Most investors are now aware of climate change risks. But biodiversity preservation may be an even bigger and more immediate issue. EDWINA MATTHEW explains
Countries representing 90 per cent of global GDP are now covered by net-zero targets, highlighted at the recent COP26 climate change conference in Glasgow.
We will soon know if those targets are sufficiently ambitious to keep global warming to 1.5 degrees — meeting the Paris Agreement adopted at COP21 in 2015.
But net zero emissions by 2050 is not the whole story.
As Glasgow was ramping up for COP26, the southern Chinese city of Kunming was just winding down after another COP (or Conference of the Parties) which focused on conserving biological diversity.
At COP15, 195 countries pledged to reverse biodiversity loss by 2030 at the latest and agree on a framework to protect species and their habitats.
Biodiversity may not be as attention-grabbing as climate change. But it is a critical part of the overall solution and directly impacts many industries.
Agriculture. Medicine. Insurance. Real estate. Tourism. To name a few.
Half of the world’s total GDP — or some US$44 trillion of economic value generation — is moderately or wholly dependent on nature and its services, according to the World Economic Forum.
“Climate change is a very complicated issue, but biodiversity is on a whole other level,” says Pendal’s Head of Responsible Investments, Edwina Matthew.
Sustainable and
Responsible Investments
Fund Manager of the Year
Twin crises
Climate change and biodiversity loss are inter-related, “twin crises”, says Matthew.
Climate adaptation strategies such as protecting and restoring natural habitats offer defence against the physical impacts of climate change.
Nature-based solutions are also part of the broader universe of carbon removal projects underlying the carbon credits or offsets that are part of net zero strategies.
But climate change itself is destroying our natural capital (soil, air, water and living organisms) and biodiversity ecosystems — as seen in Australia’s Black Summer bushfires.
“Encouragingly, governments, business and investors are starting to understand that nature and climate can’t be separated — and that nature-related impacts and dependencies need to be considered alongside climate-related exposures,” says Matthew.
“We need to invest in mutually reinforcing solutions. A 1.5-degree pathway cannot be achieved without major investments in natural capital.”
Industries threatened by biodiversity loss
Agriculture is the most obvious example of an industry threatened by loss of biodiversity.
The agriculture sector accounts for a quarter of Australia’s exports (and employs 60 per cent of the world’s working poor).
Scientists estimate $US577 billion of annual crop production is at risk from loss of pollinators like bees.
The Worldwide Fund for Nature says 60 per cent of the world’s coffee varieties are in danger of extinction due to climate change — a sector with more than US$80 billion in global sales.
Nearly half of all medicines are derived from natural sources.
“We’re also starting to see scientists linking the transmission of animal disease to humans because of a breakdown in biodiversity buffers,” says Matthew. “We had SARS, now we have COVID.”
The UK Treasury’s Dasgupta Review on the Economics of Biodiversity released earlier this year says the “devastating impacts of COVID-19 and other emerging infectious diseases — of which land-use change and species exploitation are major drivers — could prove to be just the tip of the iceberg if we continue on our current path”.
Find out about
Pendal Horizon Sustainable Australian Share Fund
Much of global tourism is linked to natural attractions. The Great Barrier Reef brings in $A1.5 billion a year in tourism and fishing.
The loss of wetland buffers for flood-prone areas can expose real estate and insurance companies to higher risk.
Nature also helps regulate the climate itself — as we acknowledge in the development of nature-based carbon offsets.
What it means for investors
Just as investors now understand the risks posed by climate change, so too natural capital and biodiversity considerations are starting to creep into the investor engagement and corporate reporting agenda.
“It’s twofold,” says Matthew.
“It’s about understanding biodiversity loss as a top-down, systemic issue — as a threat to the global economy — as well as understanding and managing bottom-up, company-specific natural capital and biodiversity-related exposures.
“It’s also about holding companies to account for their impacts, as we do for climate. What role do they play in adverse outcomes for biodiversity and natural capital? How are companies embedding these considerations into their own governance structures and risk management frameworks?
“And to what extent are they dependent on natural capital for their own business? How do they think about biodiversity loss and related policy and regulatory trends and shifts in key stakeholder expectations?
“A lot of the learnings we’ve had from climate change are starting to play out in the natural capital space.”
The good news is, companies are starting to respond.
“We are seeing efforts in mining, property and finance to build understanding around dependencies and impacts in business models and supply chains.”
Biodiversity and land management reporting is already a feature in some company public disclosures.
