Midcaps are not just a diversification opportunity – right now, they are also outperforming their larger cap counterparts. BRENTON SAUNDERS explains why – and where to look.

• Higher earnings growth driving performance
• Diversification benefits
• Find out more about the Pendal MidCap fund

MIDCAP stocks are a sweet spot in the Australian share market, delivering higher earnings growth and outperforming their large cap peers over time, says Pendal’s Brenton Saunders.

Narrow market leadership in recent years has left many index investors increasingly concentrated in mature, slower-growing sectors like the big banks.

Saunders says midcaps can offer a more balanced alternative with better exposure to faster-growing businesses and a higher level of corporate activity that can help to underpin valuations.

“If somebody asked you at a barbecue, why do midcaps outperform the large cap indices, quite simply it’s because they have higher earnings growth,” says Saunders, portfolio manager of the Pendal MidCap Fund.

“They’re typically companies in the sweet spot of their corporate development and their evolution as businesses.

“They’re big enough to attract real investment attention – both from investors and bigger corporates – but unlike many smaller cap companies they’re pretty settled in terms of their balance sheets and funding.

Saunders was speaking at the Pendal webinar Why ASX midcaps are out-performing – and which sectors are best-positioned.

What makes an attractive midcap?

Different investors can have different views on what makes a midcap company.

For Pendal, the segment includes stocks ranked 51 to 150 on the ASX – a wider definition than the ASX MidCap index.

Saunders says those 100 companies have a lower concentration in slower-growth sectors compared to the broader market, with no single industry dominating performance.

“The spread in midcaps across the economy and sectors on the ASX is just much better,” says Saunders.

“The sector historically has empirically done better than most of the other larger and small cap aggregates on the ASX.

“And despite that, it acts as a very powerful portfolio diversifier.”

Top 10 midcaps include companies like Lynas Rare Earths, Life360, JB Hi-Fi, ALQ, and REA Group, offering exposure to diverse growth themes rather than concentration in banks and large-cap resource stocks.

Why midcaps look appealing now

Saunders says recent conditions have shifted the balance in favour of midcaps after a multi-year period of trading in a range as investors chased large-cap bank stocks instead.

Corporate activity has picked up, with several companies under offer or recently acquired.

“In my portfolio, I’m usually dealing with two or three of them that are under offer,” says Saunders.

“That just serves to underpin ratings and the price discovery.”

A lower interest rate environment is also aiding rate-sensitive parts of the investment universe such as real estate, while easing real rates are typically supportive for the gold price.

“There are good opportunities in mid-caps now – there are a number of companies and sectors on the ASX with strong outlooks.

“It’s well positioned to carry on outperforming, which it has done for the past year and a half.”

Diversification benefits

Saunders says the midcap sector’s breadth is a core part of its appeal.

Businesses in industries as diverse as software, data centres, gold, energy, consumer goods and medical technology are all offering attractive opportunities.

The diversity makes the segment much less concentrated than the broader market.

The biggest 10 companies in the 51-150 represent just over a fifth of the index, with no single sector dominating.

That compares to a 45.6 per cent weighting for the top 10 in the S&P/ASX 300, where banks alone represent nearly a quarter of the S&P/ASX 300.

Saunders names diversified financials as a particularly interesting opportunity, with platform businesses like Netwealth and Hub24 benefiting from growing demand for more sophisticated wealth-management functionality.

He says retirement is another area he is watching closely, driven by government efforts to improve retirement income products. This is creating opportunities for companies like Challenger and AMP as the population ages.

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

• Find out about Pendal Focus Australian Share fund

MUCH of the gain in global equity markets this year can be attributed to the step up in AI expenditure, US GDP acceleration and Fed interest rate cuts – and in the short term these narratives are running out of steam.

But we need to be careful about getting too bearish, given financial conditions remain loose and US GDP growth should reaccelerate in CY26.

Equity markets were volatile last week. They started stronger on the announcement of a deal to end the longest US federal government shutdown in history.

But then they gave gains back of an increasingly hawkish view of the Fed and a savage rotation away from the AI/tech sector midweek, to the benefit of resources and defensives.

The S&P 500 finished up +0.1%, while the NASDAQ was off -0.4%.

