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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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
- Find out about Pendal Focus Australian Share fund
- Tune in: register to watch Crispin’s Beyond the Numbers webinar
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
Find out more about Pendal Asian Share Fund
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.
Pendal’s emerging markets team explores the latest developments in India and explains why the team remains underweight in the region
- High risk of India shifting into a down-cycle
- Pendal remains heavily underweight India in emerging markets portfolio
- Find out more about Pendal Global Emerging Markets Opportunities Fund
MOST emerging markets — particularly those with weaker export bases and greater dependence on external capital flows — go through multi-year positive and negative cycles.
In the up-cycle, incoming capital flows strengthen the currency and depress bond yields, facilitating lower policy interest rates. This drives growth, attracting more capital inflows.
In the down-cycle, outgoing capital flows weaken the currency and raise bond yields, driving policy interest rates higher. This weakens growth and encourages greater capital outflows.
There are many factors to consider in these cycles. But a core component is that in the upcycle, central banks do not need to defend the exchange rate.
India cuts rates, but currency remains weak
In February, the Reserve Bank of India cut its benchmark “repo rate” by 0.25 percentage points to 6.25%, marking the first policy interest rate cut in nearly five years.
(Repo stands for “repurchase agreement” and refers to the cost of borrowing. When banks need money they can sell government securities to the RBI with an agreement to repurchase them at a future date. The repo rate is the interest rate the banks pay on this transaction.)
The RBI’s move signalled a shift towards supporting economic growth amid declining inflation, which stood at 4.3% in January.
However, the decision came against a backdrop of geopolitical tensions, global monetary policy divergence, and volatile financial markets.
India’s appointment of a growth-focused governor, Sanjay Malhotra, was seen as a sign of prioritising expansion over inflation control.
But concerns remained regarding the exchange rate.
The Indian Rupee experienced significant volatility, reaching an all-time low of 87.95 against the US dollar before rallying in mid-February due to aggressive intervention by the RBI.
The RBI reportedly sold around $US6 billion of foreign exchange reserves to stabilise the currency, which gave the Rupee a one-day lift.
But foreign investors have continued withdrawing from domestic markets, with net sales amounting to nearly $10 billion so far this year.
Policy-easing by the RBI has encouraged speculative pressure on the Rupee, making it one of the EM universe’s weakest-performing currencies this year.
This contrasts with currencies such as the Brazilian Real, Colombian and Chilean Pesos and South African Rand, which have all strengthened against the US dollar this year.
Decline in foreign exchange reserves raises concerns
The RBI’s intervention raised another major concern: the decline in India’s foreign exchange reserves.
Reserves fell from a peak of $700 billion in September to about $631 billion by the end of January.
This depletion raises concerns about India’s ability to manage external shocks in the face of capital outflows, rising import costs, and weakening investor sentiment.
The broader economic outlook suggests slowing growth.
India’s GDP growth fell to 5.4% in the September quarter – a seven-quarter low and well below initial RBI estimates.
Weak consumer demand, sluggish private investment, and reduced government spending have contributed to the downturn.
Inflation peaked at 6.2% in October 2024 (driven by rising food prices), but lower interest rates may not be sufficient to revive growth without stronger demand.
Risk of a down-cycle
India is not yet definitively in a down-cycle.
The bond yield curve has barely moved, for example, and currency weakness is not yet driving higher forward inflation expectations.
However, the local-currency equity index peaked at about the same time as foreign exchange reserves, and a poor fourth quarter for equities has been followed by further weakness.
We believe most Indian assets are too expensive to provide a backstop to weakness and the risk of an extended down-cycle is high.
We remain heavily underweight India in our portfolio and defensively positioned where we do have exposure.
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’s top-down allocation process is based on analysis of a country’s economic growth, monetary policy, market liquidity, currency, governance/politics and equity market valuation.
James, Paul and Ada are senior fund managers at UK-based J O Hambro, which is part of Perpetual Group.
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’s head of equities CRISPIN MURRAY. Reported by portfolio specialist Chris Adams
- Find out about Pendal Focus Australian Share fund
- Tune in: register to watch Crispin’s Beyond the Numbers webinar
A decent US earnings season, bond-yield resilience in the face of higher inflation and continued positive retail investor flows are supporting equity markets.
The S&P 500 gained 1.5% last week, while the S&P/ASX 300 was up 0.5%.
There was limited new developments on tariffs, but we did see building expectations of a potential Ukraine deal post Trump’s unilateral call with Putin.
This remains a complex issue, and even if something was to happen, it will take time.
The market’s breadth is narrowing, which is a concern. Seasonals also turn less favourable from here. However, the underlying liquidity environment appears supportive.
The market has also held up in the face of the first wave of negative headlines on tariffs and there is no evidence of a technical breakdown.
So overall, we believe the market remains in a gradual up-trend.
Australian reporting season has swung into action. Overall, the results so far suggest the economy is holding up – with some small positive signs, notably from Commonwealth Bank and JB Hi-Fi.
Victoria remains the standout weakest state, but everywhere else is performing well.
There are some early signs that some of the higher P/E names are not delivering sufficient upside surprise to sustain their outperformance.
