Small businesses are under pressure to shift accounting systems online as a new global regulatory push gathers speed. That’s an opportunity for ASX-listed accounting platform Xero, says Pendal’s Elise McKay

• Drive towards e-invoicing, e-tax, digital accounting
• Regulatory tailwinds support cloud accounting adoption
• Find out about Pendal Horizon Sustainable Australian Share Fund
• Find out about Pendal Focus Australian Share Fund

SMALL businesses are under pressure to shift their accounting and reporting systems online as a global regulatory push to real time taxation and e-invoicing gathers speed, says Pendal’s Elise McKay.

McKay, an investment analyst in Pendal’s Australian equities team, recently visited online accounting firm Xero’s annual Xerocon partner conference in the UK. She says a wave of change is sweeping small businesses.

“It’s huge. I spoke to one accounting firm in the UK with more than 3000 clients who are going to be impacted by this change and have to adopt cloud accounting solutions.

“They have to adapt over the next 18 months — educating and changing their clients’ behaviours to adopt new digital solutions.”

Among the biggest changes coming is the UK’s new sweeping new reforms to the taxation system dubbed Making Tax Digital, which applies to businesses, the self-employed, and landlords. 

From April 2024 and will require all businesses and landlords with turnover exceeding £10,000 to report digitally, impacting an estimated 4.2 million taxpayers. 

McKay expects this will drive another wave of adoption of cloud accounting solutions in the UK where penetration is estimated to be less than 30%.     

“It changes the way you keep records. Historically, you might have you might have just once a year pulled all your records from a shoebox and taken them to your tax agent.

“Now, you have to update those records digitally on a quarterly basis.”

The goal of Making Tax Digital is to ensure taxation in the UK is more effective and more efficient — and make it easier for taxpayers to get their tax returns right.

“They have a tax gap where avoidable mistakes cost the exchequer GBP 8.5 billion from 2018 to 2019,” says McKay.

The UK moves echo changes to the Australian tax system in recent years, including the single touch payroll system that requires all businesses to report salary, pay-as-you-go withholding tax and super information to the Australian Taxation Office.

More change to come

The sweeping digitisation of small business is not stopping there.

Next up is the global roll out of electronic invoicing — the automated digital exchange of invoice information between companies through secure networks.

E-invoicing replaces posted or emailed PDF invoices and means information is automatically entered into software systems.

The aim of e-invoicing — which is being pushed by the ATO and other regulatory bodies globally — is to reduce security issues and fraud.

It also offers the upside for small businesses of quicker payment. Federal government agencies have agreed to pay e-invoices within 5 days.

McKay says the impact will be felt among service providers as well as small business.

“There are accountants who aren’t digitally savvy at all. Do some potentially bring forward retirement? Do you see a wave of consolidation?”

But she says the changes offer a win for businesses like Xero that supply products to help businesses digitise.

“Regulatory tailwinds are very supportive for cloud accounting adoption,” she says.

ASX-listed Xero is part of Pendal Horizon Sustainable Australian Share Fund and Pendal Focus Australian Share Fund.

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About Elise McKay and Pendal Australian share funds

Elise is an investment analyst with Pendal’s Australian equities team. Elise previously worked as an investment analyst for US fund manager Cartica where she covered a variety of emerging market companies.

She has also worked in investment banking and corporate finance at JP Morgan and Ernst & Young.

Pendal Horizon Sustainable Australian Share Fund is a concentrated portfolio aligned with the transition to a more sustainable, future economy.

Pendal Focus Australian Share Fund is a high-conviction equity fund with a 16-year track record of strong performance in a range of market conditions. The Fund is rated at the highest level by Lonsec, Morningstar and Zenith.

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

Miners are investing billions to achieve net zero carbon emissions, creating new opportunities across the supply chain for sustainable investors, says Pendal’s ELISE MCKAY

• Find out about Pendal Horizon Sustainable Australian Share Fund
• Find out about Pendal Focus Australian Share Fund

AUSTRALIA’S mining industry is investing billions as part of a push to achieve net zero carbon emissions, creating new opportunities across the mining supply chain for sustainable investors, says Pendal’s Elise McKay.

Iron ore miner Fortescue Metals Group has committed to net zero operational emissions by 2030.

BHP is seeking a 30 per cent reduction in operational emissions by 2030 and Rio is targeting a 15 per cent reduction by 2025 and a 50 per cent reduction by 2030.