The Australian market was quite a bit weaker after being spooked by a strong jobs number that put hopes of further rate cuts to bed. The S&P/ASX 300 finished down 1.3%.

Macro data out of the US continues to be in short supply due to the shutdown, but the Australian market saw a lot of news from September reporting companies and AGMs.

US macro and policy

The big news was an end to the federal government shutdown as a spending package law was signed by President Trump on Wednesday night.

The deal only funds the government through to January, but restores SNAP funding for low-income earners and provides retroactive pay for furloughed government workers.

We should now get a catch-up on economic data releases over the next month which, given the direct and indirect impacts of the shutdown, may come in on the weaker side.

Elsewhere, the market was concerned by an increasingly hawkish tone out of the Fed.

The Wall Street Journal – regarded as being plugged into Fed thinking – reported a major divide on the Board of Governors regarding a December rate cut, reflecting a tug-of-war between softening employment fears and still resilient inflation. 

Four different Fed members spoke last week, and all noted a high bar to cutting rates in December given slower progress in reducing inflation.

The probability of a December cut fell to 50% – a material move from the 100% implied probability a month ago. 

Amidst the shutdown’s data vacuum, proprietary surveys are showing further softening in labour markets.

Goldman Sachs’ job growth tracker slid to 50,000/month in October – from 85,000/month in September – and it anticipates a 50,000 decline in nonfarm payrolls in October. This would be the weakest print since 2020 and would likely lead to the probability of a December cut rebounding.

The challenge for the doves looking to cut rates is that alternative measures of consumer spending suggest a pick-up in October, following September weakness.

Given the lack of official data and mixed signals from alternative measures, it is understandable why the Fed is considering skipping a cut in December.

Data points in the next few weeks will be critical.

Tariffs

The Supreme Court’s ruling on the legality of the bulk of the Trump tariffs is a wildcard to watch for December and January.

Oral arguments were held last week and suggest a majority of Justices are sceptical of the President’s authority to impose these tariffs under the International Emergency Economic Powers Act (IEEPA).

Prediction markets are implying only a 25% probability that the tariffs are upheld.

The Trump Administration does have other avenues to pursue but this issue, along with how tariffs are treated retroactively, is a significant source of uncertainty.

Given a poor performance from Republicans in the gubernatorial, state legislature, and New York mayoral elections held in November, the Trump Administration is making some moves to ease tariffs. 

A range of agricultural imports including beef, tomatoes, coffee and bananas are now excluded from reciprocal tariffs.

This could reduce pressure on CPI; for example, Brazil – the largest supplier of coffee to the US – has faced tariffs of 50% since August and this flowed through to a nearly 20% rise in coffee prices in the September CPI.

The Administration also announced a new trade framework with Switzerland, lowering tariffs on goods to 15%, from 39%.

So there is also progress on country-by-country deals. These developments may also play into the Fed’s deliberations.

Australia macro and policy

The key news was a surprisingly strong October employment print with +42,000 jobs added versus consensus expectations of +20,000. The growth as high-quality, driven by full time employment rising +55,000.

Unemployment fell to 4.34%, from 4.45%, and underemployment also fell.

This moved unemployment below the RBA’s year-end forecast of 4.4% and, alongside the much stronger Q3 CPI print, makes it very difficult for the RBA to make near-term rate cuts.

We do note that, despite this month-on-month rebound, the longer-term trend remains of a steadily rising unemployment rate.

In the last month, two-year bond yields have risen 50 basis points (bp) in response to the macro data, while the market has shifted from pricing two cuts to just one by June 2026.

There is puzzling dynamic in Australia where the Westpac consumer confidence survey is quite strong, rising above 100 for the first time since Feb 22, but expectations for unemployment are also rising.

The explanation is likely the positive wealth effect on homeowners from rising house prices.

Australia’s variable rate mortgage system provides a rapid transmission mechanism for rate cuts. The RBA has cut 75bp since February – and capital city house prices have risen 7% in the same period.

Scentre Group’s quarterly sales data last week showed this positive wealth effect flowing through. Quarterly sales grew 3.7% for the September quarter, up from 2.7% in the June quarter.