US inflation and economy watch
The key focus for the US economy is the interplay between policy growth and inflation, and how that will affect interest rates this year.
The case for a June rate cut from the Fed relies on Core Personal Consumption Expenditures (PCE) growth being below 2.5%, employment not being too hot, and policy (i.e. tariffs and deportations) not being worse than is currently expected.
Last week’s CPI data for January was poor. In summary:
- Headline CPI was up 0.47% month-on-month versus 0.30% expected. It was 3.0% year-on-year versus 2.9% expected.
- Core CPI was 0.45% month-on-month versus 0.3% expected, and 3.26% year-on-year versus 3.1% expected.
Higher numbers for used cars and airfares drove the surprise – combined, they added 8 basis points (bps) to Core CPI. Communications and insurance prices were also higher, having been soft in recent months.
The market’s initial reaction was negative, with bond yields backing up 10bps. However, the reaction moderated through the week and bonds recovered because:
- There is a belief that the seasonal adjustments fail to take fully into consideration the concentration of annual price increase put through in January – that is, it overstates inflation now, then understates it later in the year. Higher communications and insurance prices indicate this.
- Some of the beat was driven by “volatile” components (e.g. used cars and airfares), which are not included in the Core PCE – the Fed’s favoured inflation measure. Used car prices appear to be moderating already, based off auction data.
- Federal Reserve Chair Jerome Powell’s comments, which signalled he was taking a muted reaction to the data point.
- Other measures of inflation look to be easing.
- The Producer Price Index (PPI) and import price data was okay – and the combination of these and CPI allows the market to market an accurate estimate of the core PCE data. Using this, the Core PCE is forecast to come in at 0.26-0.29% month-on-month (implying 2.5% to 2.6% year-on-year) versus 2.81% in December and closing in on the Fed’s target inflation of 2.5%. Consensus has Core PCE falling to 2.5% by midyear.
The market is pricing in a 40% chance of a June cut and 50% by July’s meeting. The current implied probabilities for year’s end are 22% no cut, 39% one cut and 39% of two-or-more cuts.date, breaking through technical resistance levels.
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US retail sales – implies the US consumer may be softening
January’s headline retail sales came in at -0.9% versus -0.3% expected (-0.4% versus +0.3% expected, excluding autos).
Again, the market is not reading this as a fundamental shift in trend given some mitigating factors:
- cold weather and the LA fires
- strong holiday season sales, which may have been pulled forward
- auto sales affected by low inventories.
It does highlight that the prior 4%+ 3-month-on-3-month annualised run rate in consumer spending was not sustainable and we may be falling back to around a 2% run rate.
This slowing consumer also affected the Atlanta Fed’s GDPNow Q1 2025 outlook, dragging it from 2.9% on 7 February to 2.3% on 14 February. This is now back in the consensus range.
Tariff watch
There were limited new signals last week from the US.
The market focus is on the meaning of “reciprocal tariffs”, with the White House instigating a study on this issue which may not report back till 1 April.
This was taken as a small positive as it is an alternative to “across the board tariffs” and will take time to prepare.
We should still expect other tariff announcements in the next few weeks, with potential targets being critical imports (e.g. pharmaceuticals and semiconductors) to incentivise a shift to domestic supply, and autos which would effectively be targeting Europe.
China appears to have been spared the expected tariffs so far.
There are plans for a meeting between Presidents Trump and Xi, which may help defer this matter, but the issue remains volatile and an increase in the current 10% tariff is still possible.
Australia
The RBA meets on Tuesday and the market continues to price a high probability of a 25bp cut to 4.1%.
Should it cut, the RBA may frame it in cautious terms – a “hawkish cut” – as the risk of a policy mistake is high given that underlying inflation (once adjusted for the one-off subsidies) remains relatively high and the economy seems to be in good shape (with the exception of Victoria).
In this vein, Commonwealth Bank (CBA) updated its customer analysis in last week’s result.
According to the analysis, essential spending is slowing as a result of falling inflation – allowing younger age cohorts to spend more on discretionary items and to start saving again. It also suggests that disposable income is recovering.
The other risk for the RBA is the currency, which is already helping to ease financial conditions and – should it fall further – would add to inflationary pressure.
The last thing the RBA will want to do is look to have eased prematurely and run the risk of needing to reverse course in the future.
Markets
US earnings season is around 80% completed and is positive, with reasonable upgrades, and is on track for 13% year-on-year EPS growth.
While strong, we are now entering a deceleration phase, with consensus bottom-up forecasts suggesting EPS growth drops back to mid-to-high single-digit growth in coming quarters.
However, this is driven by the slowing of Mag7 earnings growth; the rest of the market is expected to accelerate. The remaining 493 companies in the S&P 500 are estimated to have delivered 4% earnings growth in 2024, increasing to 15% in 2025 and 17% in 2026.
We have already seen Mag7 earnings revisions stall.
While the market remains very full value in the US, liquidity remains supportive given the following factors:
- On 21 January, the US hit its debt ceiling and cannot issue net new debt. Instead, it must fund itself by drawing down on the general account, which is effectively QE. This is likely to continue through to midyear. This has meant the market has reloaded with liquidity in the calendar year-to-date.
