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
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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.
About Tim Hext and Pendal’s Income & Fixed Interest boutique
Tim Hext is a Pendal portfolio manager and head of government bond strategies in our Income and Fixed Interest team.
Tim has extensive experience in banking, financial markets and funding including senior positions with NSW Treasury Corporation (TCorp), Westpac Treasury, Commonwealth Bank of Australia, Deutsche Bank, Bain & Co and Swiss Bank Corporation.
Pendal’s Income and Fixed Interest boutique is one of the most experienced and well-regarded fixed income teams in Australia.
The team won Lonsec’s Active Fixed Income Fund of the Year award in 2021 and Zenith’s Australian Fixed Interest award in 2020.
Find out more about Pendal’s fixed interest strategies here
About Pendal
Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management.
In 2023, Pendal became part of Perpetual Limited (ASX:PPT), bringing together two of Australia’s most respected active asset management brands to create a global leader in multi-boutique asset management with autonomous, world-class investment capabilities and a growing leadership position in ESG.
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.
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“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”.
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.
Here are the main factors driving the ASX this week, according to Pendal investment analyst JACK GABB. Reported by portfolio specialist Chris Adams
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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.
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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.
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.
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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.
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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.
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.
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Pendal, part of Perpetual Group, is a global investment management business focused on delivering superior investment returns for our clients through active management.
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.
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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.
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.
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.
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Pendal Global Emerging Markets Opportunities Fund
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.
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.
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
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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.
- 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.
- 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.
- 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.
About Tim Hext and Pendal’s Income & Fixed Interest boutique
Tim Hext is a Pendal portfolio manager and head of government bond strategies in our Income and Fixed Interest team.
Tim has extensive experience in banking, financial markets and funding including senior positions with NSW Treasury Corporation (TCorp), Westpac Treasury, Commonwealth Bank of Australia, Deutsche Bank, Bain & Co and Swiss Bank Corporation.
Pendal’s Income and Fixed Interest boutique is one of the most experienced and well-regarded fixed income teams in Australia.
The team won Lonsec’s Active Fixed Income Fund of the Year award in 2021 and Zenith’s Australian Fixed Interest award in 2020.
Find out more about Pendal’s fixed interest strategies here
About Pendal
Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management.
In 2023, Pendal became part of Perpetual Limited (ASX:PPT), bringing together two of Australia’s most respected active asset management brands to create a global leader in multi-boutique asset management with autonomous, world-class investment capabilities and a growing leadership position in ESG.
Here are the main factors driving the ASX this week according to portfolio manager JIM TAYLOR. Reported by investment specialist Jonathan Choong
RECENT themes continue, with equity market rotation out of the best performers, weakness in the speculative end of the investment landscape (eg Bitcoin), and ongoing effects of policy uncertainty under Trump 2.0.
The S&P/ASX 300 fell -1.3% while the S&P 500 was off -1.0%.
KPMG chief economist Diane Swonk probably summed it up best. “We’re all sitting here trying to filter through the noise to the economic reality,” she said. “But the noise itself has its own economic consequences.”
Last week perhaps saw some early indications of this economic impact across both the consumer and business segments in the US.
- On the consumer side we saw very weak sentiment measures, spending data and a tick up in jobless claims.
- On the business front we have seen capex intentions slipping and a surge in imports as businesses look to front-run tariffs set to commence from March 4th.
The net effect was a big rally in bonds – with US ten-year yields dropping 23bps to 4.19% – which reflects increased uncertainty around growth rather than a material change in rate cut expectations.
For their part, the Fed has kept a consistent line about rates remaining on hold until some of the policy settings become clearer, but still with the prospects of some cuts at the back-end of the year.
Notwithstanding all the macro noise, the second of the two main weeks of Australian reporting season was the key driver of moves within the local market.
There were plenty of hits and misses, with increased levels of volatility around results driving some big moves within the market.
We are seeing companies place a greater focus on the language used in their releases, given the influence of systematic strategies that use earnings releases as an input.
The savage reaction to earnings misses is also driving corporate Australia to be much more proactive in cost-cutting to support earnings. They are also more constructive on share buybacks as a mechanism to support the stock in increasingly volatile times.
Macro and policy Australia
Headline January consumer price index (CPI) inflation came in at -0.2% month-on-month and up 2.5% year on year, the latter unchanged from December and a touch below consensus expectations of 2.6%.
Seasonally adjusted, it ticked up 2.7%.
The RBA’s preferred trimmed-mean measure rose from 2.7% year-on-year in December to 2.8% in January. The reading excluding volatile items was 2.9% year-on-year, up from 2.7% in December.