“We visited 15 different companies across the mining supply chain in Perth last week and one of the key standouts was the extent to which there’s a huge focus on getting to zero emissions,” says McKay, an investment analyst in Pendal’s Australian equities team.

“About 40 to 50 per cent of mining company emissions are from diesel in mobile equipment so it’s a big problem that needs to be solved — and solved quickly.”

It’s perhaps not surprising that mining companies are at the forefront of sustainability planning.

“It’s a broad generalisation, but companies that tend to be the most forward thinking in terms of ESG are typically the ones that have the biggest problems to solve,” says McKay.

“The miners are right up there. They have big problems that need to be solved and that’s a threat to their ability to continue to operate unless they can address these issues.”

Reducing haulage emissions

Haulage emissions — pollution from big mining trucks — is one area miners are focused on.

Solutions are focused on two broad directions and it’s unclear which will be more effective, says McKay.

Majors like BHP, Rio and Newmont have announced partnerships with NYSE-listed Caterpillar, the world’s largest maker of construction and mining equipment, which is distributed locally by Westrac, owned by ASX-listed Seven Group.

Caterpillar is trialling zero-emission trucks on mine sites by 2024 and intends to have them for sale by 2027.

But Fortescue’s 2030 net zero commitment suggests that time frame is too slow.

Instead, it recently announced the acquisition of Williams Advanced Engineering, a battery systems developer with its roots in the revered F1 racing team.

“They’re working together on the power units that will go into a truck,” says McKay, and intend to retrofit existing trucks to get to zero emissions vehicles earlier.

There are some important problems to be solved – basic functions like cooling systems and weight distribution are different for battery powered trucks and need to be designed around.

“And these are regions that are typically not liked by electric vehicles – the Pilbara is hot, it’s dusty and there’s a lot of rain. The technology needs to cope with these types of conditions.”

The construction of the truck itself also has to meet zero emissions requirements so companies are now exploring green steel solutions such as those made with renewable energy.

And even fundamental operational issues need to be addressed – diesel trucks can be refuelled in less than 20 minutes and may only need refuelling once a day, but batteries only last one to three hours.

“How can you recharge 10 times a day without having massive hits to productivity?” says McKay. One near-term solution to reducing emissions is more autonomous vehicles, which use less energy to run and can be run more productively. 

Where to look for opportunities

So how can investors assess the opportunity of mining net zero?

“What’s really interesting is how it all flows through the supply chain,” says McKay.

“Seven’s Westrac, for example, owns the Caterpillar dealership in WA and has the leading market share in the west for mining equipment and autonomous vehicles.

“But is there a threat there? How does it change their relationships with customers?

“Do those customer relationships become stickier because they’re working on whole of mine-site solutions? Is there an opportunity to extend their product strategy?”

• Find out about Pendal Horizon Sustainable Australian Share Fund
• Find out about Pendal Focus Australian Share Fund

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About Elise McKay and Pendal Australian share funds

Elise is an investment analyst with Pendal’s Australian equities team. Elise previously worked as an investment analyst for US fund manager Cartica where she covered a variety of emerging market companies.

She has also worked in investment banking and corporate finance at JP Morgan and Ernst & Young.

Pendal Horizon Sustainable Australian Share Fund is a concentrated portfolio aligned with the transition to a more sustainable, future economy.

Pendal Focus Australian Share Fund is a high-conviction equity fund with a 16-year track record of strong performance in a range of market conditions. The Fund is rated at the highest level by Lonsec, Morningstar and Zenith.

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

Investors often overlook European markets due to outdated assumptions. But the new Europe is a fast-growing, cheap play on global themes, argues PAUL WILD

• New Europe less cyclical, higher growth
• Sector composition change
• Global mega-trend alignment

A DECADE of change in Europe has resulted in a faster-growing, higher-quality and less cyclical market that is becoming more international and aligned with global themes like decarbonisation and digitalisation, says Pendal’s Paul Wild.

“There’s a lot of pre-conceived ideas around Europe,” says Wild, a senior fund manager with Pendal’s London-based affiliate J O Hambro.

“Cyclicality, low growth, dirty industrials — generally just not that attractive.

“But what people are missing is a huge amount of sector change over the last 10 or 15 years. The European market is now higher return, higher growth and less cyclical.”

Investors in European stocks have endured a very poor decade of performance, compounded by the post-GFC re-regulation of the banking system which crimped credit growth and ultimately triggered a double dip recession.

But the poor performance has hidden sweeping changes in European markets, which today are vastly different from a decade ago, says Wild.