- US retail ETF flows remain strong. This year has seen three of the largest daily retail ETF inflows on record. Seasonal trends in ETF flows will get less supportive – January and February are typically two of the strongest months – but still remain okay.
- US corporates are now entering their buyback window. Goldman Sachs expects US$1.2T of buybacks this year. The daily flows doubles when window opens from $3b/day to $7b.
Overall, while the market is at high valuations and there are material policy risks, the liquidity that has fuelled it remains supportive.
Australian equities
Industrial and consumer stocks led the market’s small rise last week, mainly as a function of results coming through.
Healthcare was the weakest sector on the back of Cochlear’s downgrade and CSL being softer.
CBA appears to have done enough for now to maintain its high premium, however, other popular names saw muted reactions to decent results – indicating positioning may be getting tired.
Resources have been outperforming this month, up 2.1% versus a 0.5% gain in the S&P/ASX 300. There has been a lot of news flow:
- Tariffs on aluminium and steel (though the aluminium impact has been muted so far, this is going to be inflationary in the US).
- A record gold price.
- Cyclone disruption in iron ore.
- In lithium, volatility continues, with CATL restarting its large lepidolite operation in China – which you can either read as positive in terms of being in response to market demand, or negative in terms of additional supply. The mine previously accounted for about 10% of China supply, or 3-4% of global supply.
- China lending growth was strong in January, which is a constructive lead indicator.
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.
A gradual rate cut path over 2025 should support economic growth, meaning investors should think carefully about fixed-income positioning. Pendal’s TIM HEXT and ANZ’s ADAM BOYTON explain in a new webinar
- Bonds help protect portfolio returns
- Browse Pendal’s fixed interest funds
- Watch now, on demand: Preparing for rate cuts in a shifting global economy
THE Australian economy is strongly placed as cost-of-living pressures recede and market expectations grow for a lower-rates environment – setting the stage for an economic rebound from last year’s tougher conditions.
That was the message from Pendal’s head of government bond strategies, Tim Hext, and ANZ’s head of Australian economics, Adam Boyton, at a Pendal webinar How to prepare for rate cuts in a shifting global economy.
The webinar took place ahead of this week’s Reserve Bank meeting which is expected to start a rate-cutting cycle.
A second cut is expected within the next six months. But Hext and Boyton see the pace of interest rate reductions as gradual due to underlying economic strength.
“The economy isn’t necessarily screaming out for a rate cut the way you typically see when the Reserve Bank starts easing,” says Boyton.
ANZ expects a second 25-basis-point cut in August. Hext says it could come as soon as May.
“We’re looking for just those two rate cuts,” says Boyton. “The reason being that the economy isn’t collapsing, there are signs of the consumer recovering, the labour market has performed remarkably well over the past 12 months … and inflation has eased more than expected.”
Labour market resilience and RBA caution
One factor behind the RBA’s cautious approach is the remarkable strength of the labour market.
“My best assessment is that full employment in Australia is probably between 3.75 and 4 per cent – so you’re close-ish to it. The most recent published thoughts from the RBA are a bit higher,” says Boyton.
Boyton says employment is being supported by jobs growth in health care, social assistance, public administration, and safety, and there is also evidence that the private sector is picking up as the stage 3 tax cuts wash through.
“This story of a resilient labour market is probably one that will play through for most of this year,” he continues.
“Either way, this is a really interesting cycle. We could end this economic cycle with the peak in the unemployment rate not very far at all away from full employment.
“To me, that says a couple of things – firstly, it’s great news for Australians.
“Secondly, it tells me that this is probably going to be a pretty cautious easing cycle from the Reserve Bank.
“If the unemployment rate is 5 per cent or 6 per cent you can cut much more aggressively, because you’re not going to be stoking inflation with a tight labour market.”
Falling inflation and household incomes
Further buoying the economic outlook is the fall in inflation itself – an often-overlooked factor in the economic outlook that plays an important role supporting household incomes and lifting consumer spending as real-wages improve.
“Inflation is an insidious tax on everyone – you go backwards, even if you get a wage increase, in a period of high inflation,” says Boyton.
“The fact that inflation has come down so much is really helpful for household incomes. Prices aren’t going back to where they were – but what it does mean is the wage increase you get this year isn’t going to be eroded by inflation. That will change the dynamic.”
Productivity challenges and Australia’s economic model
But while the near-term outlook is stable, Australia still faces longer-term headwinds, says Hext.
“We talk about the three Ps – population, productivity, and participation,” says Hext.
“Participation is looking good. Population is looking generally good, as it always does in Australia. But productivity has looked pretty bad for quite some time. It’s been going nowhere for almost a decade.”
Productivity means getting more output from existing resources and has been the key driver of economic growth from the industrial revolution to the IT boom of the 1990s, says Hext.
But the poor recent performance puts Australia in sharp contrast to the US economy, which has seen a very strong 10 per cent lift in productivity over the last seven years.
Hext says part of the explanation for Australia’s poor performance is a drift away from being a US-style, dynamic economy to a more government-centric, European-style economy.
“We’ve made some deliberate choices in the last five years in Australia – partly to strengthen our health care system, the NDIS, education. But there is a productivity cost to that which we’re now bearing the brunt of.