An increase in inflation in food (+3.3%) and clothing (+2.1%) were major contributors. So too was a reduction in the effect of electricity (-11.5% versus -17.5% in December as some subsidies start to roll off.
Key housing-related categories such as rents (+0.3% month-on-month) and new dwelling prices (-0.1% month-on-month) are showing further disinflation, which is a good sign for the Q1 CPI print.
Both the headline and trimmed-mean year-on-year CPI rates are within the RBA’s 2-3% band – as are the majority of items in the CPI basket, although the latter ratio has flat-lined in recent months.
Macro and policy US – policy uncertainty manifesting in the data
Fedspeak
The Federal Reserve Bank of Atlanta’s President Raphael Bostic said the Fed should hold interest rates where they are, at a level that continues to put downward pressure on inflation. This is in contrast to his comments a week ago when he said that another two cuts would be appropriate.
Jeffrey Schmid, President of the Kansas City Fed, noted that inflation has been just recently at a 40-year high and that “now is not the time to let down our guard,” saying that inflation risks have to be balanced with growth concerns.
February Conference Board data
February’s Conference Board consumer confidence index fell to 98.3 from 105.3 in January. This was well below consensus expectations of 102.5 and was the weakest reading since August 2021.
Consumer confidence appears to have fallen sharply in the face of threats to impose large tariffs and to slash federal spending and employment.
The Conference Board expectations index – which is most relevant for spending growth – weakened to an eight-month low of 72.9 and is consistent with year-over-year growth in real consumption of about 2%, down markedly from 4.2% in Q4 2024.
The weakness of confidence strongly suggests that recent rapid growth in spending on durable goods mostly reflects households pre-empting tariffs.
The Fed keeps a keen eye on the Conference Board consumer inflation expectations series and may have been concerned by a further increase in median one-year ahead inflation expectations, from 4.2% in January to 4.8% in February. This is well above the 4.3% average reading from the years 2000 to 2019.
Mean inflation expectations leapt to 6.0%, from 5.2%, indicating that some individuals now expect extremely high inflation.
The key risk is contagion from these expectations into wage setting outcomes. The weakening environment for labour probably provides some weight against this – but it will be very closely watched over the next six-to-twelve months.
In this vein, the proportion of people saying that jobs are plentiful fell to 33.4% in February, from 33.9% in January, while the share saying they are hard to get increased to 16.3%, from 14.5%.
In addition, the proportion of people expecting fewer jobs to be available in twelve month’s time exceeded those expecting more jobs by 8 percentage points, the joint-largest gap since November 2013.
Other data
Real consumption expenditures fell by 0.5% in January, much weaker than the -0.1% expected. The drop was driven by the reduction in vehicle purchases, post the surge in people buying replacement autos following recent hurricanes.
Nominal personal incomes rose 0.9%, well ahead of consensus expectations of 0.4%. However this was driven by government transfers, an effect not expected to be sustained.
The Core PCE deflator rose 0.3% in January, as expected. This reduced the annual inflation rate to 2.6%, which is down from 2.9% in December and is the lowest since March 2021.
The trend here is your friend – with expectations that the path of decline toward 2% is reasonably entrenched, save for the huge caveat being how the tariffs play out.
If China gets an additional 10% and the 25% tariffs on Canada and Mexico hold then it probably impacts Core PCE by about 0.5% and keeps the number in the mid-to-high 2.0% to 3.0% range.
Elsewhere, the NFIB measure of capex intentions has seen a pullback, suggesting businesses are increasingly nervous around tariffs and inflation and reining in spending intentions.
On the employment front, weekly initial jobless claims rose to 242K, up from 220K and above the 221k consensus. Continuing claims fell to 1,862K from 1,867K, slightly below the consensus of 1,871K.
Higher jobless claims appears the result of extreme weather rather than the efforts of DOGE.
Washington, Virginia, Maryland have around 5% of the US population but 20% of the Federal government workforce and the data from these regions were marginally (~2k) above recent data points.
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Crispin Murray’s Pendal Focus Australian Share Fund
Total Federal government-dependent employment – excluding military and postal workers – probably stands at about 9.5 million workers, which is about 6% of total payrolls.
Finally, we note that the net trade balance is going to be a very large drag on US growth amid a pre-tariff surge in imports.
The goods trade deficit surged to US$153.3bn in January, miles ahead of December’s US$122.0bn deficit – which had itself been a record – and well above the US$116.6bn consensus expected.
Exports rose by 2.0% – so the blow-out is entirely the outcome of an 11.9% surge in imports.
All the major import categories rose, but around two-thirds of the surge resulted from a 32.7% increase in industrial supplies. That category is almost 70% above its October level.
