Here are the main factors driving the ASX this week, according to portfolio manager OLIVER RENTON. Reported by portfolio specialist Chris Adams

• Find out about Pendal Focus Australian Share Fund
• Tune into Crispin Murray’s latest Beyond the Numbers webinar

A QUARTER AGO, the market had strong momentum, favourable liquidity and seasonals, but definitive signs of overexuberance. 

It could be argued it was due a correction, and this has occurred.

The answer has consistently been to buy the correction.  It never feels comfortable at the time, but this has been the correct answer – unless the economy is sliding into recession. 

We have seen extremely rapid unwinding of positioning, some soft economic data and some weak company updates. 

The market stabilised last week – a sign that it is entering a new phase. The S&P 500 was up 0.5% and the S&P/ASX 300 1.9%.

What the US is attempting to do – in fundamentally rebalancing its economy – is not something society or the market has had to deal with much over the last few decades (we’ve had other things, certainly). 

It creates uncertainty.  This is reflected in sentiment indicators within the US.  It is also being reflected in capital flows globally.

Uncertainty feeds into confidence which can and does have the ability to drive the economy.  The prospect of policy missteps is elevated.

The Fed does have some room to maneuver with a currently strong employment backdrop and only moderately high but stable inflation. 

The Trump Administration can also try and give the market confidence at various points. They have made it clear they want to create structural change without causing recession.

We suspect short-term volatility will be elevated, as we head toward a most-likely favourable long-term environment for risk-assets. 

It feels somewhat analogous to the constant back and forth we had on soft versus hard landing. This is likely to go on for an extended period of time.

The comments above regard the US and its economy – the implications for individual countries and blocs will be just as interesting, with the derivative impacts highly uncertain. 

China is pushing a consumer recovery, while Germany is stimulating via higher defence spending and has awoken.  We are already seeing major shifts.

It seems more important than ever to construct portfolios to reflect vastly different economic outcomes, to be open minded and nimble but not reactive.

David Zervos, Chief Market Strategist at Jefferies, summed it up nicely. While approving of the “withdrawal” or “detoxification” of the US economy from dependence on the government sector, he noted the risk of economic convulsions through the process.

With regard to markets, he said that how it will play out “over the short term remains difficult to predict; but with the end result being a decisive move towards spending and regulatory parsimony, the long-term outlook for risk asset returns couldn’t be any brighter”.

Thus far, the S&P 500 drawdown is playing out in line with previous examples of corrections greater than 10%.

Historically, the median outcome is that stocks start a strong rebound two-to-three months after the market’s previous top – if there is no recession. If there is a recession, equities have historically continued to sell off.

US macro and policy

FOMC

As expected, the Fed left rates unchanged at 4.25%-4.50%.

The “dot plots” of expectations for future rate cuts from the FOMC participants still suggests a further 50bps of cuts in 2025, however the distribution shifted upwards, with four now expecting a midpoint of 4.375% in December, up from one, and the number expecting only a 25bp cut lifting from three to four.

New economic projections suggest most members expect the inflationary effect of tariffs to be short-term, but that concern over the outlook for employment is increasing.

Expected GDP growth for 2025 was reduced to 1.7%, from 2.1% in December, the unemployment rate nudged up from 4.3% to 4.4% and Core PCE inflation from 2.5% to 2.8%. However, 2026 expectations were largely unchanged.

The statement noted the economy “has continued to expand at a solid pace”, unemployment has “stabilized at a low level” and labor market conditions “remain solid”.

However, it noted that “uncertainty around the economic outlook has increased.” It also removed the previous reference to risks over employment and inflation goals as being “roughly in balance.”

It has announced that the pace of balance sheet reduction will be slowed, as a result.

Equity market took the release well and consensus rate cut expectations remained steady.

Other data

The preliminary Michigan Consumer Sentiment survey dropped from 64.7 in February to 57.9 in March – well below consensus and the third straight month of declines.

Both current sentiment and expectations were lower – the latter down 10 points from February. The difference in sentiment according to political party remains stark.

US Nominal Retail Sales increased just 0.2% month-on-month (MoM) in February. We note that high-frequency data like Open Table booking and bank lending show no signs of consumer caution yet.

US weekly unemployment benefit application were largely changed at 223,000, which is a relatively low level and indicates a resilient labor market.

This may deteriorate, however, given some of the recent layoff announcements.

The National Association of Home Builders/Wells Fargo Housing Market Index dropped three points to 39 this month, versus consensus expectations of 42. This is the lowest level since August 2024.

We also note that the average US 30-year mortgage rate rose for the first time since early January, to 6.72% for the week ending 14^th March.

Expectations of lower growth and higher inflation due to tariffs are also reflected in New York state manufacturing activity, which dropped in March to the lowest level since early 2024, while measures of prices picked up.

China policy and macro

The action plan announced following the recent National People’s Congress is aimed at boosting consumption as a driver of economic growth.

The plan’s seven parts, with some key elements, are:

1. Promote income growth. Boosting spending power via higher minimum wages, stabilizing stock and real estate markets, as well as subsidies and measures to support rural economies.
2. Improve consumption capacity. Giving people the means and confidence to spend via better access to credit and stronger social safety nets (eg childcare, pensions and healthcare support). 
3. Improve consumption of services and public benefits. Better access via measures such as elderly-friendly infrastructure, community-based childcare, home services industry standards and steps to improve tourism.
4. Upgrade large-item consumption. Encouraging purchases of items like cars and home appliances via subsidies and trade-in programs. Also measures to support affordable housing.
5. Improve consumption quality. Implement product standards and promote domestic brands, support further technological innovation such as AI and encourage sustainable products.
6. Improve consumption environment. Enhance consumer rights and tackle issues such as fake goods and unfair pricing. Upgrade infrastructure and improve convenience of the consumption environment.
7. Remove restrictive measures. Easing regulations that hinder consumption and improve credit availability. 

Elsewhere, year-on-year growth of industrial production (IP) came in at 5.9% for January-February, versus 6.2% in December but ahead of consensus expectations at 5.3%.

Fixed asset investment grew 4.1% (versus 3.2% expected) up from 2.2% in December. Retail sales rose 4.0% (3.8% expected) up from 3.8% in December.

There has been some front-loading of demand and production from a recent trade-in program and a boost in exports looking to get ahead of tariffs, so this growth may moderate in coming months.

Other policy and macro

The OECD cut global GDP growth forecasts from 3.3% to 3.1% for 2025 and from 3.3% to 3.0% for 2026, citing the uncertainty relating to trade barriers among G20 nations.

Mexico and Canada saw the largest reductions, but China was lifted from 4.7% to 4.8% in 2025.

The February Eurozone consumer price index (CPI) was revised lower to +2.3% year-on-year, versus the earlier flash reading of +2.4%.

The Bank of England’s Monetary Policy Committee left the benchmark policy rate at 4.5%.

Australia policy and macro

Employment

Employment data came in much weaker than consensus, falling -53k in February (seasonally adjusted) from January, versus -30k expected. This is after a year of almost continual upside surprises.

Hours worked fell -0.4% month-on-month.

The Australian Bureau of Statistics cited fewer older works returning to work post the holiday period, noting the participation rate dropped from 67.2% to 66.8% driven by change in the age cohorts 55 years and older.

The unemployment rate fell from 4.11% to 4.05% and underemployment from 6.0% to 5.9%, indicating that capacity remains relatively tight.

Indicators suggest labour demand remains stable and supported. 