“Just last month BHP acknowledged evolving stakeholder expectations about its efforts to achieve nature-positive outcomes during an ESG investor roundtable.”
The newly launched Taskforce on Nature-related Financial Disclosure — supported by the United Nations and endorsed by G7 ministers and financial institutions — is setting up a risk management and disclosure framework for organisations to report and act on nature-related risks.
The taskforce supports a shift in global financial flows away from “nature-negative” outcomes toward “nature-positive” outcomes.
Opportunities
Similar to the transition to a “low-carbon economy”, a transition to a “nature-positive economy” also offers economic opportunities.
There is potential for almost 400 million jobs and some $US10 trillion in annual business value by 2030 across three socioeconomic systems (food, land and ocean use; infrastructure and the built environment and energy and extractives) according to WEF.
Pendal clients are exploring how they can direct capital to support nature-positive outcomes, Matthew says.
“They have a fiduciary and financial interest in the wellbeing of the economy as a whole. They expect active managers like Pendal to exercise our ownership rights on behalf of our clients to encourage the protection of natural capital.
“They are also seeking opportunities for how they can allocate capital to support and scale nature-positive outcomes.”
Pendal will “continue to work with our clients and other stakeholders to build understanding around biodiversity loss and access to nature-positive investment solutions to help tackle the next sustainable investment challenge,” Matthew says.
About Edwina Matthew
Edwina Matthew is Pendal’s Head of Responsible Investments. Edwina is responsible for maintaining our leadership position in the provision of sustainable and ethical investment products.
Edwina is actively involved in the implementation of the UN-supported Principles for Responsible Investment. She also represents the company in working groups with a number of industry associations and initiatives relating to responsible investment.
About Pendal Group
Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management.
We believe sustainability considerations ultimately drive higher and more stable investment returns over the long term.
Pendal Group has a proud heritage in responsible investing, extending back decades. Our specialist responsible investing business Regnan includes highly experienced ESG research and engagement experts and offers a growing range of investment strategies.
Some of our responsible investing strategies
What are the major factors driving global equities investments in this volatile period? And which plays should investors be considering right now? Pendal’s head of global equities, Ashley Pittard, explains in this fast podcast
Listen to the podcast above or read the transcript below
Interviewer Sean Aylmer: Ashley, there’s incredible volatility in Wall Street at the moment, particularly among the tech stocks. What is going on?
Ashley Pittard, Pendal’s head of global equities: It really comes down to a couple of key points. The key points are:
- Inflation: Is a transitory or is it frustratingly structural?
- In addition to that, you have the Federal Reserve tapering
- You have long-term interest rates increasing
- You have a debt ceiling negotiations in the US that are dragging on
- In addition to that, you have China’s increasing regulatory risk. China also has real estate issues with regards to their largest developer.
All of that together creates uncertainty and that uncertainty is creating volatility in companies that have re-rated over the last five years to valuation levels that are very, very high.
Interviewer: Inflation – is it transitory or is it structural?
Ashley Pittard: I get back to what Fed chair Powell said. He originally thought inflation was transitory, but it’s now becoming frustrating.
When you step back, you look at wage growth in the US which is compounding at 3-4%. You’ve got higher energy prices. We’re actually near an oil price of $80. And you’ve got massive higher transportation costs — an example is the UK’s with their fuel and transport issues.
All of those issues, in addition to commodity prices that are at near-term highs, are all contributing to inflation that I believe will be more longer-term in nature then transitory.
So it’s interesting now that we’re starting to see the Federal Reserve think that way.
Find out about
Pendal Concentrated Global Share Fund
Interviewer: How big a worry is China — be it the regulatory risk or real estate issues particularly around Evergrande?
Ashley Pittard: There’s no doubt China is a massive risk. The reason it’s a massive risk is because they’re trying to redistribute wealth. And whenever you try and redistribute wealth, people that have the wealth usually lose out.
So where is the majority of wealth situated in China? It is in the large property businesses. And more importantly, these large technology companies. As we’ve seen over time, restrictions being put in place which means the market will start giving a significantly lower valuation to these businesses on the tech side.
With regards to the real estate side, in addition to lowering house prices, these development companies have significant amounts of debt. And if you have debt, you can start getting into a situation that is very reminiscent of what we saw in the US housing market probably a decade ago now.
So the risk in China is very, very high because you’re redistrubuting wealth, the P/Es have to come down because of the increasing risk. And then you also have this debt burden associated with a reduction or slowing in property development, which is very reminiscent of what we saw a decade ago in the US.