This is showing up in the Atlanta Fed GDPNow measure, where expectations of Q1 GDP growth plunged from 2.3% on 19 February to -1.5% on 28 February as a result of the net export and personal consumption expenditures data.
Macro and policy rest of the world
There are reports that China is planning to inject at least US$55 billion into three of its biggest banks.
This could apparently be completed as soon as June and builds on the stimulus package unveiled in 2024.
In Europe, France is destroying its industrial base with over taxation, according to Michelin CEO Florent Menegaux.
“You’re economically killing your country when you’re imposing taxes much higher than in other countries,” he said. “Right now, the direct and indirect taxation in France is the highest in Europe. Don’t expect corporations to be able to swallow that all the time”.
Higher taxes and the drop in auto demand across Europe has forced Michelin to shut down three plants in Germany, two in France and one in Poland.
Producing in Europe is twice as expensive as in Asia. “We have to re-adapt our industrial footprint in Europe to export less because it’s not economical,” said Menegaux.
In Germany, the energy regulator is proposing a plan to require around four hundred manufacturers to adjust their operations to match real-time wind and solar supply, in order to keep the grid stable and prevent price spikes.
The plan would force companies to ramp down production during periods without wind or sunshine, and run at full throttle on breezy, bright days, which could help keep a lid on prices but would further add to company cost of production.
Reporting season
The number of companies seeing upgrades versus downgrades for out-years was pretty evenly split.
As a result of revisions, around 1% has been taken from both consensus FY25 and FY26 overall ASX200 profit expectations. Year-on-year EPS growth for the market now sits at -0.7% for FY25, then accelerating to +8.0% for FY26.
The downgrade skew was disproportionately driven by lower-than-expected earnings being factored into some larger-cap names in the Energy, Banks, Health Care and Tech sectors.
There was a step-up in stock price volatility in response to earnings results over recent periods. 40% of stocks that reported moved by more than 5% either way – a level not seen since the second half of FY2019 and well ahead of the ~25% average over reporting seasons going back to FY2007.
This is also reflected in a new high for the ratio of a stock’s earnings day move versus its thirty-day average daily move. This hit 5x, versus an average of 3x in reporting seasons back to FY2007.
Ultimately the ratio of beats to misses remained just in positive territory. 26% of companies beat consensus EPS expectations by 5% or more, versus 24% that missed.
The ASX 100 performed better than the Small Ordinaries in this regard. 23% of ASX 100 companies beat consensus EPS expectations by 5% or more – and 17% missed – while 28% of Small Industrials beat but 28% also missed. 35% of ASX 100 Resources beat and 24% missed, while 23% of Small Resources beat and 38% missed.
Dividends provided decent support; 26% of companies beat DPS by 5% or more, versus 20% that missed.
Changes to guidance were balanced. 15% of ASX 100 companies upgraded guidance, while 15% also downgraded. In Small Industrials, 12% upgraded and 12% downgraded.
About Jim Taylor and Pendal Focus Australian Share Fund
Drawing on more than 25 years of experience investing in top-performing Australian companies and a background in accounting, Jim manages our Long/Short Fund and co-manages our Imputation Fund. He is a Chartered Accountant with membership of the Australian Institute of Chartered Accountants.
Pendal Focus Australian Share Fund is managed by Crispin Murray. The fund has beaten its benchmark in 14 years of its 18-year history (after fees), across a range of market conditions. Find out more about Pendal Focus Australian Share Fund here.
Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management.
Here are the main factors driving the ASX this week, according to Pendal’s head of equities CRISPIN MURRAY. Reported by portfolio specialist Chris Adams
- Broader equity markets have been weak
- Market technicals don’t yet signal a more material selloff
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THERE has been some concern that the pace of policy actions in the US is creating uncertainty and deferring decisions among businesses and consumers.
This was reinforced by slight weakness in the University of Michigan Consumer Confidence Survey and the US Purchasing Manager’s Index (PMI) last week, as well as guidance from Walmart, which was 8% below consensus expectations.
Walmart pointed to currency headwinds, some pressure from mix shift as consumers “trade down” to cheaper items, and “geopolitical uncertainties” (also code for tariffs). The stock fell 9%.
Broader equity markets were also weaker, though there was no specific catalyst. The S&P 500 fell 1.6% and the S&P/ASX 300 was off 2.8%.
There was interesting rotation within the market, with a big unwind in momentum stocks such as Apollo (-7%), Citi (-6%), Goldman Sachs (-5%), Tesla (-18%) and Palantir (-15%) late in week.