Tariffs

On tariffs, current estimates suggest 2-8% of Australia’s $30bn in exports to the US will be hit in the next round, in the event of no exemptions. Affected areas include beef and pharmaceuticals.

Budget

Commentators broadly expect strong revenues, but offset by further spending and no change to the expectation of further deficit spending.

There is a likelihood of further rebates or “cost of living” measures given the upcoming election.

The spending outlook could hit a snag in the event of a minority government – based upon the 2010-2013 experience – depending on who formed it. Betting markets still imply a 2/3rds chance of this outcome, reflecting how tight the race is.

Elsewhere, March quarter manufacturing activity remains below average, whilst business investment has eased but remains above average.

Advertised salary growth is remaining stickily high at 3.6%.

Markets

Bond yields were down across the curve in US, with the 10-year down 7bps to 4.25%. The Australian equivalent fell 2bps to 4.40%.

Commodity prices were up small, on the whole. Gold (+14.8%) and copper (+27.6%) are the standouts calendar year-to-date.

Global equity indices were up over the week. The EUROSTOXX50 is the best performer in 2025, up 11.19%, which would not have appeared on too many bingo cards.

The current US drawdown is nothing out of the ordinary thus far – and is currently less than the average intra-year drawdown of 14.1% going back to 1980.

The correct response historically has been to buy the dip…unless the economy is heading into recession.

The rebalancing of systematic strategies away from equities appears to have played out and has already hit the low end of its 10-year range for a measure of commodity trading adviser (CTA) strategies.

Measures of investor net leverage and long/shorts suggest that fundamental investors have also shifted back to the bottom end of five-year ranges in terms of US equity exposure.

Retail investors have been slower to move.

The Goldman Sachs risk appetite indicator has diminished, but only back to a ‘neutral’ level.

Ther were some interesting company-specific updates to note:

• Nike Q3 revenue rose 3%, beating expectations. China was weak but North America and EMEA were better than expected.
• Fedex reduced its FY profit outlook for a third consecutive quarter, calling out waning consumer confidence and the impact of trade wars. 
• Homebuilder Lennar’s forecast for quarterly orders missed analysts’ estimates, with the co-CEO noting “a challenging macroeconomic environment for homebuilding.”

 Australian equities

The week finished with solid gains across the board for the ASX and its sectors, but was choppy throughout.

The S&P/ASX 300’s 1.9% gain brings it back to down -2.3% for the month.

Consumer staples (+4.0%) had the best week on news flow out of the Government review into supermarkets.

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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 here.  

Contact a Pendal key account manager here.

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

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

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

Contact a Pendal key account manager here

In a volatile world, equities investors should seek out businesses that are taking control of their own destiny, argues Pendal equities analyst ANTHONY MORAN

• Look for companies with control of their own earnings trajectory
• M&A, cost-cutting, market share gains
• Find out about Pendal Focus Australian Share fund

THE market turmoil triggered by Donald Trump’s trade wars, spending cuts, and geopolitical brinkmanship can leave investors feeling there’s nowhere left to hide.

But beyond the chaos, opportunities abound in companies simply getting on with business — cutting costs, expanding margins, lifting market share, and delivering for shareholders, says Pendal’s Anthony Moran.

In uncertain times, companies with control over their own future are precisely the sort of investments investors should be hunting down, he says.

“You want to lean into idiosyncratic upside — upside that won’t be derailed by macroeconomics or the business cycle.”

Moran, an investment analyst in Pendal’s Australian equities team, highlights ASX-listed companies such as Amcor, Light & Wonder, and BlueScope Steel as examples of businesses creating their own growth opportunities, led by management teams with the capability to control their own destiny.

Pendal invests in all three stocks.

Amcor merger upside

Moran says Pendal has been adding to its position in Amcor (ASX: AMC) and sees the global packaging giant as an attractive opportunity in the current market.

“Amcor’s cycle is not one that’s hugely volatile,” he says.

“They sell consumer packaging focused on the centre of the supermarket and healthcare – low-volatility, in-demand sectors.

“The plastic packaging industry globally is just coming out of a nasty bout of destocking after consumers cut back due to inflationary pressures and Amcor is regaining its operating momentum and returning to growth.”

Amcor’s all-scrip acquisition of New York-listed Berry Global Group – approved by shareholders last month – is set to accelerate earnings growth, argues Moran.

“Berry makes semi-rigid plastic packaging – think yoghurt tubs and beauty product containers – and Amcor is targeting US$650 million of synergies from the merger, which is 23 per cent of the combined EBIT.

“So, you’ve got a company that’s going to drive tremendous EBIT growth relative to historical levels over the next three years on the back of those synergies.

“Even if you have a cyclical slow down, consumer confidence softens, and volume growth is flat, that’s immaterial compared to the earnings growth.”

Amcor benefits from a well-structured deal struck at a reasonable price by allowing Berry shareholders to share in the upside, Moran says.

With high gearing, shareholders will see even faster growth in earnings per share than the EBIT growth alone suggests.

And because Amcor manufactures locally in its key markets, it is insulated from US threats of trade tariffs.

“Amcor was already looking attractive beforehand — it’s currently trading on 11 times FY26 PE versus a historical average of 14.5 times.

“People haven’t given them full credit for the cyclical recovery and haven’t factored in the merger yet.”

Light & Wonder gaining share

Light & Wonder (ASX: LNW) is another company that fits the theme of being in control of its own destiny. For the slot machine maker, it’s the ability to gain market share that’s driving the upside, says Moran.

“If you’re doing something different, developing a competitive advantage that’s seeing you gain meaningful market share relative to the underlying growth rate in the industry, then that’s going to insulate you from the macro weakness we’re seeing.”

Light & Wonder is gaining market share in the US slot machine industry as a result of a multi-year turnaround strategy that has seen the company restructure how it develops games, revamp its sales and distribution model, and introduce better incentives for game designers.

With the US slot machine market growing in the low single digits, Light & Wonder’s market share gains have helped it deliver growth in the low teens, say Moran.

That means even if the broader economy slows, the company is still positioned for strong growth.

Cost control

Moran says other companies are delivering positive results for shareholders by refocusing on cost control.

BlueScope Steel (ASX: BSL) is a standout example, he argues. Alongside being a beneficiary of US steel tariffs due to owning US-based steelmaking, BlueScope is also delivering strong cost savings across its Australian steel-making business.

“They’re targeting $200 million in cost reductions, which is significant for a company making $1.2 billion to $1.4 billion in EBIT,” says Moran.

Toll road operator Transurban (ASX: TCL) and gas pipeline owner APA Group (ASX: APA) are also set to benefit by turning to cost control after a long focus on major growth projects in recent years.

Transurban has recently completed Sydney’s giant Westconnex motorway system and is nearing the end of Melbourne’s West Gate expansion.

APA has been focused on its east coast gas grid expansion and recently completed the purchase of Alinta Energy’s remote WA power assets.

Now both businesses are turning their attention to costs.

“If they can even keep their cost growth flat for a year in absolute terms, because their revenues are growing at CPI-plus their margins start expanding and that will fall quite nicely to free cash flow and dividends.”

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About Anthony Moran

Anthony Moran is an analyst with more than 15 years of experience covering a range of Australian and international sectors. His sector coverage has included Australian Industrials and Energy, Building Materials, Capital Goods, Engineering & Construction, Transport, Telcos, REITs, Utilities and Infrastructure.

He has previously worked as an equity analyst for AllianceBernstein and Macquarie Group, spending a further two years as a management consultant at Port Jackson Partners and two years as an institutional research sales executive with Deutsche Bank.