Since the GFC:

• Healthcare sector has grown 7 percentage points to be 16 per cent of the MSCI Europe ex UK index
• Technology has lifted 5 percentage points to 9 per cent
• The consumer sector is up 4 percentage points to 24 per cent
• Industrials are up 4 percentage points to 16 per cent.

“What’s gone down is financials, which have fallen by 7 points to 16 per cent — and only 11 per cent of that is banks — and the triumvirate of oil, utilities and telecoms have all pretty much halved in their sector weighting and are now just 3 or 4 per cent of the index each,” says Wild.

The changing face of Europe is even more pronounced at the top end of the market – the top 10 companies account for about 26 per cent of the index and are stocks with genuine global leadership.

Luxury goods behemoth LVMH, semi-conductor leader ASML, diabetes and obesity drug maker Novo Nordisk and business software group SAP are each among the 10 largest European companies.

“Since the GFC, the only two stocks which have stayed in the top 10 have been Nestle and Novartis,” says Wild.

“As a result, the top 10’s average weighted return on equity is now nearly 40 per cent, which compares to about 13 per cent to the index as a whole.

“So, the strong are getting stronger and the biggest stocks of Europe have got very strong structural growth. That will drag the index as a whole into a higher average return on equity.”

Despite this improvement, European shares are still trading on about 13 times forward earnings, in line with the average multiple of the past 20 years.

European markets becoming more international

Wild says another factor many investors miss is that the European companies increasingly draw their revenues from outside Europe.

“As a function of this, the European markets are becoming much more international. The MSCI Europe ex UK index currently gets about 55 per cent of its revenue from outside of Europe – versus about 45 per cent 15 years ago.

“The top 10 stocks get about 75 per cent of their revenue from outside of Europe.

“This means Europe is becoming much more of a play on the rest of the world, because the more domestic sectors like banks, telecoms and utilities are becoming a lesser part of the index.”

One main driver of this change is that Europe is highly aligned with global megatrends like decarbonisation and digitalisation, each of which has been the focus of recent stimulus measures.

Wild says that there has not been enough investor attention on decarbonisation and the path to net zero.

“There is a plethora of European companies brilliantly positioned to benefit from that — from the wind turbine companies to the renewable generators, the industrials focusing on building efficiency, the car companies which are pioneering electric vehicles.

“We think a multiyear period of re-rating lies ahead of us.”

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About Paul Wild and Pendal global equities strategies

Paul Wild is senior fund manager with J O Hambro Capital Management, a London-based active investment manager which is part of Pendal Group.

Paul manages J O Hambro’s Continental European fund.

Pendal offers a range of global equities strategies to Australian investors including:

• Pendal Global Select Fund
• Pendal Concentrated Global Share Fund
• Regnan Global Equity Impact Solutions Fund
• Pendal Global Emerging Markets Opportunities Fund

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 account manager here

Investment flows into European equities funds are positive again after a milder-than-expected winter and successful efforts to build gas storage. J O Hambro’s PAUL WILD explains

• European energy crisis averted
• Euro fund flows return
• Many investors still underweight

INVESTMENT flows into European equity funds have returned after almost a year of withdrawals as the region’s prospects brighten amid mild weather, falling gas prices and a re-opening of Chinese export markets, says J O Hambro PM Paul Wild.

Russia’s invasion of Ukraine last February prompted global investors to start withdrawing money from Europe and 48 consecutive weeks of outflows left most investors underweight European companies.

A big driver of the outflows was fears that energy shortages would drive the region into recession.

But a rapid turnaround in sentiment on the back of a milder-than-expected winter and successful government efforts to build gas storage has seen investors once again turn their attention to the eurozone.

“Midway through last year, it looked like Armageddon as Europe was held to energy ransom,” says Wild, who manages JOHCM Continental European Fund.

“But now, gas prices are back below where they were before the Ukraine conflict, supply is plentiful, and it looks like it’s going to stay that way for the next year or so.

“I can’t say the uncertainty has disappeared, but certainly it has massively improved in an almost unbelievably favourable way.

“In the second half of this year, many consumers will be facing lower energy bills again.”

Russia previously supplied some 35 per cent of Europe’s gas — including half the gas needs of Germany and Italy — prompting a concerted effort to import liquified natural gas and build up storage reserves to counter Russian threats to cut supply.

But mild weather means Europe will exit the winter with its gas storage more than half full.

“That means for Europe to rebuild up to a 90 per cent plus storage level for winter 2023-24, it needs about 30 per cent less gas per day than it’s been importing over recent periods,” says Wild.