REITs and consumer discretionary stocks have had a good run this year on the back of rate cuts. With the cutting cycle looking to have an extended pause, these sectors could now take a breather.

China macro and policy

The dour state of the Chinese property market continued with floor space sales falling 19% year-on-year in October and new starts down 30%, taking them to the lowest level since 2003.

Property has now declined to less than a fifth of steel demand in China, so the incremental impact for iron ore demand is less material.

Markets

Tech pullback

The AI/tech/datacentre space saw a healthy pullback last week, coming after a strong run year-to-date

There wasn’t any individual catalyst, but there has a been a steady drumbeat of concerns about the economic viability of the AI/datacentre boom over the last few weeks, raising anxiety in a bit of a news vacuum ahead of the key Nvidia results this week.

Talking points during the week included:

• Neocloud provider CoreWeave fell ~30% after cutting its revenue guidance. We note that the downgrade was driven by supply chain issues, not demand.  
• Softbank selling its entire stake in Nvidia (to fund other AI investments).
• Commentary questioning the sustainability of OpenAI’s economics.

It was no surprise that the higher beta parts of the tech space – such as the “Unprofitable Tech” basket – have seen the biggest pullback. Bitcoin has broken below US$100,000 and kept falling on Friday despite the Nasdaq stabilising.

Concerns are also spreading to the credit market, as seen in a spike in the spread of Oracle’s credit default swaps.

On a technical basis, the Nasdaq has been hanging onto the support of its 50-day moving average and finished there on Friday, adding to the importance of Nvidia’s result this week.

Pulling back and focusing on the medium-term picture, Goldman Sachs published a piece last week highlighting that the current AI boom is not showing the macro and market imbalances that were visible in 1999/2000.

Instead, Goldman Sachs argues the current conditions have more in common with the earlier-stage tech boom in 1997/98. 

On factors such as investment as a share of GDP, contribution of tech to real growth, corporate debt as a proportion of profit and equity returns, the current AI boom has not reached the levels of 1999/2000, suggesting that despite concerns and the inevitability of short-term corrections, the story could have further to run.

Resources

The resources sector benefitted from the rotation out of tech and the broader market sell-off last week.

The iron ore producers benefitted from resilient pricing as Chinese steel exports remain elevated, and supply is relatively disciplined.

Energy similarly benefitted from looking like it is recovering from its floor, while gold benefitted from its safe haven status.

Notably, there was a sharp recovery in sentiment towards lithium prices and equities.

The last few years saw an implosion of the lithium bubble as global supply ramped up and demand disappointed due to weaker-than-expected penetration of EVs.

However, there has been a potentially material change in the story on renewed growth in Chinese lithium demand driven by utility energy storage systems.

China’s rapid renewables rollout, stimulated by government incentives, has led to a “duck” curve in prices – where power prices are negative in the middle of the day.

This has made battery storage projects profitable and is driving a ramp up in investment.

Market technicals

The S&P 500 is right back to the bottom of the channel it has been occupying for six months and so approaching a meaningful resistance level.

This week will be important for indicating any change in trend.

The turnaround in investor positioning sentiment from positive to negative has been pretty sharp but is not at a level that suggests there is little downside.

On the positive technical side, markets historically trade weaker immediately after government shutdowns end, but then trend positively over following months.

US financial conditions also remain at reasonably loose levels, while the bar for markets in terms of consensus quarterly earnings expectations eases materially – from just over 10% in Q3 to just over 5% in Q4.

Australian equities

The Australian market underperformed US markets during the week.

We saw the same rotation out of tech and into the resources and defensive sectors. We also had the additional drag of a sharp pull back in the banks, driven by a poorly received CBA result.

The rise in rates following the jobs data dragged down REITs and consumer discretionary stocks. The insurance sector outperformed as a beneficiary of higher rates.

Stock moves reflect the market rotation, sector specific themes and a continuation of the trend this year of relatively modest earnings misses being heavily punished by the market.

So resources dominated the top performers – particularly lithium and gold stocks.

On the flip side a range of tech companies were heavily sold off, as well as disappointing reporters including Xero, CBA and Aristocrat.