Interviewer: So bringing that all to portfolio construction, what does it mean in terms of investing in global markets at the moment?
Ashley Pittard: We think that you want to be different. What do I mean by that? You want to be contrarian. If you look over the last five years, the best sectors to be in globally have been technology and pharmaceuticals. They are at all-time highs as a per cent of the index — and also their stock prices.
We believe, as inflation becomes more structural, that you want to be concentrated in a portfolio of financial and energy plus aerospace exposure.
So effectively we believe you want to be in re-opening plays and contrarion plays as inflation becomes frustratingly higher for longer and not transitory – just like Chairman Powell said.
About Ashley Pittard and Pendal Concentrated Global Share Fund
Ashley Pittard leads Pendal’s Global Equities investment boutique. He is responsible for setting the strategy, processes and risk management for the boutique and its funds including Pendal Concentrated Global Share (COGS) Fund.
Ashley has more than 24 years of finance experience, including roles in petroleum economics, global energy investment analysis and 20 years as a global equities fund manager.
Pendal COGS Fund is an actively managed, concentrated portfolio of global shares diversified across a broad range of global sharemarkets.
Find out more about Pendal Concentrated Global Share Fund
Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management.
Investors concerned about the banking crisis and recession fears in the US may be missing out on finding investment opportunities in other parts of the world, says Pendal’s CLIVE BEAGLES
- US banking crisis creating opportunities elsewhere
- UK banks trade at steep discounts
- Browse Pendal’s global equities funds
MARKETS are watching the US closely as its banking system reels from the impact of higher interest rates on regional bank bond portfolios.
Three US banks have been shuttered during the rolling crisis and regional bank shares have been volatile as markets weigh up the prospect of further failures.
But the crisis has also swept up banks and markets outside the US, which may offer opportunities for investors who can keep calm amid the noise.
Clive Beagles, a senior fund manager at Pendal’s UK-based asset manager affiliate J O Hambro, has similar things to say about British bank stocks.
“Many of the UK banks are posting returns on equity of close to 20 per cent in the first quarter,” says Beagles.
“But they all trade at a discount to book value — some of them at 0.4 or 0.5. That includes big names like Natwest and Lloyds.
“Discounts to book value for that kind of return on equity just look silly.”
Beagles says the US market is acting like a “rotating firing squad” that seems to be picking a different name every other day to sell off.
But he believes the banks that are failing in the US are smaller players which are not globally significant.
“The differential between how the US has been regulating their banks and how the UK and Europe are regulating banks is becoming ever clearer — which is frustrating because they have been dragged down a bit by the noise.
Is everyone else still catching cold when America sneezes?
Beagles says the underlying concern many investors have is of a global recession triggered by a downturn in the US.
“There’s an old assumption that when the US sneezes everyone else catches a cold. But I do slightly wonder if it’s going be different this time.
“If this is a crisis, it’s the first one we’ve had where the US dollar is going down rather than up.
“Normally, you head to the dollar for safe haven status.”
Beagles believes the US dollar weakness indicates something different is going on from the usual global contagion. It could point to a period where the US is one of the slower-growing economies in the developed world rather than its traditional role as one of the fastest.
“The banks are just a microcosm of that — they will need more capital and need to be more tightly regulated in a slower US.”
Beagles also cautions against comparisons to previous banking crises.
“In 2008, UK banks had tier-one capital ratios of 4 per cent. Today they have tier-one ratios of 14 per cent.”
Tier-one capital refers to bank’s most reliable and highest-quality capital. A higher tier-one capital ratio generally suggests a bank is better equipped to absorb losses and maintain its financial stability.
“In 2008, there were something like £400 billion more loans than there were deposits — today it’s the other way around.
“The UK as an economy is under-geared rather than over-geared.”
About Clive Beagles
Clive Beagles is a senior fund manager with Pendal Group’s UK-based asset manager, J O Hambro Capital Management. Clive is one of the UK’s most highly respected equity income managers. He has 32 years of industry experience and co-manages the JOHCM UK Equity Income Fund.
About Pendal Group
Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management.
A rotation from growth to value will take years to play out for a generation of investors that has only known low interest rates, says senior fund manager CLIVE BEAGLES
- Rotation from growth to value underway
- Corporate activity could be next trigger
- Investors slow to embrace change
A STOCKMARKET rotation from growth to value could take years to fully play out, with corporate action likely to be the next catalyst for investors, says senior fund manager Clive Beagles.