The reduction in forecast demand has sent natural gas prices plummeting more than 70 per cent from last year’s peaks.

The China factor

But Wild says the positive outlook for Europe is based on more than just energy prices, with the re-opening of China also buoying prospects.

“It’s estimated that European companies have on average about a 10 per cent revenue exposure to China, so the re-opening is very positive.

“Europe is home to lots of global companies, from the famous luxury goods companies to the big German manufacturers.”

The EU economy itself is also proving surprisingly resilient. Eurozone GDP numbers for Q4 were up 0.1 per cent, allaying fears of a recession.

The upshot for investors is that European stocks look attractive compared to global peers, says Wild.

“Europe has now outperformed the US over the last year but it is still trading below its average long-term PE levels.”

Rates close to peaking in Europe

Key to the positive outlook are interest rates which are expected to peak in Europe at about 3.25 per cent over the next few months.

This is driving improvements in earnings in interest rate sensitive sectors like banks which are seeing a return to growth after eight years of negative interest rates.

“Europe has been labelled as an area of perpetual underperformance.

“But people forget what an unusual period investing history we have been in since the GFC, with a significant decline in interest rates largely benefiting the US, which is significantly overweight technology.

“Things have changed now. With higher interest rates, the focus moves to value driven sectors and Europe is at the heart of many of those sectors like financials and industrials.”

Wild says the extent of the outflows through last year has left most investors very underweight European equities.

“Since 2016, European equity funds have lost about a third of their assets.

“So, it doesn’t need a sea change of flows for it to be significant.”

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About Paul Wild and Pendal global equities strategies

Paul Wild is senior fund manager with J O Hambro Capital Management, a London-based active investment manager which is part of Pendal Group.

Paul manages J O Hambro’s Continental European fund.

Pendal offers a range of global equities strategies to Australian investors including:

• Pendal Global Select Fund
• Pendal Concentrated Global Share Fund
• Regnan Global Equity Impact Solutions Fund
• Pendal Global Emerging Markets Opportunities Fund

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 account manager here

Investor pessimism about a Continental recession seems overdone and European shares are starting to look good value, argues Pendal’s Paul Wild

• EU shares hit by war and energy crisis
• Value emerging
• Banks to benefit from rising rates

EUROPEAN shares are starting to look good value for investors willing to look through the Ukraine war and winter’s likely energy crisis, argues Pendal Group’s Paul Wild.

Companies in Europe are trading at an average of about 11 times next year’s earnings, which is around 20 per cent lower than the average price earnings ratio of the last few decades.

There is reason for the pessimism. The drawn-out Russia and Ukraine war shows no sign of resolution, and a looming energy crisis and potential power rationing is raising the risk of recession.

“The starting point is that investors are basically at maximum underweight for European equities,” says Wild, who manages a European equities fund at Pendal’s UK-based subsidiary J O Hambro.

“We’ve had about 30-plus weeks of outflows this year. Since 2016, investors have redeemed about 30 per cent of their holdings in European shares.”

For most investors, reducing euro holdings has been the right move.

European shares have underperformed US shares over the last 10 years, largely because the US economy has been growing faster and US market features more technology and other high-growth companies.

“But if you look at the decade before that, in local currency terms Europe and US performance was pretty similar,” says Wild.

Growth stocks outperforming

“So the question is, can the growth stocks keep outperforming?”

That depend on the path of interest rates, says Wild.

“The growth boom benefited from the extrapolation of very low risk-free rates and negative real rates which had a massive effect on valuations.

“Coming into the Covid period, it almost felt as if valuation didn’t matter anymore.

“Now with interest rates going back up, valuation has become a hot topic again.

“That’s quite exciting and puts Europe in a good place. Why? Because on a global basis, Europe shares are slightly underweight growth and overweight value.”

One of the main reasons European markets overweight value is because of a heavy weighting to financials, with some of the world’s largest banks listed on the European exchanges.

“European banks have around €6 trillion of demand deposits which until recently yielded zero or lower. If the European Central Bank moves rates move north of 2 per cent, sector profitability will be transformed,” says Wild.

“The bottom line that you are starting to see already is very large earnings upgrades for European banks, simply on the back of net interest margin expansion.”

Wild says the trajectory of global interest rates favour Europe over the US, with the likely peak in cash rates in Europe likely to be nearly half the level of where the US peaks.

“Interest rates in Europe are rising but they are still going to be far lower than in other parts of the world.”