Anthony is a CFA Charterholder and holds bachelor’s degrees in Commerce and Law from the University of Sydney.

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 Pendal’s head of equities CRISPIN MURRAY. Reported by portfolio specialist Chris Adams

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

GROWTH concerns triggered by policy uncertainty remain a headwind, with further tariff threats and signals from some US companies, like airlines, noting weakening demand.

The move in markets has been exacerbated by a significant positioning unwind in hedge funds. This is the nature of markets today, where automated risk-cutting forces a wash-out of crowded trades – in this case, momentum stocks.

By the end of the week, the positioning wash-out played out and markets began to bounce.

We are likely to see an uneasy truce for the next few weeks as forced selling ends and some quarter-end rebalancing may help equities, but the real driver of markets will be evidence of how the US economy is going.

The benign scenario is that we have seen around a 50-basis-point (bp) stepdown in US GDP growth to the mid 1.0%-2.0% range. This is probably factored in.

The risk scenario is that uncertainty sustains for longer and we see a self-reinforcing slowdown, as spending caution translates into job cuts. This could see markets fall further.

The “Fed put” is not yet in play, as inflation is not yet benign enough and the issue of how to manage the impacts of tariffs remains up for debate.

There is some good news as Germany looks set to get support for its fiscal stimulus, which will support growth in the EU.

China-exposed assets are also holding up, signalling the worst may have passed there.

The S&P 500 was down 2.23% for the week. At its Thursday low, the US market had sold off about 10% from its February high, while post-Friday’s rally is down some 8%.

The S&P/ASX 300 fell 1.87%. It’s off about 9% from its high, or 8% when adjusting for stocks going ex-dividend.

To understand why we have seen such a sharp move, we need to consider both fundamental and technical issues.

Fundamentals

The fundamental catalyst has been fears of a quick slowdown of economic growth.

A combination of concerns over tariffs, the erratic policy narrative, DOGE cuts, and deportations has led to businesses and consumers winding back investment and spending.

Last week, we saw more anecdotes to suggest growth was slowing:

1. US airlines downgrading on slower sales. Delta CEO Ed Bastian said that there was “something going on with economic sentiment, something going on with consumer confidence”. The Southwest CEO said: “What we’re seeing now is a kind of broad softness in the macro economy… it’s hard to attribute to any one thing.” United noted US government air travel demand has dropped 50%.
2. The NFIB Small Business Survey saw the post-election surge in optimism rolling over.
3. Consumer expectations – as measured by the University of Michigan – are falling sharply. Among Democrat voters, they are at record lows.

Expectations among Republican voters are much higher but have also rolled over.

To give a sense of what has shifted in expectations, Goldman Sachs has moved its estimated effective tariff rate rise from 4.3% to 10%.

For context, the combination of the 25% tariff on steel and aluminium plus 20% on China and 10%-25% on some Canadian and Mexican imports already represents a 3% uplift in the tariff rate.

In addition to these, tariffs are expected on specific products such as autos, electronics, and critical minerals, as well as reciprocal tariffs to equalise those put on US goods.

According to Goldman Sachs, the overall economic impact may drive core Personal Consumption Expenditure (PCE) inflation from its current mid-2.0% range to 3.0%, and increase the tariff-related hit to GDP growth from 0.3% to 0.8%.

This takes its estimated Q4 year-on-year growth down to 1.7%. While this is below trend, it is a long way from a recession call.

No Fed pivot in the short term

An issue compounding these growth concerns is that inflation data is not currently sufficient to give the Fed a reason to bring rate cuts forward.

The University of Michigan Survey also highlighted a material rise in forward inflation expectations.

While both Consumer and Producer Price Index (CPI and PPI) data is benign, the components of it that are relevant for the Fed’s preferred PCE indicator signal that this is not coming down.

Core CPI data was up 0.23% month-on-month (3.1% year-on-year), which is the lowest level since April 2021.

However, the three-month annualised rate has stalled and is running at a 3.6%, which is not improving enough.

Furthermore, the relevant inputs from CPI and PPI signal that February’s PCE will be higher, with PPI for hospital prices and insurance premiums stepping up in February.

This makes it difficult for the Fed to move earlier than the market expects, which is one 25bp cut in either May or June and a second by November.

Technicals

The second reason for the selldown has been market positioning.

Given the rally from November 2023, positioning was extended and concentrated in momentum stocks such as technology and financials.

Therefore, as expectations have changed, there had been a sharp unwind of risk positioning –particularly in systematic strategies, which have automatic risk-cutting rules.

We have seen the sharpest rate of investor de-grossing (i.e. reducing positions to lower overall risk) since 2022.

Hedge fund net leverage has unwound substantially. It is interesting that gross leverage has stayed high, so hedges have been deployed but some of the core positioning may not have been unwound.

The momentum factor has worn the main impact and is off about 17% in the S&P 500. There are signs that this wash-out has largely played out. The key question is, what happens from here?

We believe we will see a period of stabilisation or a bounce-back in the market short term, as the technical drivers of the sell-off have played out and there has been a material rebasing of growth expectations.

However, there is still risk in the market should growth soften and begin to affect corporate earnings.

Reasons for near-term recovery include:

1. The positioning unwind looks to have played out, particularly in the systematic strategies that employ automatic risk-reduction overlays.
2. Quarter-end rebalancing should lead to net buying of the market given the selloff in equities. While still too early to estimate, at current levels this is potentially US$40b of buying.
3. Technical signals such as the VIX Curve, and bull/bear ratios are suggesting the market is oversold.

There are, however, two things to remain mindful of.

First is that ETF flows remain strong. This is also consistent with the level of retail investor speculative behaviour and does not appear to have been washed out.

Second, while volatility (as measured by the VIX) has spiked, it has not yet reached the August 2024 high when the yen carry trade was unwinding.

Historically, in periods such as this, we do tend to see re-tests of the volatility high, as happened in 2022.

Market outlook

Looking forward, the market’s valuation de-rating is consistent with the selloffs we have seen in more recent drawdowns.

In some, such as in April and August 2024, the valuation recovered from here.

In March 2022, the de-rating continued following concerns over stagflation and the need for substantial rate hikes which were expected to hit growth and earnings (i.e. an extended period of uncertainty about the economy).

So the signals to follow now are the economic fundamental ones.

As it stands, the US economy looks to have stepped down to around a 1.5% GDP growth run-rate from the mid-2.0% range. Should this prove to be the case, then the risk of a material further drawdown is low.

Evidence that this is the case can be seen in:

• Real-time survey data such as the Evercore ISI Company Survey, which is plateauing but not falling further.
• Credit spreads, which are a good guide on the risk of a material economic slowdown and are not moving as materially as equities, which is constructive.
• The employment market holding up. The recent JOLTS data had a small rise in the Quits rate, which is a signal of confidence in the outlook for jobs. It should be noted that the weekly surveys of layoffs have begun to pick up a lot, tied to DOGE and the public sector.

While these signals are benign, we are in a unique situation with a new US administration focused on fixing what it sees as a flawed global economic model.

Its view is that the US effectively borrows money from other countries to buy its products and payments are recycled into US financial assets.

This creates an outcome where jobs are exported from the US, the US becomes increasingly vulnerable to global supply chains, the US debt level is increasingly unsustainable, and the US Dollar is overvalued.

While the desire to unwind this global trading model is understandable, the process is fraught with uncertainties and risks.

There are two key differences between the current administration and Trump 1.0.