Many investors sold down high-growth stocks like big US tech firms over the past year as higher interest rates reduced the future value of their earnings.
But despite a dramatic selldown that shaved trillions from market values, investors are only at the start of a reorientation in markets that could last up to three years, believes Beagles, an UK equity income manager with our London-based sister company J O Hambro.
“There’s a generation of fund managers who have only ever lived in a world of zero interest rates and very low discount rates and it’s taking them a long time to recognise that this is a regime shift,” he says.
The gap between average valuations of US and UK-based companies is evidence of how far the changeover has left to go, he says.
UK shares are trading at an average price earnings ratio roughly half their US counterparts as the war in Ukraine overshadows a robust local economy and better-than-expected company reporting season.
“The UK has the greatest exposure to the value factor of any developed market,” he says.
Value gap may trigger corporate activity
This relative value is starting to trigger corporate activity, says Beagles.
The UAE’s First Abu Dhabi Bank is reported to have been considering an all-cash bid for banking icon Standard Chartered.
Anglo-Dutch energy giant Shell has been mulling a move to the US.
Cement and concrete producer CRH unveiled plans to move its main listing from London to New York, sending its shares up 7 per cent on the day of the announcement.
Adviser Sam is invested
in making our world
A better place.
Watch as Sam meets a
mum rebuilding her life
thanks to responsible
investing
“This could be the sort of thing that jolts investors into realising quite how ridiculous this valuation gap between the UK market and other parts of the world has become,” says Beagles.
“Standard Chartered is an interesting example. As far back as 50 years ago, it was one of jewels in the crown of the UK market — listed in London but exposed to high growth markets in Asia with a very interesting geographical footprint.
“It has been struggling for years and is now trading on about half its book value. First Abu Dhabi trades at two times book value — so you can see what they are trying to do.”
Reports of Shell considering a move to the US markets also indicate that corporate activity can be the catalyst to realise investment opportunities.
“In terms of the geographical footprint, there’s not much to choose between Britain’s BP and Shell and their US peers Exxon and Chevron.
“But the US peers trade on anywhere between 50 to 75 per cent premiums. There’s no logic to it.”
Trend to value has years to play out
Beagle says this indicates the trend towards value stocks has some years to play out.
“It is taking investors a while — the UK has been deemed to be this sort of Jurassic Park market where companies go to die for some time.
“This is why I come back to: does it need one of our banks to get bid for? Does it need one our big oil companies to get bid for?
“If you have two or three come along in quite short order that might be the thing — investors have been very slow to embrace the change.”
Beagles says the recent corporate earnings season in the UK saw a mix of solid results and muted outlook statements.
But he says better-than-expected dividends indicate that corporate Britain is in good health.
“That’s the ultimate manifestation of business confidence, isn’t it? It reflects strong balance sheets and demonstrates what companies really think about the world.
“Consumer confidence in the UK is almost at a one year high, so despite all the misery they read in the newspapers, people are just getting on with their lives.
“Retail spending has generally come in better than people would have expected, and we’ve still got this massive cushion of £270 billion in savings.
“There’s a little bit of noise about currency, with sterling rallying off its lows, and there’s a little bit of noise around interest costs for companies that are heavily levered – but overall things are looking pretty good.”
About Clive Beagles
Clive Beagles is a senior fund manager with UK-based asset manager, J O Hambro Capital Management. Clive is one of the UK’s most highly respected equity income managers. He has 32 years of industry experience and co-manages the JOHCM UK Equity Income Fund.
About Pendal Group
Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management.
The British share market shows why it’s important to look past the headlines and see the world objectively, says Pendal’s Clive Beagles.
IT’S easy to forget that newspaper headlines are designed to do only one thing: sell newspapers.
If long-term investors needed a reminder of the importance of looking past the headlines, consider the UK, says Pendal’s Clive Beagles.
Recent commentary on the UK has focused on political instability, energy market disruption and the prospect of a real GDP recession in 2023.
Yet UK shares are the best-performing developed market in the world this year — and still offer strong value, healthy dividends and the prospect of growth, says Beagles, a senior fund manager at Pendal’s UK-based asset manager J O Hambro.
Consider this: the FTSE All-Share Index — a measure of the biggest 600 companies on the London Stock Exchange — trades at about the same market cap as Apple.
“It’s crackers,” says Beagles. “One is a two product company — the other is an extraordinarily diverse index in all sorts of industries.
“And yet which one have investors got more money in?”