European recession fears ‘overdone’

Wild also says investor pessimism about recession is likely overdone, with the eurozone likely to skirt recession over the winter.

“Fiscal policy in Europe, particularly in Germany, is having a significant turn. Germany has come out with three aid packages since the Ukraine invasion which in total equate to about 2.7 per cent of GDP.

“Unemployment in Europe is still at all time low levels and we’re seeing reasonable consumer resilience.”

And importantly, the EU has also been aggressively building gas reserves to head off shortages over winter.

“It feels like European governments have taken away the Armageddon scenario,” says Wild.

The environment is ripe for a shift in investor approach back to GARP — buying ‘growth at a reasonable price’ — which suits Europe’s weighting towards industries like pharmaceuticals, automotive, insurance and banks.

“Who doesn’t like to buy growth? But it absolutely has to be at the right price.

“There are banks in Europe trading at five- or six-times earnings, yielding 7 or 8 per cent — with share buybacks.”

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About Paul Wild and Pendal global equities strategies

Paul Wild is senior fund manager with J O Hambro Capital Management, a London-based active investment manager which is part of Pendal Group.

Paul manages J O Hambro’s Continental European fund.

Pendal offers a range of global equities strategies to Australian investors including:

• Pendal Global Select Fund
• Pendal Concentrated Global Share Fund
• Regnan Global Equity Impact Solutions Fund
• Pendal Global Emerging Markets Opportunities Fund

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

Europe’s biggest economy is in the news for the wrong reasons. But Germany’s underlying economic picture still looks robust, says Pendal fund manager Paul Wild

SHOULD global equities investors be worried about the headlines coming out of Germany?

For a country dubbed the economic engine of Europe, Germany is in the news for all the wrong reasons at the moment, hit by rising energy prices, threats to gas pipelines, slowing production and a trade deficit after decades of surplus.

But the underlying economic picture for Europe’s largest economy still looks robust, says Paul Wild, who manages a European equities fund for Pendal’s UK-based J O Hambro asset manager.

Investors should look beyond disruptions caused by Russia’s invasion of Ukraine and cuts to gas supplies — and instead focus on longer-term fundamentals, says Wild.

“Put it in context. Germany has a fairly unparalleled track record of growth.

“Unemployment is much below European levels, the Bundesbank has always been very conservative, debt-to-GDP ratios are very low.”

Even the May trade deficit — the first for Germany since the 1990s recession — is not something investors should fear.

“The US has run a trade deficit for a very long time and done very, very well — so I don’t think a short-term deficit is going to be the death of Germany.

“And don’t forget that all these issues have helped weaken the euro. You could argue that Germany is the single biggest beneficiary of a weaker currency.”

Energy crisis impact

Still, Europe’s energy crisis is spooking investors in German companies.

The May trade deficit came almost entirely on the back of the rising cost of energy imports.

Germany’s domestic energy capacity is carbon heavy, with large deposits of dirty, lignite coal and it has no LNG terminals or regasification capacity. Instead, it imports some 40 per cent of its gas from Russia, principally through the Nord Stream 1 pipeline.

In June, Russia cut volumes in Nord Stream 1 by 60 per cent in retaliation for Western Europe’s support for Ukraine in the war. It followed that with a further cut in July.

“Now Nord Stream 1 volumes are about 20 per cent of what they were pre-war,” says Wild.

“So, there is a small short-term possibility that there might have to be some kind of industrial rationing of gas over the winter period.”

Should global equities investors be worried?

Wild says it is important to look to the past for clues as to how things might play out.

“Germany has always been dependent upon Russian imports of oil and gas including through the Cold War — and through all of it, the gas has flowed.

“The question mark here is how long is the Ukrainian war going to last? If the war ends, we will likely see a normalisation of gas volumes.

“And in the shorter term, Germany will be dragging in gas through the interconnected pipelines with the rest of Europe and starting to build its own LNG terminals.

“It also has three remaining nuclear plants which are due to be shut down but could be prolonged. And they can generate more energy from coal.”

From an investment perspective, Wild says Germany offers much to like.

A strong industrial focus, open economy and expertise in autos, chemicals and machinery means it is fundamentally a play on global GDP growth.

“Frankly, none of that has actually changed,” says Wild.

“Remember if you buy shares in Siemens, it might be quoted in Germany but it gets most of its revenue and profits from overseas.”

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About Paul Wild and Pendal global equities strategies

Paul Wild is senior fund manager with J O Hambro Capital Management, a London-based active investment manager which is part of Pendal Group.

Paul manages J O Hambro’s Continental European fund.