The first is there is a more ideological approach to policy – it is not necessarily just the “art of the deal.” The administration, for example, has been staffed with people who believe in this as an existential risk to America’s future.

The second difference is Trump 1.0 was able to offer the carrots ahead of the stick i.e. tax cuts came first, driving demand and investment, with tariffs coming later. This time, the stick comes first with tax cuts later – and these are more about extending existing ones rather than new ones, with little economic impact.

Perhaps the administration will find a path to cut taxes further, but this is a more complicated challenge given the fiscal deficit.

So, for now, the economy is probably still strong enough for the market. But this could be a very different cycle to ones we have seen in the last twenty years.

German fiscal package

The new federal German coalition has secured support from the Green party for its fiscal package, with only minor modifications.

In the exclusion of defence spending above 1% of GDP from the budget, the definition of defence spending has been widened e.g. to include support for Ukraine.

The EUR500bn infrastructure fund has been extended from 10 to 12 years, with a concession to allow EUR 100bn to be put towards climate projects.

This deal is expected to pass through both chambers next week and could potentially add 1.5% to 2.0% to GDP per annum.

This has had a significant positive impact on confidence surveys in Germany.

Australian equities

ASX performance was in line with the US, rather than Europe.

Sector rotation was once again substantial, with previous laggards such as resources (+0.7%) and energy (+0.3%) up, and banks (-3.2%), technology (-4.1%) and consumer discretionary (-3.2%) down.

Stocks exposed to US consumers such as Aristocrat Leisure (ALL, -4.4%) continued to fall, while Qantas (QAN, -6.2%) fell on the back of the US airline downgrades, though the Australian domestic market looks very different.

In the data centre sector, there has been much debate regarding hyperscalers cutting back roll-out plans.

We now have more insight on this: it appears one hyperscaler has over-procured 1 giga-watt (mostly in the US), which is roughly four months’ worth of capacity and is driving the pause in its data centre leasing.

It has apparently been making polite inquiries of some of its customers to see if there is an opportunity to delay or reduce some of its commitments, understanding that it has no legal basis to request this.

Certain players dependent on this customer may feel obliged – others with more mixed business models are likely to decline.

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About Crispin Murray and the Pendal Focus Australian Share Fund

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

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

Find out more about Pendal Focus Australian Share Fund  

Contact a Pendal key account manager

As the Australian bond market tries to navigate Trump-driven market turmoil, Pendal’s TIM HEXT says it can help to stay focused on the hard data

• Watch now, on demand: How to prepare for rate cuts in a shifting global economy
• Browse Pendal’s fixed interest funds

AUSTRALIAN equity markets have returned to their August 2024 levels, a time when the US election was beginning to take shape.

Optimism for a business-friendly Trump has turned into pessimism over his seeming willingness to experience short-term pain to achieve his agenda.

Meanwhile, Australian bond markets are trying to figure out what it all means.

For our team, which is focused on interest rates and credit, it means not losing sight of the data and what the picture is for the Australian economy.

Besides the headline-grabbing inflation and employment numbers, the most important release we get every month is the NAB Monthly Business Survey.

It is very timely and comprehensive, and a credit to the soon-to-retire Chief Economist Alan Oster and his team.

So, what did Tuesday’s release tell us? The picture is quite a bond-friendly one.

Business conditions remain below long-term averages and the bounce in confidence we saw in January fell away again.

Surprisingly, retail conditions fell away and remain low, which doesn’t support the narrative of a more confident consumer.

The chart below, courtesy of NAB, highlights the ongoing and consistent moderation in business conditions.

 

Capacity utilisation continues to moderate and is now almost back to the average level of the last decade (stripping out the Covid fall and surge).

In other words, capacity constraints are not a major problem, which is an important outcome for keeping inflation low.

Secondly, forward orders are yet to bounce back to normal levels. Like the economy, they are slowly improving but indicate ongoing caution.

Thirdly, prices paid remain consistent with easing inflation pressures.

Final product prices eased to 0.5% a quarter – the lowest since early 2021. Labour costs grew by 1.5%, which – adjusting for strong employment growth – is consistent with wage growth around 3-3.5%.

Our quantitative models use several factors from the NAB Business Survey.

The net impact was to trigger a signal to add some duration, consistent with our qualitative view that the current fall in business confidence will feed into lower employment and inflation outcomes.

This may all sound a bit dry and technical in the face of far more exciting hour-by-hour headlines and equity market chaos. However, we always need to make sure we keep an eye on the hard data, especially when it is timely.

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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.

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There are opportunities in Aussie equities for investors willing to look through the noise, says Pendal’s head of equities CRISPIN MURRAY in his bi-annual Beyond The Numbers webinar

• Uncertainty creates mis-pricing and opportunity
• Find out about Pendal Focus Australian Share fund
• Watch Crispin’s latest Beyond the Numbers webinar

ECONOMIC uncertainty, recession fears and swerving policy changes from the US Trump administration are creating opportunities for investors willing to look through the noise, says Pendal’s head of equities Crispin Murray.

An index of economic uncertainty spiked to levels not seen since the pandemic in February amid debate about the effects of US policies on tariffs, federal government spending cuts, and deportations.

Murray says the uncertainty is causing companies and consumers to defer spending decisions – which will ultimately affect economic growth – while also causing mispricing in markets as investors second guess the outlook.

“We’ve got uncertainty at stock levels, sector level, policy, geopolitics – everything is creating confusion,” says Murray.

“To be frank, we actually like this confusion. We like this uncertainty because uncertainty creates mispricing and it plays to our strength.

“That’s why we still believe, while the broader market trends for lower returns, there is still lots of opportunity to add value for our investors.”

Murray was speaking at the bi-annual Beyond The Numbers webinar after the February ASX earnings season.

Still Biden’s economy

Murray says it is increasingly clear that Trump is keen to attribute the first-half performance of the US economy to the previous Biden administration, indicating that he may be willing to wear prolonged uncertainty and weakness.

“That may be self-serving, but that’s the way they see it. Therefore, if we have uncertainty or weakness in the economy in the near term, they don’t see it as their issue,” he continues.

“To us, that would suggest that they are using this first few months of the year to do the hard yards on trying to get better outcomes in terms of trade, using tariffs as a stick, and this uncertainty period will extend for a few months.”

Markets fell this week after Trump said the US economy would see “a period of transition” and refused to rule out a recession.

For investors, Trump’s reform-driven agenda may turn short-term uncertainty into long-term gain, says Murray.

“Ultimately, we do believe this administration is here to drive growth, to drive markets, and will do what it takes to try and underpin that.”

Positive factors

Despite the uncertainty and likely growth slowdown looming over markets, there are some significant positive factors weighing in investors’ favour.

Central banks are in an easing cycle and rate cuts mean financial conditions have moderated, while liquidity remains supportive due to the US debt ceiling restricting net issuance of new bonds.

“It is a bit of a safety net,” says Murray.

“If we do see a slowing in the economy, there is room for the Fed to ease. There’s room for bond yields to come down, and that could act as a mitigant for some of the short-term uncertainty.”

Australia sluggish, but downturn unlikely

Domestically, the Australian economy looks set to avoid a significant downturn as real disposable income holds up due to the effect of tax cuts, interest rates, higher wages, and moderating inflation, says Murray.

“We’re back to the pre-COVID era 2-to-3-per-cent real disposable income growth that should underpin consumption,” he says.

Recent data from the Commonwealth Bank of Australia show essential spending has slowed as inflation comes down, giving households more money to spend on discretionary purchases and reducing the need to draw down on savings.