It’s a reminder of the importance of looking through the noise in investment markets and trying to see the world objectively, he says.
UK issues milder than they appear
Many of the perceived problems facing the UK are milder than they appear, says Beagles.
The recent chaos in political leadership is likely to settle down to an era of more predictable politics, with the extremes of both sides reined in by the shambles of three Prime Ministers in two months.
“In any case, we have left the EU so we might as well try and make the best of it — many of the government’s policies about accelerating deregulation were exactly what we need to do.”
The energy crisis triggered by the Russia Ukraine war is dissipating as European governments co-operate to find alternative gas suppliers and build stockpiles.
“And obviously we can’t rely on the weather, but it’s 19° here this weekend in the middle of November. Each week that goes by like that means accumulated gas reserves are being built up for the winter.”
Sustainable and
Responsible Investments
Fund Manager of the Year
Look to nominal GDP
Even the prospect of recession in 2023 is not as simple as it appears, says Beagles.
“There’s far too much focus on real GDP as opposed to nominal GDP.
“Yes, we are likely to have a real GDP recession, but it could easily be in a situation where nominal GDP is still growing by 4 or 5 per cent.
“Real GDP is an artificial construct. It doesn’t exist in the real world. Companies don’t operate in a real GDP world – their revenues and profits are denominated in nominal terms.
“Many analysts are looking at previous recessions and assuming some sort of 20 to 30 per cent earnings fall for the more cyclical parts of the market.
“But in nominal terms, revenues may well be flat or rising.
“Ultimately, equities should give you an inflation hedge.”
Misery ‘slightly overdone’
Beagles says many of the key indicators of Britain’s economic health have also settled down.
Bond yields in the UK are now lower than they were before the political instability. Sterling is trading at a similar price versus the euro to what it was five years ago.
Households have some £230 billion of accumulated savings, which will offset the effect of interest rate rises and cost of living issues.
Shares also look good value, even with the FTSE100 outperforming other developed markets and trading relatively unchanged year to date.
“The dividend yield in our fund for this year is 6 per cent. It’s only ever been higher than that very briefly during the financial crisis,” says Beagles.
“Dividend cover is the highest it’s ever been and many of the stocks in our fund are on free cash flow yields in the mid-teens or above which means there’s quite a buffer against earnings disappointments.
“It feels a bit like the misery is slightly overdone.”
About Clive Beagles
Clive Beagles is a senior fund manager with Pendal Group’s UK-based asset manager, J O Hambro Capital Management. Clive is one of the UK’s most highly respected equity income managers. He has 32 years of industry experience and co-manages the JOHCM UK Equity Income Fund.
About Pendal Group
Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management.
Inflationary periods can be a good time to identify mis-priced stocks if you know what to look for, says Pendal’s CLIVE BEAGLES
- Inflation triggers mis-pricing of stocks
- Important to decipher inflation and volume in revenue growth
- Cyclical stocks oversold in UK market
HOW can equity investors identify mis-pricing in an inflationary environment — and therefore identify opportunities?
Pay attention to the difference between real growth and nominal growth rates of a company, says Clive Beagles, senior fund manager at Pendal’s UK-based asset manager J O Hambro.
Real growth measures growth adjusted for inflation. Nominal growth doesn’t adjust for price changes.
“Inflation has meant real growth forecasts have come down somewhat. But companies operate in a nominal growth rate world, and they’re still going to be high,” says Beagles.
“In the UK nominal growth could be 10 per cent — and that hasn’t happened since the 1980s.
“It’s a very different environment and people haven’t been focusing on it. Earnings could prove to be much better than people think because they are in nominal terms.”
Sustainable and
Responsible Investments
Fund Manager of the Year
In all markets it’s important to look at individual companies and decipher the split of revenue growth between inflation and volume, says Beagles.
“Some companies are very helpful at providing it and some aren’t.
“If you can understand the split, you can identify companies that can pass through price rises, and those that might end up with strong revenue growth but no volume growth,” he says.
Rotation away from cyclicals and financials ‘overdone’
In the UK, the rotation away from financials and cyclicals towards defensive stocks is overdone, argues Beagles.
Extreme risk aversion in the market means the valuation between defensives and cyclicals is now at the same low level as after 9/11 and during the Lehman collapse in the global financial crisis.
“That’s pretty staggering. We are in this phony period where everyone is anticipating that life slows down quite dramatically but companies haven’t seen it yet.”
The cost-of-living crisis particularly around energy prices in the UK has gotten a huge amount of attention.