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About Anthony Moran

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

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

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

Find out more about Pendal Focus Australian Share Fund  

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Employment data came in stronger for October, prompting the market to ‘almost’ abandon 2026 rate cuts, writes Pendal’s head of government bond strategies, TIM HEXT

• Employment numbers stronger
• Most remaining economists abandon rate cut forecasts
• Find out about Pendal Government Bond Fund
• Browse all Pendal’s fixed-income funds

TODAY’S October employment numbers provided the usual amount of noise but highlighted that the rise in unemployment in September to 4.5% was a head fake.

Employment in October grew by 42,000 jobs and unemployment fell to 4.3%, or 4.33% to the second decimal place.

For those looking to dampen the noise, the trend unemployment rate stayed at 4.4%, spot on the Reserve Bank medium-term forecast.

Unemployment, October 2025 (seasonally adjusted vs trend):

 

Source: Australian Bureau of Statistics

Hours worked also rose to 0.5% and given it was all full-time jobs this month, the underemployment (part time workers seeking more hours) also fell to 5.7%. This leaves labour underutilisation at 10%.

Not surprisingly today’s number saw most remaining economists who had rate cuts still forecast abandon them. The market has less than 10% chance of a February cut and 20% chance of a May cut.

This has finally piqued our interest. Yes, we agree the Reserve Bank is likely to be on hold well into next year but there is time value in these sorts of chances.

We have entered some short-dated received positions post today’s numbers, as they provide a good risk/reward defensive hedge against all sorts of eventualities in the months ahead.

Our own data expectations do not have much of a view on unemployment. We think the consumer is picking up pace, but against this the government fiscal pulse is falling.

However, we think the quarterly pace of trimmed mean inflation will return to the 0.6% to 0.7% level in the quarters ahead, consistent with the Reserve Bank target.

Yes, annual numbers are lumbered with the recent 1% third-quarter number which will see annual inflation above 3% for a while yet, but it is the pulse that is important.

Meanwhile, for those planning holidays in December the Reserve Bank meeting on the 9th should be the most boring in years. ‘Happily on hold and balanced risks’ is all you need to know.

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About Tim Hext and Pendal’s Income & Fixed Interest boutique

Tim Hext is a Pendal portfolio manager and head of government bond strategies in our Income and Fixed Interest team.

Tim has extensive experience in banking, financial markets and funding including senior positions with NSW Treasury Corporation (TCorp), Westpac Treasury, Commonwealth Bank of Australia, Deutsche Bank, Bain & Co and Swiss Bank Corporation.

Pendal’s Income and Fixed Interest boutique is one of the most experienced and well-regarded fixed income teams in Australia.

Find out more about Pendal’s fixed interest strategies here

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About Pendal

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

In 2023, Pendal became part of Perpetual Limited (ASX:PPT), bringing together two of Australia’s most respected active asset management brands to create a global leader in multi-boutique asset management with autonomous, world-class investment capabilities and a growing leadership position in ESG.

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Here are the main factors driving the ASX this week, according to head of listed property PETER DAVIDSON. Reported by head investment specialist Chris Adams

• Find out about Pendal Property Securities Fund

“WHAT do you do if you’re driving in a fog? You slow down,” said Jay Powell Fed Chairman in late October.

And that is what markets have done in the past couple of weeks.

The S&P/ASX 300 fell 1.3% last week – its second weekly decline, having fallen 1.5% in the previous week.

Markets are no longer fully factoring in an interest rate cut during this cycle after the RBA maintained the current cash rate last Tuesday.

The S&P 500 market has fallen by 2.4% from the peak late last month and was down 1.6% last week.

The Nasdaq (-3%) racked up its worst week since April with sell off in Palantir (-11%), Nvidia (-7%), Core Weave (-22%) and Oracle (-9%). 

Bitcoin, the bellwether for speculative euphoria, has fallen by 8% in the past week, US jobs data – as reported by Challenger – was weak and a near-record low University of Michigan sentiment number added to the caution.

Meanwhile, prospects for a resolution to government shutdown seem to fade further. At 37 days, this is the longest shutdown in US history and is starting to impact the real economy with disruption to the SNAPS program (42 million Americans, or 12% of the population, are on food stamps) and air travel.