“We hear a lot about US exceptionalism – that term is used for very good reason.”
Investment implications
Hext says investors need to remember that when cash rates come down, floating rate investment returns come down – “it’s a mathematical formula”. That means lower returns on investments like term deposits and cash.
“But with bonds, you’re fixing your return – if you buy something with a yield of 6 per cent, you’re earning that 6 per cent for the life of that security. The comparison to me does look compelling.
“Would you be coming out of other asset classes, like growth assets, at this point in the cycle? I think it’s a bit early for that. Equities look to me quite fully valued, but I don’t see any major sort of trouble brewing there.”
He says bonds can also act as an insurance policy in a portfolio.
“The final thing you’ve got to remember is, as much as Adam and I sit here pontificating about the next 12 months, there’s going to be something coming from left field.
“And what bonds do, by locking in your return, is if there is a crisis that comes that none of us are seeing at the moment, that’s going to provide you insurance as your growth assets collapse.
“The way I like to say it is you’re almost getting free insurance and you’re getting a decent return.
“The two together is quite powerful.”
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.
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About Pendal
Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management.
In 2023, Pendal became part of Perpetual Limited (ASX:PPT), bringing together two of Australia’s most respected active asset management brands to create a global leader in multi-boutique asset management with autonomous, world-class investment capabilities and a growing leadership position in ESG.
Here are the main factors driving the ASX this week, according to analyst and portfolio manager ELISE McKAY. Reported by head investment specialist Chris Adams
MARKETS have been dominated by political news flow – with almost daily updates on tariffs, which have been used largely as negotiating tools.
As we navigated through the tariff minefield, noisy macro data, more US earnings, as well as the start of Australian earnings, markets were relatively flat for the week.
The S&P 500 was down 0.23%, while the S&P/ASX 300 was down 0.24%.
US Treasury Secretary Bessent commented that he and President Trump are focusing on lower 10-year US bond yields and expanding energy supply to drive down inflation.
While Bessent does not control the market, this does suggest a very strong political desire to keep rates from breaking through 5% – helpful for markets!
Robert F Kennedy Jr is another step closer to becoming the Health Secretary after clearing a key senate vote. This has meaningful risk for healthcare names given some of his controversial views on areas like vaccines.
Flows are providing a strong tailwind for the US market, with retail investors so far buying the dip in 2025. The corporate buyback window is also largely open as of last Friday.
Hedge funds are again buying AI stocks following the DeepSeek sell off on 27 January and the “big four” hyperscaler results (Amazon, Google, Microsoft and Meta), which were broadly bullish on AI customer demand.
We are also seeing a bullish divergence in the calendar year-to-date, with the S&P 500 up 2.6% despite Microsoft, NVIDIA and Apple (which together make up 20% of the index) all declining 2.8%, 3.3% and 9.1%, respectively.
This is good for both stock-pickers and the extension of the bull market.
It was a quiet week on the macro front, with the market looking through a noisy jobs print and instead focusing on the University of Michigan Consumer Inflation Expectations Survey increasing to 4.3%.
This spooked the market on Friday, in combination with further threats of tariffs from Trump.
US macro and policy
Jobs
We saw a noisy jobs print on Friday, which supported the view that the US Federal Reserve should be in no hurry to cut rates at its March meeting.
While the near-term labour market is in good shape, there is potential for some softening later this year, which should support a recommencement of the rate-cutting cycle.
January payrolls increased by a weaker-than-expected 143k (versus consensus at 175k), likely dragged down by strike action and adverse weather. There was a 100k upward revision to prior months.
As a result, three-month average private sector job creation has accelerated to 237k, which is above the pace that should keep the unemployment rate stable.
After peaking at 4.25% in July 2024 and sitting within a 4.1-4.2% band for the past six months, the unemployment rate fell to 4.01% in January 2025 (versus consensus at 4.1%).
While the trend for jobs is currently accelerating and the ISM data is supportive of near-term growth, there are a few headwinds which may result in softer readings later this year:
- Hiring indicators are muted and DOGE-led policy changes are also a headwind.
- Around 60,000 government workers (2% of the federal civilian workforce) are reported to have accepted a “deferred resignation” package effective September 2025, a program originally targeting 5-10% of the workforce.
- Hiring freezes and headcount reduction programs at some government agencies may further weigh on upcoming job reports.
Wages
Average hourly earnings rose by 0.48% month-on-month (versus consensus at 0.3%) in January, but this appears to be affected by weather – with a decline in average hours likely triggered by some workers being unable to make it to work due to heavy snowfall.
The quarterly Employment Cost Index (ECI) remains more important for the Fed.
The JOLTS quits rate continues to point to weaker underlying wage growth and, therefore, softer services inflation ahead.
ISM survey data
The Services ISM dipped from 54 to 52.8 in January, driven by weakness in new orders and business activity.
The New Orders Index declined from 54.5 to 54.3 – a seven-month low – suggesting that worries about immigration and trade policy under Trump are overriding optimism on potential tax cuts or deregulation.
Meanwhile the Manufacturing ISM increased to 50.9 from 49.2, its highest level since September 2022, driven by strong new orders and production.