“But the stock of savings is elevated and at an aggregate level that will provide a bit of a cushion.” (Though the savings aren’t distributed evenly across society, he adds.)
“The investment community has been whipped up into very bearish sentiment, but the UK is different to Europe. It hasn’t been hit as hard by higher energy prices. It is much more service, consumer-spending oriented. It hasn’t got a big manufacturing sector.
“Share prices are assuming much worse than what we’ve seen so far.
“As risk tolerance normalises, cyclicals and financials should outperform.”
About Clive Beagles
Clive Beagles is a senior fund manager with Pendal Group’s UK-based asset manager, J O Hambro Capital Management. Clive is one of the UK’s most highly respected equity income managers. He has 32 years of industry experience and co-manages the JOHCM UK Equity Income Fund.
About Pendal Group
Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management.
Despite recent volatility the fundamentals of investment in European equities haven’t changed much says Pendal Group’s Clive Beagles
- Investors in Europe must not panic.
- Long term fundamentals remain sound.
- Pricing of some stocks, due to the conflict, is irrational.
Clive Beagles has a message for investors in Europe: don’t panic.
The war in Ukraine is a human tragedy and has immediate implications for many commodities, says the senior fund manager from Pendal’s UK-based J O Hambro asset manager.
But considered long-term investment strategies remain sound.
It’s a particularly pertinent message given the rotation that had been going on since the middle of last year from large, tech-focused growth companies (often on Wall Street) to value stocks.
“For many years people wanted to invest in mega caps and growth stocks and not much else,” Beagles says. “And then late last year and into this year investors got the point of thinking about something else.”
European and UK markets, particularly banks, become attractive to what Beagles describes as “slightly lower conviction” investors. They were prepared to buy into European equities, but not with gusto.
Then came Russia’s unprovoked invasion of Ukraine and those slightly-lower-conviction investors pulled back on European and UK stocks.
Broadly, the more a stock is invested in Europe — or relies on energy, or is a bank or a consumer staple relying on customers that feel the effect of higher gas prices — the more the share prices fall have been, Beagles says.
And the reaction to perceived bad news has triggered big declines.
Sustainable and
Responsible Investments
Fund Manager of the Year
“Interest rates are still going up and the fundamentals of the story haven’t really changed much. Investors need to remember that,” Beagles says.
“Going back a month, the UK and Europe were much cheaper than their US counterparts in comparable sectors. And that has been accentuated in the past few weeks.
“What’s happening is a human tragedy. In economic terms, outside some commodities like wheat and wool and coal, the main impact is on business confidence. And, of course, there’s more short-term uncertainty.
“While it’s right to think that economic growth across Europe might be 100 basis points lower, the region is still expanding.”
The pricing of some equities in Europe and the UK is now verging on the absurd, Beagles says.
He uses the example of British free-to-air television network ITV. It recently reported 24 per cent growth in revenue to a record level, a 40 per cent jump in earnings per share, and said the current year has started strongly.
It’s share price dropped 27 per cent on the day of the announcement, with investors focused on the costs associated with the acceleration of ITV’s digital transformation strategy.
“Obviously investors are concerned that future economic growth and business confidence may be materially impacted by events in Ukraine. But going through the numbers the share price drop is absurd,” Beagles says.
If you look at the UK specifically the market has a relatively high weighting to oil and mining, and commodity prices are up, Beagles points out.
“Assuming we get a couple of rate rises, many companies in Europe and the UK will get back to getting a return on equity of about 10 per cent. You’d normally expect them to be trading at least at book value, and many, such as UK banks, are not. Absurd.”
A Pendal statement on Russia’s invasion of Ukraine
During these tragic times, Pendal’s sympathy lies with the people of Ukraine in their struggle to maintain their freedom.
As responsible investors, Pendal Group and its affiliates J O Hambro Capital Management, TSW and Regnan have taken decisive steps to reduce our already minimal exposure to Russian securities.
We are limiting direct risk in client portfolios and taking decisive steps to comply with evolving sanctions and restrictions. We will refrain from investing in Russian and Belarusian securities for the foreseeable future.
The situation is evolving rapidly and we continue to monitor the emerging risks, which may take an unexpected form as the consequences ripple through the financial and economic systems.
As active managers, our purpose is to navigate our clients through a world in flux to protect their interests during uncertain times.
About Clive Beagles
Clive Beagles is a senior fund manager with Pendal Group’s UK-based asset manager, J O Hambro Capital Management. Clive is one of the UK’s most highly respected equity income managers. He has 32 years of industry experience and co-manages the JOHCM UK Equity Income Fund.