On the positive side, markets are holding key technical levels, and we are near a strong period in the equity markets with seasonal inflows in 401K accounts.

Oil (-15% CYTD) has been a positive for the equity markets.

US Treasury markets were relatively quiet last week, with 10-year yields unchanged.

On a calendar year basis, there has been a change in leadership so far this year with the UK and Japanese markets performing well.  At the margin these markets are also benefiting from a shift away from dollar assets with US dollar trade-weighted index (DXY) down 8% for the year.

US macro and markets

Consumer sentiment weakened

The University of Michigan Consumer sentiment index fell from 53.6 in October to 50.3 in November, nearing a record low in a series that goes back to 1980.

In terms of components, the percentage of respondents expecting a higher unemployment rate over the next year rose to 62%, up from 52% in October.

Consumers’ one-year inflation expectations rose slightly to 4.7% from 4.6%, with one third of respondents expressing concerns regarding weak income levels, marking the highest proportion since 2020.

While consumer sentiment is expected to improve following the eventual resolution of the US federal government shutdown, there are ongoing concerns that previous over-hiring, labour hoarding, and productivity gains related to artificial intelligence may contribute to a jobless economic expansion.

Jobs market: Mixed but soft

The Challenger Job Cuts report indicated continued weakness in the US labour market, reflecting the highest year-to-date job cuts since the onset of the pandemic.

Elsewhere, the October ADP employment report registered a modest recovery in private sector hiring; however, the three-month average remains below breakeven estimates for employment growth.

The Fed

The Fed served up another 25 basis-point (bp) rate cut but could not quite decide what to do next.

This is the fifth cut, so total rate cuts have amounted to 1.5% in this current cycle. The vote was 10–2, but the dissents were in opposite directions.

• Stephen Miran (Governor) wanted a larger cut of 0.50%.
• Jeffrey Schmid (Kansas City Fed President) wanted no cut at all.

With a US government shutdown weighing on economic growth, Chair Powell is treading cautiously and has clearly opted for the “let’s just see what happens” approach until more data arrives on his desk.

Tariff Troubles

The Supreme Court is currently examining the Trump Administration’s $195 billion tariff initiatives, which have broad implications for international trade.

According to betting agency Polymarket, there is a 75% probability that the court will impose restrictions on the emergency powers granted under the International Emergency Economic Powers Act (IEEPA), despite being stacked with Republican-friendly judges.

It is likely that the imposition of new tariffs would slow as a result, although the Trump Administration does have alternative avenues to pursue them.

Ultimately, the Supreme Court’s ruling will be critical, with a key question being how tariffs already paid would be treated and the US government potentially being on the hook for billions of dollars of refunds.

China macro and policy

China’s trade engine hit a speed bump in October, with both exports and imports slowing down.

Exports decreased by 1.1% compared to the previous year, contrary to analysts’ expectations for an increase. Headline exports dropped for the first time since February. Shanghai port activity hit its lowest level since April.  

Imports were also subdued, falling short of expectations with growth of just 1% year-on-year (consensus: 3%, prior: 7.4%). China’s imports from the US declined at the fastest pace since September 2019.

The figures probably don’t capture the US-China trade de-escalation.

Commodity imports remained resilient, while high-tech goods were the main drag.

Agricultural imports showed improvement and could continue to recover in the coming months, supported by China’s resumption of purchases of US farm products

Australia macro and policy

The RBA kept the cash rate at 3.60%, as expected.

The latest Statement on Monetary Policy indicates lingering inflation pressures, prompting cautious policy and higher CPI forecasts, with trimmed mean inflation staying above 3% until mid-2026.

Unemployment projections edged up, but labour market tightness persists. The RBA trimmed GDP estimates.

Analysts now expect a prolonged rate pause, seeing May 2026 as the earliest possible cut. The RBA’s hawkish tone shifted rate cut odds from 97% by June 2026 to 74%.

The recent Q3 inflation print (+3.2% versus +3.0 expected) might well be considered transitory, reflecting the removal of government electricity subsidies (with the housing component accounting for approximately 20% of the CPI) and increases in council rates. These factors might well reverse in Q4.

