
• Property market remaining fragile

It is estimated that 44 Chinese cities are under some form of lockdown. This equates to 25% of the population and 38% of GDP — of which around 16% is in strict lockdown.

Estimates indicate Chinese growth could slow from 4.8% in Q1 to less than 2% in Q2.

This risk is emphasised by a sharp fall in road freight volumes (a reasonable indicator of Chinese economic health) and a backlog of ships off Shanghai.

There were hopes that policy easing would see a moderate pick-up in the housing market. This is not yet showing any sign of coming through.

The rise of the US dollar — against which the Chinese yuan is managed — has left China in a difficult competitive position given the relative depreciation in the Japanese yen and Korean won.

This exacerbates the existing pressure on China’s export engine from slowing global growth and a shift in consumer demand from goods to services.

Under pressure

This pressure seems to have forced a crack last week, with the currency breaking down relative to historical ranges.

It moved about 3% against the US dollar. While that may not be large in absolute terms, it is a four-standard-deviation event in historical terms.

The equity market was also pummelled. The rebound after the government’s comments in support of the market following concerns earlier in the year has proved short-lived, with some signs of outflows in foreign capital.

The policy response so far is regarded as too limited. The People’s Bank of China announced a 25bp cut in the bank reserve requirement ratio from April 25.

The immediate impact is concern around commodity demand, which risks being crimped by slower growth and a weaker currency.

We think the structural story in commodities remains attractive. But there is a sense it is a very long position among investors at the moment.

Aggressive Fed tightening — plus slowing Chinese growth and a devalued yuan — may see a sharp near-term unwind in the sector.

This is also materialising in some recent Australian dollar weakness.

Markets

Most asset classes weakened in response to all this.

Some are pointing to negative sentiment measures as a possible support. We are not so convinced by this — we are still seeing positive inflows into equity markets.

This is the key week for US earnings.

Last week saw two high-profile disappointments which dragged on sentiment:

1. Netflix: The US$100bn cap stock fell 38% in a week. Several issues (such as switching off the Russian subscriber base) were specific to the company, but they exacerbated market concerns regarding consumer demand. Combined with other issues outlined above, this seemed to be a negative catalyst for mega cap growth names which have previously supported the market overall.
2. Alcoa: The alumina and aluminium producer fell 23% on concerns regarding costs – particularly around energy which is a large input into the refining and smelting process. This was compounded by the broader growth outlook.

Interestingly, despite a few major disappointments aggregate revisions to Q1 FY23 have been positive, reflecting what remains a strong economy.

For example, US airlines are seeing strong upgrades. At this point, earnings remain supportive of markets.

The ASX missed the big US fall on Friday, which is likely to emerge this week.

The local market was helped by the private equity bid for Ramsay Health Care (RHC, +30.6%). This supported the health care sector. Other than this, defensive sectors out-performed.

Mining was weak on a series of disappointing quarterly production report. Costs and production both disappointed, mainly due to the disruption associated with Omicron.

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About Crispin Murray and Pendal Focus Australian Share Fund

Crispin Murray is Pendal’s Head of Equities. He has more than 27 years of investment experience and leads one of the largest equities teams in Australia. Crispin’s Pendal Focus Australian Share Fund has beaten the benchmark in 12 years of its 16-year history (after fees), across a range of market conditions.

Pendal is 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  

Contact a Pendal key account manager

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

Find out about Crispin’s Pendal Focus Australian Share Fund
Find out about Crispin’s sustainable Pendal Horizon Fund

The recent recovery in equity markets looks to be ending as the S&P 500 fell -1.2% and the NASDAQ -3.9% last week.

Australia remains more defensive in this environment, falling just 0.3% for the week. More hawkish comments from the Fed prompted the fall.

It signalled a 50bps hike in rates for May, absent any major new shock. It also reinforced the message that quantitative tightening is on its way. While this was known, it triggered a further sell off in long-dated bonds.

US 10-year Treasury yields rose 32bps for the week. It also took the yield curve back into positive territory. 

This reinforces the key message that the Fed needs overall financial conditions to tighten sufficiently to cool wage inflation.

Surging equity markets loosen overall conditions, and the Fed is likely to try and prevent this.

China is also weighing on market sentiment. The situation in Shanghai appears to be deteriorating, with lockdowns potentially remaining in place into May.

This puts growth at risk but, unlike the US, Beijing’s desire to achieve its growth target is likely to see policy stimulus to mitigate the effect of lockdowns. This would be supportive of commodities.

Fed policy

The Fed remains focused on tightening financial conditions, as it tries to slow the economy enough to choke off wage inflation. The trick will be to do this without triggering a recession.

To this end, both Fed minutes and comments from Board member, Lael Brainard, last week suggested that quantitative tightening may proceed at a faster pace than expected. As well as implying greater risk to the upside for inflation.  

Federal Open Market Committee (FOMC) minutes flagged a plan to shrink the balance sheet at a run rate of ~US$95bn per month, from May. This would comprise US$60bn in Treasuries and US$35bn in mortgage-backed securities.

This would enable them to reduce the balance sheet from US$9tr to US$6tr over 3 years. The technical aspect of how they would accomplish this was slightly more hawkish than the market expected. 

The Fed also reiterated talk of moving ‘expeditiously’ towards neutral. This raised expectations of back-to-back 50bp hikes in rates.