About Pendal Group
Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management.
Greater employee power and digitalisation are two pandemic trends that will endure to shape the investment landscape in 2022. CLIVE BEAGLES explains
- Covid has forced many companies to catch up with digitalisation
- The best have adapted and created new opportunities
- Wage pressures will eat into some earnings in 2022
THE pandemic has breathed new life into some sectors of the economy that otherwise would have been swamped by technological change — and that could open opportunities for investors.
The pandemic forced some old-world industries to ramp up their digitalisation – the use of technology to provide new revenue and value-producing opportunities.
These enhancements will have long lasting benefits says Clive Beagles, a senior fund manager who focuses on equity income at Pendal Group’s UK-based asset manager JO Hambro Capital Management.
“There were some sectors that pre-Covid were structurally compromised, and their outlooks weren’t positive, Beagles says. “But that’s transformed during the pandemic and emerged as part of the vanguard of the recovery.
“Everyone talks about Covid accelerating ten years of change — and that’s helped some of these industries.”
Some old-economy industries will emerge from the pandemic in much stronger shape than where they started.
Sustainable and
Responsible Investments
Fund Manager of the Year
“They haven’t exactly reinvented themselves, but they have reacted in a meaningful and agile way.
“Yet some of them are still being valued as if they’ll have declining profits and at some point will become terminal.”
Beagles nominates recruitment and advertising-reliant industries as sectors that will emerge from the pandemic in 2022 in better shape than when Covid hit.
Two examples in the United Kingdom are broadcaster ITV and recruiter Michael Page.
“In the case of media and particularly broadcast TV, the ability to provide much greater data on audiences and who is being reached provides the medium with a whole new selling point,” Beagles says.
“In the case of recruiters, they’ve used the pandemic time to go digital, and there’s strong demand for labour.”
Greater employee power
Another big change for firms and earnings in 2022, Beagles says, is the emergence of employee power. Because of the strong demand for labour, workers can demand more.
“It’s still some way out but it could eventually be one of the biggest changes in the past 20 years, because for the last two decades all the power has been with employers,” Beagles says.
“There will be sectors where the employees will become much more strategic. We know about medical staff but also areas which weren’t considered strategic before like HGV (heavy goods vehicles) drivers.”
Labour pressures – there’s 1.4 million people unemployed in the United Kingdom currently and 1.2 million job vacancies – will put pressure on prices, and that will eat into earnings in some sectors.
“Twenty-twenty-two is only about the second or third innings, to use a baseball analogy, of a longer change period. It has a way to go and the rotation in markets in 2022 should be quite powerful.”
About Clive Beagles
Clive Beagles is a senior fund manager with Pendal Group’s UK-based asset manager, J O Hambro Capital Management. Clive is one of the UK’s most highly respected equity income managers. He has 32 years of industry experience and co-manages the JOHCM UK Equity Income Fund.
About Pendal Group
Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management.
There’ll be a lot of talk at this month’s climate change conference in Glasgow. Pendal’s MURRAY ACKMAN explains what Australian investors should pay attention to
IN TWO WEEKS world leaders — maybe even our ScoMo — will fly to Glasgow for the 26th UN Climate Change Conference of the Parties (or “COP26”).
There will be a lot of talk — but Australian investors should watch a few things closely, says Pendal Credit ESG analyst Murray Ackman.
“This is not your typical gab-fest,” says Ackman.
“The pressure on countries to act is very real as we’ve seen recently with the Morrison government’s turnaround on a 2050 emissions target.”
Murray says Aussie investors should pay attention to three things:
1. End to coal power
Coal accounts for about half of energy-related CO2 emissions and will have to be phased out to reach net zero emissions by 2050. Many are pushing for this COP to include a commitment on ending coal power.
Increasing uptake of renewables in Australia is coinciding with reduced coal use — but we still export a lot of coal.
Businesses that produce coal (eg Whitehaven), transport it (eg Aurizon) or ship it (eg Port of Newcastle) would be severely impacted by a global decision to phase out coal, Murray says.
2. Australia as a pariah
New national targets to cut greenhouse emissions by 2030 will be announced at Glasgow — as required under the Paris Agreement.
Many developed countries have already flagged stronger targets.
But Australia has been without a substantial climate policy for nearly a decade — which could start to cause problems for us, says Ackman.
“The carbon intensity of an economy may be a differentiator for future investments.