However, RBA Governor Michelle Bullock noted that “just below three per cent is not good enough for the board.

“The question we should be asking is – if we ease much further, do we think inflation will continue to come down?” she said. “If you take our forecast at face value, I think that’s a bit marginal.”

Australian home prices climbed at the fastest pace in more than two years in October, underscoring how a resurgent property market threatens to complicate the RBA’s efforts to cool inflation.

Markets

US

Over 80% of S&P 500 companies have reported Q3 results, with 82% beating earnings estimates (above the recent 73% average) and 67% surpassing sales projections.

Despite robust performance, US stocks saw limited gains for positive surprises and sharper declines for misses.

Major AI hyperscalers such as Microsoft, Google, Amazon, and Meta reported earnings and increased their annual capex guidance, indicating greater investment in AI infrastructure.

The tech giants are on a capex spree, each trying to out-build the others for AI domination.

• Microsoft plans a 59% jump in FY26 spending.
• Google will spend $91–93 billion on AI hardware next year, a 75% leap from the previous year.
• Meta aims to spend $115 billion by 2026.

This is all despite unclear payoffs from generative AI.

These are cashflow-rich companies; however, the high-grade bond market is also helping to fund DC rollout.

The Beignet Investor LLC’s – a joint venture between Blue Owl Capital and Meta – is issuing US$27.3 billion in debt to fund a 2.064-gigawatt data centre campus in Louisiana.

This is the largest US corporate bond deal in history for a single project financing.

Australia

The S&P/ASX 300 finished the week -1.3% with weakness in small caps (-3.7%), materials (-3.1%) and tech (-4.3%).

Financials (+0.3%) were muted but outperformed, buoyed by strength in the Banks (+1.6%) amid a busy reporting season, despite a notable drop from Macquarie Group (MQG) owing to an earnings miss.

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About Peter Davidson and Pendal listed property strategies

Pete Davidson is Pendal’s head of listed property.

Peter has held financial markets roles spanning portfolio management, advisory and treasury markets over more than three decades.

Specialising in the Property, Retail, Insurance and Infrastructure sectors, he has previously held roles with Midland Montagu Australia, Daiwa Securities and has served as the non-executive director of the Industry Superannuation Property Trust.

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

Pendal Property Securities Fund invests mainly in Australian listed property securities including listed property trusts, developers and infrastructure investments.

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About Pendal Group

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

Contact a Pendal key account manager

True defensiveness isn’t about sitting still, it’s about staying ready, argues Pendal’s head of income strategies, AMY XIE PATRICK

• Learn more about Pendal’s income and fixed interest capability
• Find out about Amy Xie Patrick’s Pendal Monthly Income Plus fund
• Find out about Pendal Dynamic Income Fund

“DEFENSIVE” is one of the most overused — and misunderstood — words in investing.

Too often, it’s mistaken for caution, safety, or simply holding more cash.

But being defensive shouldn’t mean being idle.

At Pendal, we see defensiveness as both a means and an end: it should protect capital in times of stress and keeps investors positioned to benefit when conditions improve.

It’s a waste to steer through a downturn successfully, only to sit out the recovery. If your portfolio never participates when markets rebound, you may as well have stayed in cash.

True defensiveness brings together capital preservation, liquidity and income — so investors can stay invested with conviction through periods of fear and recovery.

At Pendal we think about defensiveness through these three key facets, each integral to how we manage our income funds:

Capital preservation

Capital preservation is the first and most visible line of defence.

It isn’t about prediction — it’s about process. Markets will always deliver surprises, like this year’s “Liberation Day” tariff shock.

These events can’t be forecast, but portfolios can be prepared.

Our process is built on a continuous assessment of risk versus reward. When that balance turns unfavourable, we don’t wait for the headline — we step aside.

Earlier this year, as US equity markets stretched far ahead of economic fundamentals, we steadily reduced exposure to higher-risk assets such as equities, high yield and emerging markets.

Our process is designed to make the tough calls before conditions force your hand. Good decisions are made in advance, not in the heat of the moment.

By early May, the situation reversed. Valuations had adjusted, risk premiums had rebuilt, and our assessment of fundamentals hadn’t materially worsened.