It is not yet clear whether this upturn is a lasting improvement or a temporary boost from purchases bought in anticipation of tariffs.
Both ISMs saw improvement in their employment indices, reflecting near-term positivity for labor markets.
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University of Michigan Consumer Sentiment Survey
The latest survey suggests concerns about the economy and inflation are growing among consumers, with the February 2025 preliminary reading dropping from 71.1 to 67.8 – well below consensus at 71.8.
This probably reflects Trump’s threats to impose sweeping tariffs.
The consumer expectations component (which is 60% of the index) is now running at 69.3 for 1Q25, which is consistent with year-on-year growth in consumption declining from 3.2% in 4Q to 2.0% in 1Q.
It will be important to keep an eye on this in an environment of policy uncertainty as a lead on US consumer spending.
Somewhat concerningly, consumers’ inflation expectations increased to a 15-month high of 4.3% (from 3.3% previously).
Tariffs
A busy week on tariffs underscored the dynamics of current trade policies and the unknown impact on the economy, as well as the purpose of tariffs as a negotiating tool versus a means to protect domestic trade.
Over the past week, we have seen China tariffs implemented, while the initial measures on Canada and Mexico were walked back. What we know is that this uncertainty increases volatility.
Events in chronological order:
- 1 Feb: The US announced 25% tariff on all imports from Canada and Mexico, citing concerns over illegal immigration and drug trafficking. A further 10% tariff applied on Canadian energy exports into the US, as well as a 10% additional tariff on imports from China. All were to be effective from 4 February.
- 3 Feb: Tariff implementation delayed for Canada and Mexico for 30 days. Mexico committed to deploying 10,000 National Guard troops to guard its border. Canada agreed to appoint a “fentanyl czar” and enhance border security measures.
- 4 Feb: The China 10% tariff was implemented. This is not expected to have a meaningful impact on aggregate prices alone, given imports are about 10% of consumer spending and China accounts for some 14% of total imports. In retaliation, China imposed largely symbolic 10% tariffs on US crude oil, agricultural machinery and vehicles, plus a 15% tariff on coal and LNG. China also announced export controls on rare earth metals and initiated an antitrust investigation into Google.
- 5 Feb: The US removed the “de-minimis” rule on parcels from China into the US, which previously exempted imports worth $800 and under from customs duties. This has the effect of increasing prices for US consumers purchasing inexpensive items from China, primarily affecting e-commerce players like Temu and Shein.
- 6 Feb: The Federal Reserve Bank of Boston released a study estimating an inflationary impact of 0.5-0.8% on Personal Consumption Expenditures (PCE) from tariffs.
- 7 Feb: Trump announced plans to implement reciprocal tariffs this week to match duties that other countries (e.g. China, India, the EU, south-east Asia) have imposed on US goods.
With regard to China, the US measures and retaliation from Beijing look like the opening moves of ongoing negotiations with President Trump that seek to address structural trade issues, supply chain security and technology.
US productivity growth
Productivity grew at a 1.2% annualised rate in 4Q 2024, in line with consensus, and 1.6% year-on-year. This is largely consistent with the pre-Covid trend of a touch below 2%.
It remains to be seen how the deployment of Gen-AI solutions will impact the world’s labour force and influence productivity growth. The hope is that commercial deployment of AI will drive productivity growth over the medium term, which countries like Australia need.
AI and data centres capex goldrush continues
Results for the big four hyperscalers (Amazon, Google, Microsoft and Meta) wrapped up last week.
Their collective 2025 capex budgets have increased to US$296bn, up 13% from estimates at 31 December and 34% from estimates at 30 June last year.
The market was initially expecting a $150-175bn capex for 2025 before Gen-AI became a thing in January 2023.
This suggests that the US$125-150bn uplift is purely AI, with the rest being vanilla data centres or business-as-usual capex.
An additional 8-10% increase is expected heading into 2026.
Capex investment as a percentage of revenues for these players has now increased to more than 20%, which is almost double its historical levels and also significantly greater than oil industry peak investment.
So, is this bubble territory or is this sustained by long-term demand?
It is too soon to tell, but commentary from Amazon, Microsoft and Google on their most recent earnings calls discussed capacity constraints in meeting customer demand for AI, underpinning their capex investments.
Meanwhile, Trump’s US$100-500bn Stargate initiative is underway. Last week, OpenAI said it has now sent proposals to US states looking for sites to build five-to-ten 1GW+ data centres.
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Australian macro and policy
Retail sales for December 2024 were ahead of expectations, down 0.1% month-on-month (versus consensus at 0.8%) and up 4.6% year-on-year – the fastest since March 2023.
Product discounting and Cyber Monday falling into early December were key contributors, particularly for discretionary retail.
All eyes are on the RBA meeting next week to see if we will finally start our rating-cutting cycle.
If so, this could signal the bottom for the Melbourne housing market, which fell another 0.4% month-on-month in January.
UK macro and policy
The Bank of England cut rates 25 basis points (bps) to 4.5%.
While the cut was as expected, the commentary was more dovish than expected, with two members (including the previously hawkish Catherine Mann) voting for a 50bps cut instead.
Global markets
So far, 61% of corporates (or 72% of the S&P 500 market cap) have reported. EPS growth has been stronger than expected in aggregate (up 12% versus 8% expected) and across the median (up 7% versus 6% expected).