“We’ve already seen some investors avoid businesses and government bonds due to a perceived weakness in climate policy.
“They’re now known as ‘brown markets’ as opposed to ‘green markets’.
“If Australia’s national targets are not regarded as ambitious enough, this divestment trend may continue.”
3. Investment opportunities
A faster shift away from fossil fuels presents obvious challenges for Australia, since they relate to a quarter of our exports.
But change can also lead to significant opportunities.
“There is a very clear path to reduce Australia’s domestic emissions which will require substantial infrastructure investment,” says Murray.
“There will be a lot of spending on the electricity supply of the future with transmission lines, interconnectors and energy storage.
“There are also opportunities for export, whether that’s green hydrogen (produced by renewables), minerals required for electric vehicle batteries and even copper.”
About Murray Ackman and Regnan
Murray is a Senior ESG and Impact Analyst with sustainable investing leader Regnan.
He also provides fundamental credit analysis on Environmental, Social and Governance factors for Pendal’s Income and Fixed Interest team.
Murray has worked as a consultant measuring ESG for family offices and private equity firms and was a Research Fellow at the Institute for Economics and Peace where he led research on the United Nations Sustainable Development Goals.
Find out more about Regnan here
Regnan Credit Impact Trust is an investment strategy that puts capital to work for positive change.
Pendal Sustainable Australian Fixed Interest Fund is an Aussie bond fund that aims to outperform its benchmark while targeting environmental and social outcomes via a portion of its holdings.
The RBA’s Melbourne Cup day meeting will be closely watched after Wednesday’s inflation numbers. TIM HEXT explains why.
IN AUSTRALIA we only get inflation data quarterly, so the number is keenly anticipated.
For the inflation hawks Wednesday didn’t disappoint. For the RBA it looks like a decade of over-estimating inflation has now moved to a new decade of under-estimating.
The headline inflation number was on forecast at 0.8% for the quarter and 3% annually. However it was the underlying number that shows a more concerning picture.
Underlying inflation strips out the top and bottom 15% of moves, usually including fuel and food. Here the number was 0.7% for the quarter. This is the highest since 2014.
While that is only 2.1% annually, markets will usually annualise the latest quarter to get a more current read.
Of course 0.7% means 2.8% — above the RBA target.
Looking under the hood a number of factors were at play.
Fuel prices were up 7%. We knew that already but they have gone up further in October.
Find out about
Pendal’s Income and Fixed Interest funds
New dwelling purchase prices, or building costs, are losing the dampening effect of Homebuilder subsidies. These costs had risen around 5% over the last year but until now this was offset by the subsidy.
Property rates were also up 3%. Household items, usually flat or down, were up 3 to 4%. Maybe its transitory but time will tell.
The RBA next meets on Melbourne Cup day. What could have been a “nothing to see here” pre-race statement will be keenly watched.
Three days later the Statement on Monetary Policy comes out which will provide their updated forecasts.
No doubt the RBA will play down the impact of one number but inflation is already above their forecast for 2022.
Some upgrades will be required. The confidence in their “no rate rise till 2024” outlook will either be toned down or removed. It will be a step too far for now for 2022 to be in play for rate rises but surely 2023 should be.
In terms of their current policy actions there will be no changes for now. However Quantitative Easing is reviewed in February, before which we will have the Q4 CPI print.
Also, whether they keep the April 2024 bond at Yield Curve Control at 0.1% is debateable. They can change that any time and given they actually have to put their money where their mouth is with that policy, it may be reviewed sooner.
Overall we continue to hold inflation bonds in portfolios where we can and will continue to do so until the market prices in 2.5% inflation.
After these numbers that day is getting closer.
About Tim Hext and Pendal’s Income & Fixed Interest boutique
Tim Hext is a Pendal portfolio manager and head of government bond strategies in our Income and Fixed Interest team.
Tim has extensive experience in banking, financial markets and funding including senior positions with NSW Treasury Corporation (TCorp), Westpac Treasury, Commonwealth Bank of Australia, Deutsche Bank, Bain & Co and Swiss Bank Corporation.
Pendal’s Income and Fixed Interest boutique is one of the most experienced and well-regarded fixed income teams in Australia.
Find out more about Pendal’s fixed interest strategies here
About Pendal
Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management.
In 2023, Pendal became part of Perpetual Limited (ASX:PPT), bringing together two of Australia’s most respected active asset management brands to create a global leader in multi-boutique asset management with autonomous, world-class investment capabilities and a growing leadership position in ESG.