Despite that support, Australia faces significant challenges.

“Productivity growth … has clearly stepped down,” says Murray.

“Some of this can be explained away by the mining sector, but there’s still underlying issues with our ability to drive productivity, and that creates issues for longer term growth.

“We really have become more like Europe than the US, and that ultimately is not great for corporate earnings in Australia.

“It also constrains the ability for the RBA to cut interest rates because of that lack of productivity growth.”

Murray says these “challenges for the next government are going to be difficult to address”.

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About Crispin Murray and the Pendal Focus Australian Share Fund

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

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

Find out more about Pendal Focus Australian Share Fund  

Contact a Pendal key account manager

Here are the main factors driving the ASX this week, according to Pendal investment analyst JACK GABB. Reported by portfolio specialist Chris Adams

• Find out about Pendal Focus Australian Share fund
• Watch now: Crispin Murray’s bi-annual Beyond The Numbers ASX outlook

ONGOING tariff gymnastics continued to wreak havoc on markets, with US equities down sharply last week despite a little relief from President Trump.

What started with the worst sell-off of the S&P 500 this year ended on a slightly more positive note after Federal Reserve Chairman Powell reassured on growth.

All up, the S&P 500 fell 3.1%.

Tech did much of the damage (at its lows, Nvidia’s market cap was down $1Tr from its high), but Financials, Energy and Consumer Discretionary were all weak.

More positively, China’s key National People’s Congress (NPC) meeting met expectations while Germany announced a European fiscal fightback.

The latter was meaningful, triggering a rout in bonds – with German, French, Spanish and Italian 10-year yields all up over 40bps – and a 4.4% jump in the Euro/USD.

European and China equities were the standout, with Germany’s DAX up 2.0% and the Hang Seng up 5.6%.

In Australia, equities generally mirrored the US, with materials the only sector in the green. The S&P/ASX 300 fell 2.3%.

Europe macro and policy

The German – and, indeed, European – moment of truth has clearly come in response to Trump’s Ukraine pivot.

The shift is material, with Germany breaking its policy of fiscal restraint and pledging to do “whatever it takes” to defend itself.

It announced a €500bn infrastructure fund and will amend its constitution to exempt defence outlays from spending limits.

It also called on the EU to reform its fiscal rules to allow for greater defence spending – a sentiment echoed by European Commission President Ursula von der Leyen, who said the EU plans to activate a mechanism that will allow countries to use their national budgets to spend an additional €650bn in defence over four years without triggering penalties.

While some commentators have dubbed this Europe’s “Make Europe Great Again” moment, there is no doubt that Germany’s fiscal position is far stronger than others. Its debt-to-GDP ratio is 62%, versus the UK at 99%, Spain at 104%, France at 111% and Italy at 138%.

As such, it is unclear whether Germany alone can drive fundamental change.

Thus far the impact has been material on defence stocks, bond markets and the Euro, with the latter previously drifting down towards parity with the US Dollar.

While the impact of tariffs remains uncertain, greater fiscal spending should boost growth.

This is potentially positive for Australian stocks, such as Rio Tinto (RIO) and Sandfire (SFR) on greater base metal demand, as well as a number of industrials with European exposure, such as Atlas Arteria (ALX), Amcor (AMC) and Orora (ORA). A stronger Euro is also positive for CSL (CSL).

The offset is the risk of stoking inflation – something that appears front and centre with the European Central Bank (ECB).

Despite cutting rates during the week, for the sixth time since June 2024, the ECB cautioned that the cutting phase may be drawing to a close. This saw implied rates rise to 2.031% at the end of 2025 versus 1.807% at the beginning of the week.

It also raised near-term inflation projections slightly, with headline inflation seen at 2.3% this year versus an expectation of 2.1% in December 2024 – driven mostly by higher energy prices.

Two further cuts are still expected by the ECB this year, similar to both the Fed and RBA.

Tariff gymnastics

Tariffs continued to have an outsized impact on equity markets, with confirmation of tariffs on Canada and Mexico last weekend initially triggering a sharp sell-off.

However, a sharp twist followed midweek in the form of a one-month reprieve for US automakers who have been vocal critics of the proposed measures.

Separate carveouts were then agreed on Thursday to cover goods shipped under Trump’s previously signed North America free trade pact and the US-Mexico-Canada agreement, though around 50% of U.S imports from Mexico and 62% from Canada still face potential tariffs.

While some rapprochement is positive policy uncertainty is not, and adjusting supply chains is going to require significantly longer timeframes than offered by any short-term reprieve.

Moreover, while Trump has played down the potential economic fallout from the tariffs (and he isn’t “even looking at the [stock] market”), that rings hollow given the week’s chaos.

It is also at odds with the Fed’s Beige Book, which noted widespread tariff concerns and even some sectors pre-emptively raising prices.

With European tariffs still pending and the trade war with China just getting started, risks are material and we see a few more tumbles before nailing the landing – or, to quote US Treasury Secretary Scott Bessent, “there is no put” on markets.

We note that 2 April is the day when reciprocal tariffs are due to come into effect.

Looking at which countries run the largest trade surpluses with the US in January 2025, China, Mexico and Canada are three of the top five – with Vietnam and Ireland rounding them out.

The next five are Taiwan, Germany, Japan, South Korea and India.

Interestingly, Taiwan Semiconductor announced a $100bn investment to build five chip facilities in the US last week. This follows Apple’s US$500bn announcement last month and Softbank’s US$100bn announcement in December.

Elsewhere, China announced retaliatory tariffs on Canadian farm and food imports following Canada imposing tariffs in October (100% on EVs and 25% on steel and aluminium).

Trump threatened to put reciprocal tariffs on Canadian lumber and dairy products in the past week.

He also flagged potential 25% duties on pharmaceuticals, prompting the Novartis Chair to note that, “rhetoric is one thing, what actually happens is another. Traditionally, pharmaceutical products have been exempt from tariffs. So this would be something new.”

Commodities

Tariff impacts continue to be felt in commodity markets, with US steel prices up sharply as the CEOs of the largest steelmakers all wrote to Trump last week, urging him to resist any tariff exemptions.

Copper and aluminium also rose, driven by potential US tariffs on copper, a reassuring China NPC, Europe’s fiscal stimulus and the weaker dollar.

Oil fell 4% after OPEC+ announced a production increase, though losses narrowed after Russia subsequently said the group could reverse plans if prices remain under pressure.

That’s positive for curbing inflation, but it is being offset by higher natural gas prices which rose 15% on colder weather, Canadian tariffs and record LNG flows.

Gas prices are now up more than 70% since November 2024, with extreme cold over the winter also driving a sharp drop in US gas stocks.

We note energy is a bit under 8% of the Consumer Price Index (CPI) basket.

Iron ore was largely unchanged on the week, with China’s NPC providing mixed signals on demand.

While overall messages on growth reassured, commentary specific to steel was more negative, as the National Development and Reform Commission (NDRC) announced it will continue to regulate steel output and push for further restructuring.

While details are yet to be announced, the reforms are expected to be the most material since 2021 and could see 50-100 million tonnes (Mt) of capacity cut over the next few years and up to 250Mt longer term.

That is material relative to production of 1.05 billion tonnes last year.

That said, much depends on how cuts are implemented (direct intervention or left to market forces) and whether capacity cuts in China result in increases elsewhere.

Either way, risks to iron ore prices are mounting in the second half of this year.