Real US GDP growth of 2.3% in 4Q24 supported a 5% increase in revenues and profit margins expanded about 50bps to 11.6%.
Communication Services (up 29%), Financials (up 23%) and IT (up 21%) have grown the fastest, while energy declined 33%.
We note that Goldman Sachs estimates that every 5% increase in the US tariff rate would reduce S&P 500 EPS by about 1-2%.
Earnings growth divergence between the Mag 7 and the rest of the market is converging. This is good news for extending the bull market.
- Mag 7 earnings grew 36% in 2023 and 36% in 2024 (estimated) versus -4% and 3% for the remainder of the market.
- In 2025, the consensus expects the Mag 7 to grow earnings 16% versus 9% for the rest of the market. In 2026 expectations are for 17% (Mag 7) and 13% (rest of the market).
As noted earlier, the divergence between the S&P 500 (which is up 2.6% year-to-date) and Microsoft, Nvidia and Apple is also good for both the bull market extension and stock pickers.
Trading flows
After five straight weeks of selling, hedge funds were net buyers of US equities every day last week and at the fastest pace since early November, as single stocks saw the largest net buying in more than three years.
Info Tech was by far the most net bought sector, while Consumer Discretionary was net sold for a seventh straight week and is by far the most net sold US sector on a year-to-date basis.
Net buying has returned to AI for eight consecutive sessions, suggesting that hedge funds have started leaning back into the AI theme post the DeepSeek sell-off on 27 January.
Gross equities exposure is very high, which is supportive for market positioning.
Fundamental longs significantly outweigh macro shorts, so if the market sells off, those shorts will need to be covered creating demand on the way down.
Interestingly, retail involvement in the market has reached record levels to start the year, proving that at least some one is prepared to buy the dips even if institutional investors are more cautious. Some key stats:
- The largest retail buy imbalance (difference between buy and sell orders) in the history of the Goldman Sachs dataset (starting in 2019) took place on 17 January at $5.0bn. The second largest retail imbalance took place on Monday (3 February) at $4.9bn. Tuesday (4 February) was the fifth largest retail imbalance of $4.2bn.
- Four of the top five retail imbalances in the Goldman Sachs dataset took place in the last two weeks (i.e. buying the dip).
Approximately 60% of S&P 500 corporate buyback window is now open as of Friday until 16 March, with about $1.2 trillion of buying expected across 2025.
Australian market
The S&P/ASX 300 was down 0.24% last week, with Resources catching up year-to date and Healthcare lagging. Reporting season really starts picking up from this week.
Copper rallied 4.5% (up 12% CYTD) on anticipation of further China stimulus and risk of supply disruption from unrest in the Democratic Republic of Congo.
This supported further outperformance from our precious metals names.
About Elise McKay and Pendal Australian share funds
Elise is an investment analyst and portfolio manager 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.
Investors should be ready for any scenario as Trump weaponises trade tariffs. But it would take a lot to disrupt the big China e-commerce stocks, argues Pendal’s SAMIR MEHTA
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HUMAN psychology permeates investing.
In fact, several profitable businesses are driven largely by addiction, from cigarettes and alcohol to gambling, social media and — dare I venture — online shopping.
If you can get consumers hooked on your product or service, that is the ultimate bonanza.
A decades-long war on drugs, conducted globally, still raises a philosophical question: should we restrict supply or constrict demand?
Under the second Trump administration, tariffs and TikTok are front of mind. How much impact have previous rounds of tariffs imposed on Chinese goods?
I’d like to offer a quick snapshot, focusing on four big Chinese online shopping platforms.
Amazon pioneered online shopping by connecting consumers to goods through a convenient platform. China, the world’s factory, was the primary source for supply.
Yet in 2024, four Chinese companies (AliExpress owned by Alibaba, TikTok by Bytedance, privately held Shein, and Pinduoduo-owned Temu) shipped goods internationally, worth almost $US 200 billion (up 90% year on year). Of that, approximately $45 billion was sent to the US.
In the US, the ‘de minimus’ threshold (whereby goods valued below $800 can enter the US without payment of duties or taxes) also helped.
High inflation pinched consumers, incentivising them to look for bargains – exactly what these Chinese platforms thrive on. But the most instrumental part, in my opinion, are their business models.
Their ability to access vast swathes of Chinese overcapacity in manufacturing, use efficient cross-border supply chains, operate on a consignment or semi-consignment centralised model while pricing goods 20-40% below Amazon, make them potent competitors.
Temu, for example, launched its online shopping in late 2022. In 2023 and 2024, it sold a staggering combined $70 billion worth of goods across the world.
Another linked datapoint – Meta reported approximately $9 billion of incremental advertising revenues from Asia Pacific customers, helped – in no small part – by spends from these four companies driving app downloads and customer acquisition.
On February 1, President Trump imposed — and almost immediately suspended — a 25% tariff on all goods from Mexico and Canada (only 10% on oil) while goods imported from China will have an additional levy of 10%.
We await the outcome of an expected call between Trump and Chinese president Xi Jinping this week to find out if tit-for-tat US-China tariffs will be paused as they were for Mexico and Canada.