Pendal offers a range of global equities strategies to Australian investors including:

• Pendal Global Select Fund
• Pendal Concentrated Global Share Fund
• Regnan Global Equity Impact Solutions Fund
• Pendal Global Emerging Markets Opportunities Fund

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

When looking for good companies to invest in, remember that the medium term is an aggregation of many short terms, says Pendal’s PAUL WILD. Here are some tips for finding good companies right now

• Think medium term, buy sustainable themes
• Look for opportunities in healthcare, finance, tech
• Drip feed or average into the market

THE first tip for equity investors right now is “buy good companies”.

Sound obvious?

“It’s an obvious thing to say until you try and work out what a good company is,” says Pendal senior fund manager Paul Wild.

So what’s a good company?

“A good company needs a moat around it – a moat that provides it with a defensible market share and pricing power,” says Wild, who runs European equities at Pendal’s UK asset manager J O Hambro.

“That’s most clearly illustrated in financial metrics by the return a company makes on equity, or on capital employed over a reasonable period of time.

“When you’re investing for the medium term, remember that the medium term is an aggregation of many short terms. And in the short term, prices can be distorted from fundamentals, affected by the positioning of funds.

“So, it’s a good idea to drip feed or average into the market, knowing that you’re very unlikely to ever pick the absolute low.”

Look for sustainable themes and trends “which are irrefutable”, says Wild.

“The whole area of energy efficiency is one and there’s a myriad of ways to play this.

“It might be via renewables and investing in semi-conductor capital expenditure plays, or it might be within the industrials sector.

“Digitalisation is another irrefutable trend,” Wild says.

Time for equities?

With that in mind, is it time to start putting money into equities?

“The more markets fall, the more optimistic we should be getting,” Wild says, with just a hint of irony.

“But managers do need to fight the behavioural instinct to get more bearish as the market falls.”

“It’s important to be cognisant of the impact of the current sea change.

“We have the dawn of serious inflation for the first time since the 1980s and rates in Europe and elsewhere are going to be rising significantly over the next year. The market needs to price this in and the effect on growth and earnings.”

How inflation and interest rate increases impact consumption, investment and credit risk, are key considerations for investors, Wild says.

Sectors that look promising

 “Which companies have pricing power and can maintain profit margins? Which companies can maintain their return on equity?” Wild asks.

Healthcare and pharmaceutical stocks have been a “port in the storm”.

Financials have been a little more mixed, and their outlook remains that way.

While rising interest rates help many lenders improve their net interest margins, fears of a surge in non-performing loans as rates rise have partially overwhelmed the good news.

“Our view on banks is that the need to provision for bad loans will increase, but it’s coming off very low levels and thus we will see some normalisation,” Wild says.

Insurance companies look relatively attractive.

“Most large European insurance companies are undertaking share buy-backs and dividend yields tend to be north of 6 per cent.

“While they do have a lot of credit exposure in their portfolios, it tends to be high grade. It’s also a sector which has pretty good pricing power and solvency,” Wild says.

Some technology stocks present an opportunity, though they need to have strong balance sheets and be profitable.

Companies that facilitate the digitalisation process for corporates are examples of strong tech opportunities.

And there’s also opportunities in the semi-conductor sector — though Wild prefers companies that benefit from the lithography capital investment by semi-conductor companies, rather than the companies themselves.

“Clearly it is time to avoid companies that are excessively speculative, or have weak balance sheets, or will have difficulties accessing finance at reasonable rates,” Wild says.

“Investors need to look through the crisis or dislocation as best they can and know that there is always the other side, patience tends to be rewarded.”

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About Paul Wild and Pendal global equities strategies

Paul Wild is senior fund manager with J O Hambro Capital Management, a London-based active investment manager which is part of Pendal Group.

Paul manages J O Hambro’s Continental European fund.

Pendal offers a range of global equities strategies to Australian investors including:

• Pendal Global Select Fund
• Pendal Concentrated Global Share Fund
• Regnan Global Equity Impact Solutions Fund
• Pendal Global Emerging Markets Opportunities Fund

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

Investors everywhere can learn a lot from the dramatic changes in European stockmarkets over the past six weeks. Pendal European equities fund manager PAUL WILD explains

• Investors must be prepared to shift as the opportunity set changes
• Pricing power and relative resilience critical to stock success
• Sell-offs can allow investors to create better portfolios

DRAMATIC changes in European equity markets over the past six weeks — and particularly energy prices over a longer time frame — provide poignant lessons for investors everywhere.