Commodity market analysis company Mysteel currently expects Chinese steel consumption to fall 1% in 2025, having fallen 5% in 2024, with weaker real estate demand the key driver.

It also expects Chinese portside inventory of iron ore to increase materially in 2H 2025 – potentially reaching 190Mt by the year’s end – after running between 140-160Mt in 2024. Iron ore miner Fortescue (FMG) has previously estimated total Chinese portside capacity at 200Mt.

China

China’s NPC met expectations, with targets in line with consensus forecasts and policy measures targeted at boosting consumption. Property also saw further support.

There was a doubling of fiscal support for the consumer trade-in program for electronics, home appliances and vehicles – a policy that has been positive for commodity demand. There was also new mention of child subsidies.

The trade-in/upgrade programs are arguably the key to offsetting potential tariff impacts, as well as additional fiscal support (if required).

Growth is heavily reliant on government spending via expanding deficits – with the fiscal deficit to GDP expected to rise from ~7.5% in 2024 to ~9.5% in 2025. However, that does provide a level of predictability and stability.

On the negative side, supply side reforms appear likely.

We noted steel earlier, but other downstream sectors may be targeted (e.g. solar).

The congress also mandated a 3% reduction in energy intensity – returning to 2021 levels and surpassing 2024’s 2.5% target. That implies more constraints on energy-intensive industries – a potential positive for aluminium prices.

Key outcomes included:

• GDP target set at around 5%, in line with 2024.
• CPI target of 2%, down from 3%.
• Headline deficit to increase by 1% to 4% of GDP – adds RMB1.6Tr.
• Additional 0.8% on the government-managed funds deficit ratio to 4.4%.
• Monetary policy to remain moderately accommodative. Rate cuts still expected.
• Trade-in policy doubled to RMB300Bn. Equipment upgrade to RMB200Bn from RMB150Bn.

There was limited data on the economic front, but February’s Producer Price Index (PPI) came in at -2.2% year-on-year, versus -2.1% expected and -2.3% prior.

This deflationary challenge was underscored by the CPI coming in at -0.7%, versus -0.4% expected and +0.5% prior.

The Caixin PMI Manufacturing Index, an indicator of economic trends, was in slightly positive territory – coming in at 50.8, versus 50.4 expected and 50.1 prior.

US economy

While policy uncertainty was the biggest driver of US markets during the week, economic data was mixed.

On balance, it pointed towards a further softening of the economy, but the market reaction was arguably overstated.

ISM Manufacturing and Construction spending did miss expectations (New Orders also slipped back into recessionary territory), while the unemployment rate ticked up to 4.1%.

However, ISM Services data beat expectations, coming in at a healthy 53.5, and nonfarm payrolls were steady despite DOGE efforts.

The other standout was data that backed up rising inflation concerns. ISM Manufacturing prices jumped and ISM Services prices also rose.

Tariffs are also clearly having an impact, though they are yet to show up in the numbers.

We noted the commodity price impacts earlier, but the additional tariffs on Chinese imports have yet to flow through and will likely affect a large share of household furnishings, apparel and electronics.

While oil is an offset, overall inflationary concerns have risen, as noted by multiple Fed speakers over the course of the week.

Looking ahead, February CPI data is due this week. Consensus forecasts 0.3% month-on-month (2.9% annualised) versus 0.5% (3.0%) previously.

The next FOMC is set for 30 March, with the Fed in blackout until then. No cut is expected at this meeting, but one is priced in by June.

Australia

Q4 GDP was in line with expectations, albeit ahead of expectations at the February Statement of Monetary Policy.

Government spending remained the key driver, contributing 1.5% to annual growth.

Private sector activity continues to pick up, with building approvals rising to their highest level since December 2022. Retail sales also improved, coming in at +0.3%.

Still, the data did little to change RBA rate expectations, which is pricing in the next cut in May.

Markets

The ASX is technically oversold and could bounce in the absence of further policy bombs in the US.

However, tariff uncertainty is likely to persist until 2 April when reciprocal tariffs are due to take effect.

Domestically, there is little on the economic or corporate calendar this week to drive a sentiment change.

Stocks were mostly in the red for the week (with the exception of the miners and defensives), with energy and financials the weakest.

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About Jack Gabb and Pendal Focus Australian Share Fund

Jack is an investment analyst with Pendal’s Australian equities team. He has more than 14 years of industry experience across European, Canadian and Australian markets.

Prior to joining Pendal, Jack worked at Bank of America Merrill Lynch where he co-led the firm’s research coverage of Australian mining companies.

Pendal’s Focus Australian Share Fund has an 18-year track record across varying market conditions. It features our highest conviction ideas and drives alpha from stock insight over style or thematic exposures.

The fund is led by Pendal’s head of equities, Crispin Murray. Crispin has more than 27 years of investment experience and leads one of the largest equities teams in Australia.

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

Find out more about Pendal Focus Australian Share Fund  

Contact a Pendal key account manager

 

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Are global equities on the cusp of a structural change? Pendal’s SAMIR MEHTA explores the fundamentals driving bull and bear markets in the East

• China undergoing “serious” consolidation
• BYD and Tencent Music clear winners in China
• Find out more about Pendal Asian Share Fund

BUSINESSES are commercial opportunities spotted by risk-taking entrepreneurs with access to capital and other helpful resources.

Traditionally, one needs competitive “moats” to deliver sustained high Returns On Capital Employed (or ROCE). But, like much in the world, moats are no longer stable.

The internet, strident monetary actions by central banks, government policies and ideological competition have drastically modified the way that moats are built and, importantly, destroyed.

So far, we have seen momentous changes encapsulated in the mantras of:

• Deng Xiaoping and his astute strategy to “hide your strength and bide your time”
• Jeff Bezos and his simple focus on “your margin is my opportunity”
• Masayoshi Son and his grandiose declaration that “in our industry, winner takes all”

China directed its state apparatus to foster industries from scratch. Amazon became laser-focused on the long term, with nary a care for short-term losses. And Softbank handed over copious amounts of capital to one player in an industry with an explicit directive of killing competition and emerging as a winner through the carnage.

Role reversal

So, what kicked off a bull market in China around the same time as a bear market in India?

Was it just foreign investors switching from India to China, or Xi Jinping recognising the folly of his ideology and a change in heart?

Could it have been a “DeepSeek moment”? Or because (in President Trump’s world) perceived allies are worse than avowed enemies (hence India losing out from harsher tariffs)?

One can’t be sure of the exact root cause.

But let me offer a more fundamental justification: there is a significant role reversal occurring between China and India, led by the change in attitudes of management teams towards profits and ROCEs.

For decades until the pandemic, China Inc. epitomised the three mantras I referenced above.

A heady mix of abundant low-cost capital, regulatory help (including subsidies), insane hunger for scaling business, and a priority for market share over profitability defined most businesses.

Despite many ambitious talented entrepreneurs with varied opportunities, few companies achieved the haloed status that Mr Buffet might covet.

On the other hand, before the pandemic hit, India Inc. was the opposite.

Burdened with a high cost of capital, hindered by governmental regulations, and entrepreneurs with limited ambitions prioritising high ROCEs above all else.

Since 2021, economic growth in China slowed as a result of regulatory crackdowns, geopolitical headwinds and a bust housing market.

Venture capital investments slowed to a trickle; several businesses, including start-ups, shut down. The stock market tanked and foreign capital withdrew from China. And a deflationary slowdown prompted local investors to buy more bonds and shun equities.

Post-pandemic India was the rising star – benefitting partly from the ‘China plus one’ strategy (that is, diversify away from China to minimise risks).