For now, the China tariffs have removed the ‘de minimus’ loophole which benefited these Chinese companies in the past.
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In 2024, China’s trade surplus hit almost $US1 trillion.
Will a new round of potential tariffs dent China?
In anticipation of such an eventuality, Temu and Shein had already modified some of their operational procedures towards bulk shipping, diversifying logistics and expanding the their U.S. network.
Ironically, as TikTok’s future hangs in balance, Americans have flocked to another Chinese app: Xiaohongshu.
The broader point here is that when a product provides a value proposition far superior to American alternatives, tariffs might temporarily alter – but not permanently change – human behaviour. Only a complete ban can achieve it, as in the case of banning Chinese electric vehicle imports.
But for products sold by the Chinese online platforms, neither do they disrupt a high-value domestic industry nor are there big lobbies that clamour for protection.
In China, there is a proverb – “水滴石穿” (shuǐ dī shí chuān) – which translates loosely to “dripping water wears through stone”.
Only time will tell if the allure of cheap, convenient app-based shopping can be stopped by the walls of tariffs.
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.
Here are the main factors driving the ASX this week, according to portfolio manager RAJINDER SINGH. Reported by portfolio specialist Chris Adams
- Gold rallies to all-time highs
- Inflationary pressures continue to ease
- Markets pricing a February cut at over 90% probability
- Find out about Crispin Murray’s Pendal Focus Australian Share Fund
GLOBAL equity markets have been mixed, with US shares uncharacteristically underperforming European and Asian markets.
Both the S&P 500 (-1.0%) and Nasdaq (-1.6%) were dragged down by the emergence of the low-cost China-based AI platform DeepSeek.
Treasuries benefited from increased equity market volatility and tariff announcements, as well as a benign FOMC meeting outcome. US ten-year government bond yields fell 7 basis points (bps).
Despite this uncertainty, indicators point to a solid US economy that is seeing steady growth without signs of any reacceleration in inflationary pressures.
Other central banks such as the European Central Bank (ECB) and the Bank of Canada continued cutting rates in response to slowing inflation and domestic weakness.
In commodities, safe-haven gold rallied to all-time highs while oil prices drifted lower. Other commodities were mostly flat for the week.
In Australia, the December quarter Consumer Price Index (CPI) surprised to the downside on both headline and underlying measures.
Despite some pockets of elevated inflation, it led the market to believe that the Reserve Bank of Australia may cut rates at its upcoming February meeting.
Australian equities followed other non-US markets higher, gaining 1.5% (S&P/ASX 300) and finishing January close to record highs.
Healthcare (+2.7%), Technology (+2.0%) (especially non-AI related) and Consumer Discretionary (+4.2%) had the strongest performance, while the weakest sectors were Utilities (-4.5%), REITS (-0.4%) and Energy (-0.1%).
Australia macro/economy
The latest CPI update clearly grabbed the most attention, but the week began with the publication of the NAB Business Confidence Survey for December.
It showed that conditions had improved from November but were still weak and tracking below the long-term average. It confirms the current cautious and pessimistic mood among many businesses.
December quarter CPI was highly anticipated by financial (and political) watchers due to its implications for the RBA’s next move.
Overall, it was clear that inflationary pressures continue to ease – maybe a touch quicker than previously expected.
At a headline level, the CPI rose 0.2% quarter-on-quarter (QoQ) – versus expectations of 0.3% – and 2.4% year-on-year (YoY) versus the 2.5% expected.
Importantly, this is now lower than the RBA’s most recent December forecast in November’s Statement of Monetary policy of +2.6%.
Similarly, the Core (or trimmed-mean measure) CPI was up 0.5% QoQ versus expectations of 0.6% and up 3.2% YoY versus the 3.3% expected.
Notably, there continues to be a divergence in Goods versus Services inflation in the Australian economy.
The annual Goods inflation of +0.8% (driven by lower electricity, fuel and new dwelling prices) is now the lowest since 2016, while annual Services inflation remains elevated at +4.3%.
Services inflation was mainly driven by high rents, healthcare and insurance costs in the quarter – though some of these components are showing signs of slowing. As an example, rents continue to see annual inflation of +6.4%, however, the latest quarterly read was only +0.6%.
Government subsidies partially distorted numbers, but overall, they were interpreted as giving the RBA latitude to begin reducing the cash rate with the first cut even as soon as the February meeting.
Commentators noted that, due to the RBA board’s reduced schedule, the next meeting after February’s would be early April – potentially in the middle of a Federal election campaign.
Several economic forecasters moved their first rate cut expectations from mid-2025 to this month. This is now reflected in the market pricing a February cut at over 90% probability, with a total of at least two further cuts over the remainder of 2025.
We also note some recent work done by Macquarie Macro Strategy on the drivers of labour productivity in Australia. Headline productivity has slumped since 2021 and is running well below trend, prompting much handwringing in recent times.
However, Macquarie’s work suggests that the mining and public sectors are responsible for much of the decline:
- The mining sector has delivered a compound annual growth rate (CAGR) of -0.1% labour productivity since 2002, albeit in a highly cyclical pattern.