The US Dollar is the other signal to watch; there is a building view that we may have seen the peak in the Dollar Trade-Weighted Index (DXY) for now and have reached “peak US exceptionalism”.
Market technicals look reasonable and are not yet signalling a more material selloff.
Liquidity also remains good, so our current read is that this is more consolidation and rotation as the earnings growth between growth and value converges.
This view is also reinforced by credit spreads remaining tight, as well as strong performance in European (Euro Stoxx 50 up 4% month-to-date) and Asian stock markets (Hang Seng up 16% and KOSPI up 5% month-to-date).
This would be consistent with a turn in the USD.
Australia saw its first rate cut (25 basis points (bps) to 4.1%) since November 2020, ending a 33-month up-cycle. However, the RBA’s message was that the market was too optimistic in expecting three cuts this year.
That hawkish message meant the cut offered no support to the market, while a series of disappointing updates from the banks helped drive the ASX lower.
We have had just over 50% of companies by number reporting.
So far, the results are okay, with nothing suggesting any particular thematic issue. Stock-specifics are the main drivers of reaction.
We also saw M&A activity with the CoStar bid for Domain (DHG).
Australia
The RBA cut its benchmark rate 25bps to 4.1%, the first change since November 2023.
This was seen as a hawkish cut, as the RBA Governor talked down the prospect of further cuts in the next few months – specifically noting that the market’s expectation for three rate cuts in 2025 looks unrealistic.
Governor Bullock did note that the policy was restrictive – though we observe that most corporate trends suggest the underlying economic environment is marginally improving.
When asked about the catalyst for another cut, Governor Bullock noted that she is looking for:
- reduced concerns on an upside surprise in inflation
- easing in wages growth
- disinflation in services
- a sustained reduction in housing inflation
- improvement in the supply side.
The market only marginally shifted down expectations for future rate cuts.
The updated RBA inflation outlook envisages inflation falling into its target range earlier than before, but the expected trough in inflation is now higher at 2.7% versus 2.5% previously.
The forecast for inflation in December 2026 was also increased 20bps.
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US
There was not much in the way of data last week.
Minutes from the Federal Reserve’s most recent meeting reinforced a more cautious outlook for rate cuts.
The University of Michigan Consumer Confidence Survey deteriorated, with the Headline index falling to 64.7 from 71.7 in January.
The consumer expectations component, which is most relevant for spending growth, fell from 69.5 to 64.0.
We do note that the survey measures responses by political affiliation and that the fall has been driven by Democrat and Independent voters, while Republican voters were unchanged.
This survey may signal a weaker consumer, but we wouldn’t read too much into it at this point as other surveys we follow are showing some signs of improvement in February.
Flash PMIs for February were slightly soft. Manufacturing was better at 51.6 versus 51.2 in January, however, Services fell to 49.7 from 52.9.
Overall, the composite PMI fell to a 17-month low.
We may potentially be seeing the impact of Federal job cuts and concerns on tariffs affecting sentiment and deferring employment decisions.
Markets
We saw a material selloff in the US late last week, triggered by Walmart’s guidance being below market, and reinforced by softer consumer confidence data. But the price actions seemed too severe to be explained away by just that, suggesting positioning has become very crowded.
We are seeing selling in tech and consumer discretionary with rotation into cyclicals.
The overall market has been resilient despite all the noise on tariffs, DeepSeek and higher CPI.
Breadth has deteriorated, which suggests less fire power for the market to rise, but this has not fallen to concerning levels (63% of S&P 500 stocks are above their 200-day moving average).
Sentiment indicators such as futures positioning, put/call ratios and bull/bear ratios are relatively balanced now, which is an improvement from the extended positions at the start of the year.
ETF flows remain strong and in their 90th percentile versus history, but are narrowly focused into specific sectors.
Credit spreads are still low and now correcting, which is supportive for equities and highlights that liquidity is fine and there are no fears building around economic deterioration.
There is lots of focus on regarding the US Dollar and talk of a “Mar-a-Lago Accord” – akin to the Plaza Accord from the 1980s – designed to weaken the dollar to help support growth.
This would support liquidity and be broadly positive for markets.
It is clearly apparent that the Yen is strengthening.
Japanese economic growth and inflation data has improved, and this may be correlated with some of the other momentum trades as the Yen has been a funding source.
It also may be a signal that the US 10-year bond yield may be heading lower – there has been strong correlation between them and the Yen in recent years.
From a portfolio perspective, it is important to watch market rotation as an emerging theme, as momentum and growth stocks have been such big market drivers in the last 15 months.
Regions outside the US are beginning to perform better, and lead indicators on European growth are improving (e.g. performance of cyclical versus defensive stocks).