These factors triggered the sell-off in bonds and led to slight steepening in the yield curve.

US 10-year Treasury yields are very close to a multi-decade trend line. This is being seen by some as the potential catalyst for a rally on bonds, as we saw for equities in May. Others see the potential for bonds to break the trend line, which could trigger a sell-off in equities and underperformance from growth stocks. 

Any sustained rally in bonds would be contrary to the Fed’s goal of tighter monetary conditions.

We have also seen credit spreads tighten as fears around the US economy have eased. Hence the Fed remains hawkish on inflation and the need to tighten.

Former Fed official, Bill Dudley, noted in a Washington Post article that the Fed will only be able to achieve its inflation goals without increasing rates past 2.5% if;

• supply chains ease sufficiently
• the shift from goods to services ease inflationary pressures, and
• more people return to the labour market as wages move higher.

His key point is that the Fed needs tighter financial conditions if their plan is to work. This requires bond yields to move higher or equities to be flat to lower.

US economy

We are at an interesting juncture. Lagging indicators such as labour remains very strong, and wages are also continuing to slowly climb, with the latest Atlanta Fed wage tracker data coming in at 6.0 vs 5.8% quarterly wage growth.

Q1 GDP growth will slow down dramatically, with estimates down 1%.

Much of this reflects a reversal in the inventory build that drove Q4 growth, however some lead indicators of growth are signalling slowing momentum.

Consumer spending remains critical to the growth outlook. Anecdotally, consumption remains resilient, despite the increase in mortgage rates and inflation.

The US consumer is helped by having record net worth and a strong balance sheet, with US$3.9tr in savings and wages growing strongly in nominal terms.

In addition, the rotation from goods to services is becoming more evident.

Trucking appears to be showing signs of slowing, which is typically a good lead on consumption, however airline sales are strong.

There are some signs of easing inflationary pressures. For example, the backlog of container ships is falling rapidly. So too are the pricing rates for freight.

China

Shanghai’s streets are deserted, while attendance at the Melbourne Grand Prix was 420,000 over the four days.

This demonstrates how quickly things can change in the space of just a few months in the Covid era.

Official statistics suggest that the number of districts classed at “high risk” of Covid started declining last week. The share of nationwide GDP at risk also dropped from over 30% to under 20%.

However, there is more anecdotal evidence that the trends are not improving.

The situation in Shanghai has deteriorated. There are reports of food shortages as lockdowns and a reluctance to deliver to Shanghai is constraining supplies and leading to unrest.

This situation has the potential to affect supply chains. It is also relevant for specific industries. For example, Shanghai and Jilin, another city affected by Covid, provide 20% of China’s auto production.

The State Council noted the ‘especially difficult’ conditions facing a number of service industries and the desire to underpin growth this year. This is likely to lead to more stimulus which, given the limits on consumer spending, may have to come in the form of infrastructure spending. This would be supportive of commodities.

Australian Federal election and rates

From a market perspective there appears to be little at stake in this election. Given Labor’s ‘small target’ approach and the likely focus on issues such national security.

However, once the election is over it is likely that the RBA will be looking to move rates. The April meeting release removed the reference to ‘patience’ in terms of the RBA’s stance.

Recent comments have noted wages rising outside of fixed agreements and building wage pressure.

The effect of floods on construction costs, further supply chain disruption from China and the stimulatory effect of the budget have also been flagged.

All this signals the need to raise rates.

June is set to be the ‘live’ meeting, with a debate as to whether they move 15 or 40bp.

The market is implying a cash rate of 3% by June 2023, which at this point we think is a bit high.

The financial stability review released last week showed that the loan-to-value distribution in mortgages has improved significantly in the last two years due to lower rates and higher house prices.

While that signals a more resilient housing market, it should be noted that the proportion of people with more than 6x debt to income levels has risen significantly, which raises the sensitivity to rate increase.

Part of this sensitivity to rates is initially mitigated by a high proportion of people maintaining higher than required repayments in recent years.

Data suggests that 40% of households would not be affected by a 200bp rise in mortgage rates as their current repayments are already high enough.

That said, by the same measure 20% will see their repayments rise by more than 40%.

The added complexity this cycle is the higher proportion of fixed rate mortgages. This will defer the initial impact of rate increases but may cause issues 18-24 months down the line.

Overall, a 150bp move in mortgage rates would reduce capacity to pay by around 10%. It would also render consumer discretionary exposure, particularly in goods, vulnerable to a slow down.

Markets

Renewed concerns over Fed tightening and uncertainty in China saw bond yields rise while equity and commodity markets fell.

Heading into US earnings season, headline revisions still look good. However, once the energy sector is stripped out, the effect of input costs, labour, supply disruptions and a slowing consumer is beginning to tell, with the rest of the market seeing revisions back to flat for the calendar year to date.

The other thing to watch is the US dollar, which continues to grind higher and close to testing its highest levels in five years.

The Australian market saw more defensive sectors such as utilities, energy, and staples outperforming, while tech and discretionaries lagged.  

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About Crispin Murray and Pendal Focus Australian Share Fund

Crispin Murray is Pendal’s Head of Equities. He has more than 27 years of investment experience and leads one of the largest equities teams in Australia. Crispin’s Pendal Focus Australian Share Fund has beaten the benchmark in 12 years of its 16-year history (after fees), across a range of market conditions.

Pendal is 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  

Contact a Pendal key account manager