A production-linked incentive scheme (tax benefits) in India encouraged large-scale incremental manufacturing. There grew a belief of achieving GDP growth of 7-8% p.a. for the next decade. If China had achieved it in the past, why not India?

India’s downdraft

Stock markets boomed and corporate earnings grew when China struggled. Equity valuations skyrocketed, trending closer to twice the mean valuations compared to the past decades. Retail investors, global asset allocators, venture capitalists and even China-focused hedge funds wanted to invest in India.

What went unnoticed, however, was a loosening of discipline by management teams under this illusory guise of assured growth.

High ROCEs in many industries attracted new entrants as conglomerates, nimble start-ups and medium-sized firms backed by venture capital attacked incumbents. A heady cocktail brewed – fueled by high equity valuations, cheap and plentiful venture capital, and unfettered ambition.

For example, the paints industry in India was a cosy oligopoly led by Asian Paints. Decades of steady growth, high margins and high ROCEs meant that even its smaller competitors thrived.

While some international companies tried to build a business in a cautious manner, struggled to break the oligopoly and gave up, Grasim (part of the Aditya Birla group) thought otherwise. The manufacturer of viscose staple fiber and chemicals invested upwards of Rs100b (US$1.25bn) in just three years, while market leader Asian Paints invested approximately Rs.97.2b over the past decade.

Another example is Zomato, which started out as a restaurant aggregator and grew into a formidable food delivery platform. Through Blinkit (which was recently acquired), Zomato expanded into quick commerce to deliver groceries and goods to consumers within 15 minutes via ‘dark stores’ or warehouses.

Swiggy (listed, venture-backed), Zepto (unlisted, venture-backed), Reliance Industries, and Flipkart (owned by Walmart) have committed several millions in investments chasing this opportunity, while other potential competitors could also enter the fray.

Elsewhere, Ultratech Cement announced its entry with a US$200 investment in manufacturing cables and wires (another oligopolistic sector). Shares of Polycab and KEI Industries promptly fell 25-30% in less than a week.

And Reliance Industries has begun expanding into carbonated soft drinks through Campa at a much cheaper price, threatening ROCEs of Pepsi bottler Varun Beverages.

I could cite many more examples, but you get the drift.

China’s updraft

In China, after years of competition, we now have serious consolidation.

For instance, in the electric vehicles space, perhaps six to eight serious competitors (of the 80-100 start-ups and brands) have survived over the past two decades.

Build Your Dreams (BYD), the clear winner, has achieved a level of scale cost and technological leadership which, in my view, is unparalleled. BYD’s ROCE has risen from a range of 7-12% pre-pandemic to 25-30% in the past three years.

In online music, Tencent Music is almost a duopoly with Netease Music (though Bytedance is still in the mix as a marginal player). Despite slashing its marketing and sales spend in recent years by 75% (compared to 2019/20), Tencent Music has continued to gain subscribers and substantially increase gross margins.

Full Truck Alliance (Uber for logistics) has come through the downturn and emerged as one of the strongest competitors matching shippers and truckers of cargo.

Its ROCE has risen from negative pre-pandemic levels to 9-11%. And if my analysis is right, it could double over the next three to five years as it gains scale and operating leverage.

Bull or bear in the East?

Capital and competition go through phases.

While I do not suggest that these changes in China are permanent, the point I do wish to make is that Indian corporate ROCEs are waning, while those for China are ascending.

Because when structural changes in industry dynamics (higher ROCEs) combines with investor disinterest (low valuation multiples), the resulting profit growth and valuation multiple expansion for Chinese stocks can surprise on the upside.

This bull market in China – in many stocks – has legs. And if the Chinese authorities provide some stimulus, or if President Trump agrees to a deal, we could take that as superfluous arguments for capital to chase what is becoming a structural pivot.

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About Samir Mehta and Pendal Asian Share Fund

Samir manages Pendal’s Asian Share Fund, an actively managed portfolio of Asian shares excluding Japan and Australia. Samir is a senior fund manager at UK-based J O Hambro, which is part of Perpetual Group.

Pendal Asian Share Fund aims to provide a return (before fees, costs and taxes) that exceeds the MSCI AC Asia ex Japan (Standard) Index (Net Dividends) in AUD over the medium-to-long term.

Find out about Pendal Asian Share Fund

About Pendal

Pendal, part of Perpetual Group, is a global investment management business focused on delivering superior investment returns for our clients through active management. 

Contact a Pendal key account manager.

The Trump administration is having a major impact on the emerging markets asset class. Here, Pendal’s Global Emerging Markets Opportunities team outline the latest trends

• Mexico outperformed after US election
• We remain cautious on and underweight India
• Find out about Pendal Global Emerging Markets Opportunities fund

IT’S been four months since the election of Donald Trump confirmed a dramatic shift in US economics and foreign policy – bringing major implications for emerging markets.

The benchmark MSCI Emerging markets Index fell 1.6% in the four months between election day and March 5, underperforming global equities.

The MSCI All Country World Index (which measures both developed and emerging markets) returned 2.7% over that time and the MSCI USA gained 1.5%. (These are total returns in US dollars).

However, the headline numbers mask several major trends.

Emerging markets investors need to look deeper into the data to see which markets and sectors are winning and losing, along with more recent year-to-date trends.

High performers

The two emerging markets most exposed to the new policy environment in Washington (particularly regarding trade tariffs) outperformed in the four months after Trump’s election.

MSCI Mexico returned 3.1% and MSCI China gained 9.5%.

MSCI Brazil was down 8.5% with increased concerns about interest rate hikes. But many other traditionally higher-risk markets – including Turkey and smaller Latin American markets – were up.

The Pendal Global Emerging Markets Opportunities portfolio has been overweight Mexico, China and Brazil in the period.

Although the portfolio does not have direct exposure to the smaller Latin American markets, there is substantial economic exposure held through Brazilian consumer names.

India and high-tech EMs struggle

Many markets that struggled last year have been doing well. But what about the losers?

Notably, MSCI India fell 12.2% over the four months, despite limited trade exposure to the US and a good political relationship with the new administration.

A sense that the recent economic boom in India is losing steam and high valuations may not be sustainable is leading to increased caution among Indian investors.

We remain cautious on India and heavily underweight.

Similarly, the technology growth stories that dominated headlines last year are weakening.

MSCI Taiwan was down 4.2% and MSCI Korea lost 7% (Korea had a major domestic political crisis in the period).

After a long period of outperformance, the MSCI Information Technology index underperformed, dropping 3%.

MSCI Malaysia (-4.8%) and MSCI Thailand (-18.3%) were also exposed to technology exports and underperformed.

We continue to be underweight Taiwan and Korea (and Information technology) and zero-weight Malaysia and Thailand.

Trends point to strong EM market

Looking beyond the headline numbers, the deeper trends suggest an exciting story for emerging markets.

Every Latin American market had a positive return in US dollars in the four months after Trump’s election.

MSCI Mexico gained 8.7%, MSCI Brazil was up 7.6%, while MSCI South Africa (an overweight in our portfolio) returned 9.6%.

MSCI China returned 16.4% and MSCI EM as a whole was up 4%.

Improved growth prospects in China and the historically riskier parts of the asset class attracted investor interest as uncertainty grew about where the pain of tariffs would ultimately be felt.

These positive returns stand in contrast to a negative year-to-date return from MSCI US; MSCI US Growth retreated 3.9%.

These trends are new and, so far, short term.