There are also signs of life in China, where the two-year bond yield has begun to move higher.
There has also been a large run in Chinese tech names, triggered first by DeepSeek and subsequently President Xi having a public meeting with key tech entrepreneurs.
There is a view this could be a catalyst for improved sentiment in China.
The key “Two Sessions” annual policy meeting of the National People’s Congress and Chinese People’s Political Consultative Conference will be closely watched in the first week of March.
We remain positive on overall on the market’s direction.
However, the rotation is giving us confidence that we may see some of the more extreme valuation premiums that have characterised the market in the last 12 months unwind.
Australian equities
The S&P/ASX 300 was down 2.8%, due to a combination of the broader global selloff, the hawkish statement from the RBA, negative earnings updates from the banks, an overhang from the Goodman Group capital raise, and a portfolio basket-trade selling Australia.
Financials (-6.9%) – specifically banks (-9.4%) – was the weakest sector as margins trends were worse than expected at National Australia Bank, Westpac, and Bendigo & Adelaide Bank.
Given their extended valuations, this triggered a selloff in the sector – similar to that seen during the late September Chinese stimulus and the August Yen carry trade unwind.
This was more fundamentally driven, with margin trends worse than expected and slightly lower capital ratios, which will limit the degree of capital returns.
The Commonwealth Bank buyback kicks in this week, which may put a floor under the sector short term.
Industrials (-3.3%) was also weak, which is partly tied to the RBA statement.
We are just over the halfway mark of company reporting and earnings beats and misses thus far suggest a benign earnings season.
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.
Local investors appear to be driving renewed interest in China stocks, argues Pendal’s SAMIR MEHTA
Chinese companies are buying back shares
Valuations are cheap
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WHEN asked about President Trump’s first few weeks in office, David Axelrod – former adviser to Barack Obama – said: “I think he will get credit in the short term for being a whirling dervish of activity. The question is, what does that activity produce?”
The Whirling Dervishes, according to Wikipedia, are most famously associated with the Mevlevi Order of Sufism – a mystical branch of Islam, which emphasises inner spirituality and direct personal experience of the Divine, often using poetry, music, and bodily movement as pathways to God.
Ironies abound.
I am fully aware that commenting on geopolitics is above my pay grade. We stock-pickers normally eschew commenting on macroeconomics or geopolitics.
But the investment landscape has changed since the 2008 Global Financial Crisis — and continues to rapidly evolve — so we need to adapt our process, even if at the margins.
Most of us were forced to incorporate the effects of actions by central banks or government-directed economic policies or geopolitical convulsions. There are pivotal moments when these factors (rather than specific stock attributes) influence – and even alter – investing landscapes.
Since President Trump’s inauguration, the flurry of executive actions and foreign policy initiatives are nothing less than spectacular.
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Pendal Asian Share Fund
The Paris Agreement on climate change and principles of ESG are now by the wayside.
Free trade and globalisation are fettered by tariffs and transactional diplomacy.
Speeches by US vice-president JD Vance and defence secretary Pete Hegseth have rudely shaken European complacency.
Now President Trump has escalated a war of words with Ukraine’s President Volodymyr Zelensky, calling him a “dictator” and deepening a rift between the two leaders.
Europe is being dragged by the scruff of its proverbial neck from adolescence into adulthood. In fact, Europe might be weaned away from US security guarantees.
Trump even talked about inviting Russia back into the G8. Suddenly, Russia might be investible again.
And China, perceived as the arch-enemy, is no longer so different from allies like Canada and Mexico.
That begs the question: will the US Government tear up the restrictions of investing in Russia and China?
I wouldn’t bet on it, but then again, I wouldn’t have expected Europe’s current plight either.
Change of heart for China?
Meanwhile, Chinese President Xi met with private sector executives, including Jack Ma (who was famously cut down to size in November 2021) and Liang Wenfeng (the founder of DeepSeek).
Optics matter in China. Is this a change in heart by President Xi towards technology and the private sector? Or is it that state-directed spending on projects of national importance (chips and AI) have failed to deliver?
Ironically, China’s lead in AI was established by the founder of a hedge fund without much help from the government at all.
A stealth bull market in China has crept up on us. In my opinion, local Chinese investors will most likely drive this market.
Bond yields are close to 1%, there is some stability in the property markets, and deflation might have temporarily plateaued.
Sporadic stimulus measures are helping at the margin. Now, scores of companies are trading with dividend yields north of 5%, with business models that are only marginally cyclical.
Loads of companies are buying back shares and valuations are still cheap.
From here, it seems all signs point to revisiting Asian equities as an asset class.
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.
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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.