“It shows that investors, no matter where they are, always need to think about pricing power and relative resiliency,” says Pendal senior fund manager Paul Wild, who runs the group’s European equities fund.

“The opportunity set for investors can change very quickly. In Europe it has shifted hugely since the beginning of the year and investors need to alter their stance accordingly,” he says.

“For example, we were confident for the prospects of our overweight positions in automobiles and financials, but we have had to alter our stance.

“Equity sell-offs are never disciplined affairs. Investors should now be focused on buying companies with strong franchises and strong relative pricing power against an inflationary backdrop,” Wild says.

The inflationary impact of higher energy prices affects consumers, Wild says. They’re re also hit by other issues such as higher raw materials prices and supply chain challenges. Corporates are facing similar challenges.

“Investors need to think through how shocks to the system, such as higher energy prices, flow through to the real economy. Almost no sector or company is unaffected by what’s going on in Ukraine,” Wild says.

“People in different parts of the earnings spectrum will react differently. Household fuel bills will clearly be more impactful on low-income households, than they will on higher income households.”

Sectors to watch

Wild expects luxury demand to hold up better than many other retail categories. “Many of the brands have very strong pricing power. We’ve already seen prices rising for jewellery and watches at the very high end.”

Healthcare is a sector that will be less affected, and that’s been demonstrated in the share price of large pharmaceutical companies.

“Utilities as well because of the expansion of renewable assets, notwithstanding some are more exposed to Russian gas exports.”

It’s important to look beyond the current crisis, no matter where an investor is placing funds, Wild says.

“While growth is Europe will be lower than January forecasts, the region’s baseline is extremely low interest rates.

“Investors need to keep in mind that Europe had some very significant post COVID tailwinds including a huge fiscal stimulus during the recovery plan. Unemployment is at all-time lows.

“The best opportunities are in companies with pricing power and reliability. If investors can find these and trade their way into them, they might just find themselves with a higher quality portfolio than where they started.”

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About Paul Wild and Pendal global equities strategies

Paul Wild is senior fund manager with J O Hambro Capital Management, a London-based active investment manager which is part of Pendal Group.

Paul manages J O Hambro’s Continental European fund.

Pendal offers a range of global equities strategies to Australian investors including:

• Pendal Global Select Fund
• Pendal Concentrated Global Share Fund
• Regnan Global Equity Impact Solutions Fund
• Pendal Global Emerging Markets Opportunities Fund

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

What can investors learn from 2021 as we look ahead into next year? Here are five lessons from a European perspective courtesy of UK-based senior fund manager PAUL WILD

THE past two years have been more tumultuous than most others in recent decades.

But with a greater ability of businesses and citizens to live and work with Covid, what are the lessons from 2021 to take into 2022?

Paul Wild, senior fund manager with Pendal Group’s UK-based asset manager JO Hambro Capital Management, provides five lessons from a European perspective:

1. The importance of earnings momentum

If you look at Europe, there’s been earnings upgrades of 27 per cent year to date, and clearly there’s a very high correlation between earnings upgrades and performance.

At the sector level this year, the best performers have been technology and banks, and there’s no surprise that’s where much of the earnings momentum has been.

Looking at 2022, you need to focus on areas of the market which still have earnings upside. In Europe I’d pinpoint banks again this year and automobile stocks.

2. Monetary policy matters

Monetary policymatters for market direction, sector performance and degrees of volatility. With bond buying to be wound down and US interest rate rises expected by the middle of next year, the decade-long bull market in growth stocks is set to be challenged. Equity valuations will start to really matter again.

3. The green agenda matters

Europe, in particular, is serious about the green agenda. At the UN’s COP26 Climate Change Summit in Glasgow in November, Europe showed leadership and there’s now a huge regional focus on levels of decarbonisation. Investors need to consider the green agenda.

4. The importance of digitalisation

We know the pandemic had a phenomenal impact on expediting business model change, driven by the shift to the cloud and computerisation generally. The flexibility afforded from cloud computing is enormous and companies that embrace technology will continue to reap benefits in coming years.

5. Supply chains and logistics have changed forever

One of the big themes running through 2021 revolved around transportation and supply chain shortages. In 2022 companies will react to that thematic and there will be de-globalisation. This is likely to be a permanent impact of the pandemic, particularly in manufacturing.

Companies will shift away from just-in-time manufacturing to just-in-case inventories. Management will bring supply chains closer to themselves. That will impact earnings and performance.