There is a traditional English saying, “one swallow doesn’t make a summer” – and the global economic and political environment remains volatile.

But if we were asked what an EM bull market looks like, we would say that it looks like this.

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About Pendal Global Emerging Markets Opportunities Fund

James Syme, Paul Wimborne and Ada Chan are co-managers of Pendal’s Global Emerging Markets Opportunities Fund.

The fund aims to add value through a combination of country allocation and individual stock selection.

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

The stock selection process focuses on buying quality growth stocks at attractive valuations.

Find out more about Pendal Global Emerging Markets Opportunities Fund here
 
Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management.

Contact a Pendal key account manager here

The Philippines is on a growth trajectory, but looming deficits raise concerns about its sustainability. Pendal’s Emerging Markets team explains why it has zero-weighted the region

• Loose fiscal policies have left the country vulnerable
• The sustainability of growth remains low
• Find out about Pendal Global Emerging Markets Opportunities fund

INVESTORS who follow Pendal’s emerging markets process know the team believes in buying equity for growth — and emerging markets for growth.

This means we focus on the economic growth environment and how that impacts revenue and earnings growth for listed companies.

It also means we focus on the sustainability of growth.

With this in mind, some investors may find it interesting that we remain zero-weighted in the Philippines.

Throughout 2023-24, the country’s GDP growth averaged 5.6% in 2023-24, which is higher than in Indonesia at 5.1%, where we are invested.

Annualised earnings growth for those two years was 12.7% — comparable to other strong growth stories we have been invested in: the United Arab Emirates (+13.6%) and India (+12.4%).

Yet, the Philippines doesn’t make it into our investment picture. Below we explain why.

A quick recap

To explain our view, let’s take a quick trip through recent economic and political history.

Although not hit as dramatically as Indonesia or Thailand during the 1997 Asian Crisis, the Philippines still suffered a collapse in its currency and stock market.

Similar to other countries in the region, this proved to be the trigger for economic reforms that drove strong growth in the 2000s.

Despite the Global Financial Crisis, the presidencies of Gloria Macapagal-Arroyo (2001-2010) and Benigno Aquino (2010-2016) saw GDP growth average 5.4%.

Crucially, the quality of this growth was high, with account surpluses from 2004 to 2016 and a fiscal deficit of around 2% for this period.

The rise of populist politics in the mid-2010s affected the Philippines, leading to the election of Rodrigo Duterte in 2016.

Though his government’s economic policies contained numerous reforms — including liberalising foreign investments — he also cut taxes while increasing government spending.

This was positive for growth (GDP growth averaged 6.6% from 2016-2019) but came with several costs.

The first was inflation. The Philippines CPI increased from 2.1% in 2016 to a peak of 6.9% in late 2018.

The second was the fiscal balance, which steadily worsened from 2017 to 2019, reaching a deficit of 3.4% of GDP that year.

The third was the current account balance. As imports were sucked in by strong domestic demand, the current account moved into deficit in 2017 and remained there til 2019.

Then COVID hit. 

The global pandemic arrived with President Duterte not yet four years into his six-year term. Given the pre-pandemic focus of his government, a robust fiscal response was always the likely outcome.

The government borrowed heavily to fund pandemic relief efforts, pushing the government debt-to-GDP ratio from 39.6% in 2019 to 60.5% in 2021.

The budget deficit widened to 7.6% of GDP in 2021, up from 3.4% in 2019.

This helped turn round a deep recession in the Philippine economy and was undoubtedly crucial to many Philippine citizens.

Despite the end of the pandemic, fiscal policy settings have remained extremely loose.

The Duterte administration was followed by the current incumbent, President Ferdinand Marcos Jr, who seeks economic stabilisation (including stabilising government debt/ GDP), and a focus on controlling inflation.

That has not returned the fiscal and current account balances to pre-COVID levels, let alone pre-Duterte levels.

The latest data points show a fiscal deficit of 5.8% of GDP and a current account deficit of 3% of GDP (both in 3Q 2024).

Inflation remains benign, as excess capacity in the economy post-COVID is being consumed. But this is fundamentally an unsustainable policy setting.

GDP growth (5.2% in 4Q 2024) remains high but is vulnerable to what will have to be either a sharp tightening of fiscal policy, real weakness in the Philippine Peso, or both.

In that light, the strong earnings growth from Philippine companies is, in our view, being juiced by twin deficits that cannot continue indefinitely.

We remain zero weight in the Philippines and prefer equity markets with growth in countries with stronger fundamentals.

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About Pendal Global Emerging Markets Opportunities Fund

James Syme, Paul Wimborne and Ada Chan are co-managers of Pendal’s Global Emerging Markets Opportunities Fund.

The fund aims to add value through a combination of country allocation and individual stock selection.

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

The stock selection process focuses on buying quality growth stocks at attractive valuations.

Find out more about Pendal Global Emerging Markets Opportunities Fund here
 
Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management.

Contact a Pendal key account manager here

While there’s hope for Australia’s GDP, we may be ‘running to stand still’ unless productivity starts improving, warns Pendal’s head of government bonds TIM HEXT 

• Watch now, on demand: How to prepare for rate cuts in a shifting global economy
• Browse Pendal’s fixed interest funds

IT’S been five years this week since the Covid chaos emerged.

Aftershocks have kept rolling in since then. But is the Australian economy finally starting to look more “normal”?

The latest set of Australian national accounts (see below) shows Gross Domestic Product growth at 0.6% for the December quarter, suggesting that conditions may, indeed, be moving closer to normal.

Why is that? Below are three takeaways from the latest data.

1. The consumer is back, but still cautious

The consumer is finally emerging, albeit tentatively, as a positive impact on the economy.

Household consumption grew by 0.4%, contributing 0.2% to the 0.6% overall GDP growth. The contribution had been near zero over the previous year.

Consumers finally had positive real wages growth in 2024 (3.2% wage growth versus 2.5% inflation).

Consumers also spent some of the Stage 3 tax cuts since July. We estimate that around 25% was spent and 75% saved, helping the savings rate to climb to 3.8% from below 3% a year ago.

2. Governments are still a large driver of GDP. Will they pull back further to make room for the consumer?

Government consumption grew by 0.7% in Q4, driven largely by the states. This is at least moderating from near 1.5% growth a quarter earlier.

Government investment also moderated but remains high at 1.8% over the quarter. Overall, the public sector contributed 0.2% to the 0.6% growth.

The government needs to keep moderating spending and investment if the re-emerging consumer is to avoid causing inflationary pressures.

In many areas of the economy, the private and public sectors compete for supply of labour, capital and goods.

3. Private investment remains weak, adding to poor productivity

Private investment rose only by 0.3% in the quarter. Business investment is showing some signs of life, but dwelling investment is falling — not helped by high rates.

There are, as always, different stories in different sectors. But the overall picture is productivity continuing to flat-line.

GDP per hour worked fell again and is 1.2% lower over the year.

The focus on Australia’s poor productivity is becoming a bigger issue.

Everyone has their reasons for it and different lobby groups will shift blame, promoting their own solutions (which normally involve government hand-outs).

However, I did come across the graph below courtesy of Minack Advisors.

 Put simply, as our capital-to-labour ratio has fallen, so has labour productivity.

Net investment to GDP is around the lows of the past 50 years against labour force growth at the highs (courtesy of immigration and participation).

Overall, the latest today’s national accounts report offers some hope of GDP moving back to the 2% to 2.5% the RBA is looking for.

However, unless we can start improving productivity, we will be running to stand still.

 

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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