- The public sector (which includes health and social assistance, education and training, public administration and safety) has had 0.3% CAGR since 2002.
- However, the rest of the private sector (ex-mining) has had 1.1% CAGR since 2002 and, while having fallen from its highs, remains largely on its long-term trend growth trajectory.
US macro/economic
As widely expected, the US Federal Reserve’s FOMC kept rates on hold, but both the statement and Chairman Powell’s press conference were scrutinised for any markers on the future trajectory of rate moves.
The January statement described the unemployment rate as having “stabilised at a low level in recent months”, where previously it had “moved up but remain[ed] low”.
Additionally, inflation was described as remaining “somewhat elevated” where previously it was said to have “made progress”.
These were interpreted as slightly hawkish, with a small increase in the two-year yield as a result.
However, Powell stated in his press conference that these changes were not intended to send a signal, but merely clean up the language of the statement.
He also added that he still thought policy rates were “meaningfully restrictive”.
So overall, following a slightly hawkish statement with a dovish press conference, there was little net news and the FOMC is seemingly willing to wait for more economic data and details of President Trump’s policies before deciding its next course of action.
The market is pricing in just under two cuts for the remainder of 2025.
In other data:
- Weekly initial jobless claims dropped to 207k, from 223k, and below the consensus of 225k.
- US Personal Income and Spending saw real consumption rise by 0.4%, which was above the consensus of 0.3%.
- The Employment Cost Index (ECI) – the Fed’s key measure of wages – rose by 0.9% in December quarter, in line with the consensus, and takes the annual rate to 3.8%.
- Q4 GDP was a respectable 2.3% annualised. The GDP deflator rose 2.2%, which was less than expected.
- US PCE inflation came in muted in December – as signalled by the CPI and PPI – for the second consecutive month.
In summary, the US economy registered a solid 2024 with decent growth in consumption and employment, while inflation continues to moderate. This reinforces Chairman Powell’s comments that policy rates are in a “good place”.
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Other macro/economic
The Trump administration followed up on prior threats and announced tariffs on its top three trade partners.
Canada and Mexico will face 25% tariffs (but only 10% on Canadian oil), with an additional 10% for China on top of existing tariffs.
It is unclear if there are any exceptions that will be carved out, though those countries are expected to respond with their own retaliatory tariffs.
In Europe, the ECB governing Council lowered borrowing costs for a fifth time since June to a rate of 2.75%.
The Council expressed confidence on declining inflation, while the major concern has now shifted to the anaemic growth in the Eurozone.
This was highlighted by the largest economy in Europe – Germany – announcing its GDP had contracted by 0.2% in the fourth quarter, which was more than expected.
The Bank of Canada reduced rates by 25bps but suspended all future guidance due to the uncertainty of trade tariffs imposed by the US.
Markets
Some high-level themes:
- The “January barometer.” January was a good month for equities, which has typically been a good indicator of S&P returns for at least the next six months. When January is positive, the average six-month return of the S&P 500 is 6.9%, versus only 0.6% otherwise.
- Gold. The threat of tariffs and global policy uncertainty has pushed gold to an all-time high again and is now threatening a technical “breakout” to the upside. The AUD gold price is over $4500/ounce.
- US reporting season. About 163 S&P 500 companies (40% by market cap) have reported 4Q results, with aggregate Sales growth up 4.9% and Earnings growth up 11.3% – surprising by 1.0% and 5.8%, respectively. Companies are beating on both the top and bottom lines, suggesting strong underlying fundamentals.
- DeepSeek and AI. The recent release of the Chinese-based supposedly low-cost, open-source large language models has challenged the leadership position of the US tech giants. While the accuracy of the claims is still being debated, it did lead to sharp moves in AI related stocks with Nvidia experiencing the largest single-day drop in market cap in share market history (-$US589 billion – just under $1 trillion AUD).
- The “Mag 7”. This handful of companies dominate US and international share markets, leading to global ramifications if any of them struggle to perform. From a technical standpoint, Nvidia has breached some key levels which may further dampen sentiment on the stock and sector in the near term.
Global equity indices with relatively smaller listed technology sectors, such as the UK FTSE100 (~1%), S&P/ASX 200 (~3%) and the EuroStoxx 600 (~6%), may be relative beneficiaries on any continued AI uncertainty.
In Australia, equities had a decent return for the week, capping off a solid start to 2025.
REITs, Utilities and Energy were the weakest sectors, with Tech (especially non-AI tech) and Consumer Discretionary continuing their strong 2024 returns.
About Rajinder Singh and Pendal’s responsible investing strategies
Rajinder is a portfolio manager with Pendal’s Australian equities team and has more than 18 years of experience in Australian equities. Rajinder manages Pendal sustainable and ethical funds, including Pendal Sustainable Australian Share Fund.
Pendal offers a range of other responsible investing strategies, including:
- Pendal Sustainable Australian Share Fund
- Crispin Murray’s Pendal Horizon Fund
- Pendal Sustainable Australian Fixed Interest Fund
- Pendal Sustainable Balanced Fund
- Regnan Credit Impact Trust
- Regnan Global Equity Impact Solutions Fund
Part of Perpetual Group, Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management. Responsible investing leader Regnan is now also part of Perpetual Group.