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About Paul Wild and Pendal global equities strategies

Paul Wild is senior fund manager with J O Hambro Capital Management, a London-based active investment manager which is part of Pendal Group.

Paul manages J O Hambro’s Continental European fund.

Pendal offers a range of global equities strategies to Australian investors including:

• Pendal Global Select Fund
• Pendal Concentrated Global Share Fund
• Regnan Global Equity Impact Solutions Fund
• Pendal Global Emerging Markets Opportunities Fund

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

Europe’s re-opening is about two months ahead of Australia. Pendal’s PAUL WILD explains what we can learn from its recent earnings season

• European re-opening two months ahead of Australia
• Earnings season provides pointer to local sectors
• Banks and financials the big winners

European and north American economies are a couple of months in front of Australia in terms of COVID re-openings.

The current European earnings season has highlighted the stocks and industries, that have benefited from re-openings, and provides a pointer as the Australian economy opens up.

“The European earnings season is going much better than expected,” says Paul Wild, senior fund manager at Pendal’s UK-based asset manager J O Hambro Capital Management.

“The big winner is again financials — especially banks, where there’s strong fee momentum, very strong capital momentum and a further commitment to give capital back to shareholders.

“The bank sector is yielding nearly 6 per cent and that looks favourable given the monetary policy outlook,” he says.

“Elsewhere while energy in Europe is now a small sector, the oil companies have had a strong season because of oil prices. Industrials and technology stocks have been pretty good.”

Heading into the European September quarter earnings season, expectations weren’t high given the loss of economic growth momentum, high commodity costs and supply chain issues wracking the continent.

But with more than two-thirds of the market having reported, there have been plenty of positive earnings surprises, demonstrating the benefits of re-opening.

“Only two sectors have disappointed. One is utilities and the other is consumer discretionary. In the case of the latter, it is partly because of autos and the semiconductor chip shortage and partly due to the slowdown in China.”

The semi-conductor chip shortage has hit many companies around the globe, but Wild says the tone of conversations among vehicle manufacturers suggests the situation will soon start improving.

Wall Street, and particularly the big technology companies, have dominated markets over the past five years.

“But as economies re-open, and investors look beyond growth companies, such as the tech stocks, and Wall Street, there are plenty of opportunities emerging.”

Financials, auto manufacturers and green stocks are attractive opportunities in Europe, Wild says.

“I would say banks where there’s strong momentum at the moment,” he says. “I would say autos because they will recover from the semi-conductor chip shortage.

“And I would say green stocks that have been left in the cold this year somewhat. That includes green energy, building efficiency plays and areas geared into electric vehicles.”

Europe has been a relatively unrewarding market to invest in since the Global Financial Crisis.

“Earnings are still 15 per cent below 2008 and much of that is to do with the loss of earnings within the banking sector. So, it’s very important for Europe that the bank sector gets on the front foot.”

Apart from the banking sector, Europe has underperformed because of lower economic growth and lower earnings growth.

“But earnings for Europe are forecast to grow faster than pretty much any other major area over the next year,” Wild says.

“Europe has underperformed the US so far this year, but from a GDP and earnings view, on a relative basis, Europe is starting to look like the place to be. The question for the US is how long can the technology sector outperform.”

Wild says while European equities look attractive relative to Wall Street, valuations are unequivocally high.

“So, then you look at bond markets. In the US you have seen a recent slight flattening in the yield curve but this may be premature.

“Markets have priced in more increases in short-term rates and long-term rates have come down just a little.

“Inflation is high at the moment, and it does look like it will stay higher. Fortunately for Europe the ECB will be slower than most at raising rates.”

Wild says because of the yield curve, and the fact that the European earnings season has beaten expectations, he is less bearish on Euro equities than he might otherwise be, given valuations.

“The demand side of the equation is still strong. Some of the areas suffering at the moment because of semi-conductor chip shortages will improve. For example, the size of the backlog for auto companies is huge.

“People have savings, employment prospects in general are pretty good and corporates are under-levered.

“In the short term, while it’s hard to see big upside in markets from here, there will relative outperformance and that will come down to style, sector and thematic.”

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About Paul Wild and Pendal global equities strategies

Paul Wild is senior fund manager with J O Hambro Capital Management, a London-based active investment manager which is part of Pendal Group.

Pendal offers a range of global equities strategies to Australian investors including:

• Pendal Global Select Fund
• Pendal Concentrated Global Share Fund
• Regnan Global Equity Impact Solutions Fund
• Pendal Global Emerging Markets Opportunities Fund

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