That shift — not a change in macro view — gave us the conviction to re-enter markets and participate in the recovery.

Another important source of defensiveness comes from how we use duration.

We don’t treat bonds as inherently “defensive,” or assume they will automatically offset equity weakness.

Bonds are not slave assets to equities, and there’s nothing in duration that guarantees it performs when equities fall.

Our active duration process is grounded in understanding what fundamentally drives bond returns: growth and inflation.

That means we can harness the power of duration when it helps and sidestep it when it harms, ensuring duration contributes to defensiveness rather than detracts from it.

Avoiding the drawdown and capturing the rebound isn’t about luck or market timing. It’s the result of a disciplined, repeatable process grounded in risk-reward.

Income

For many investors — especially in retirement — income is synonymous with defensiveness.

A consistent stream of payments provides stability and confidence even when markets are unsettled.

But income is a return like any other — and higher yield usually means higher risk.

If an income fund is to behave defensively, its income engine must be built on high-quality foundations: lending to businesses with robust balance sheets and dependable cash flows that can service and refinance debt in all conditions.

Reaching lower in credit quality can boost yield temporarily but often erodes capital stability when volatility strikes. In prolonged stress, even the income itself can come under threat.

That’s why Pendal’s income portfolios are anchored in investment-grade credit with a strong preference for senior-ranking bonds — securities that should keep paying through volatility and make income a genuine source of defensiveness.

Liquidity

Liquidity — the ability to turn assets into cash quickly and with minimal penalty — is another vital, often overlooked facet of defensiveness.

Having liquidity when others don’t provides options. It lets us move from defence to offence the moment value re-emerges.

Lower-quality bonds tend to be less liquid and compensate investors with a liquidity premium. We deliberately leave some of that premium on the table because flexibility is worth more. A liquid portfolio can act in volatility; an illiquid one can only endure it.

We also ensure our portfolios’ liquidity matches that of our funds: daily-liquid products backed by publicly traded, transparently priced securities.

Defensiveness, clarified

If 2025 has shown anything, it’s that markets continue to swing between caution and optimism.

Headlines have been plentiful; genuine opportunities rarer.

Our high-conviction process has delivered by:

• Stepping aside when the risk–reward balance deteriorates
• Using duration actively — harnessing it when it helps, reducing it when it harms — so it becomes a source of defensiveness rather than a drag
• Re-engaging swiftly when value reappears and fundamentals support it
• Maintaining liquidity and income stability throughout

That’s what we mean by defensiveness: portfolios that preserve capital, sustain income, and stay flexible enough to adapt — turning resilience into readiness, and caution into opportunity.

True defensiveness isn’t about sitting still — it’s about staying ready.

If your definition of “defensive” feels due for an upgrade, Pendal’s Income & Fixed Interest team would welcome an opportunity to talk about how we build portfolios that protect and participate.

You can contact us through the client account team here.

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

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

HEADLINES are dominated by trade and AI at the moment – two structural forces with the potential to reshape markets for years to come.
Once driven by economic efficiency, global trade flows are now being redefined by national security priorities.

Tensions eased modestly in this respect after last week’s Trump–Xi meeting signalled de-escalation rather than confrontation.

Meanwhile the big four “hyperscalers” – Microsoft, Amazon, Alphabet and Meta – reported earnings that underscored a new phase of AI-led investment, with capex budgets revised meaningfully higher.

This helped lift the S&P 500 (+0.7%) and NASDAQ (+2.3%). Though flow data shows the rally remains narrowly led and heavily hedged – a “liquid, levered, but not long” market where resilience reflects liquidity and capital concentration rather than broad conviction.

The Fed’s “hawkish cut” last week reinforced this tone of cautious optimism.

Fed chair Jay Powell compared policy to “driving in fog”, signalling the Committee’s growing division over the December meeting.

Having retraced only 28% of its prior tightening, the Fed remains cautious by global standards, leaving the economy to run on its own amid a soft patch of moderating job growth, flat housing activity and an ongoing government shutdown.

Yet inflation expectations remain well-anchored, and the AI capex boom continues to deliver productivity and margin gains that help offset cyclical softness.

Looking ahead, provisions in Donald Trump’s “One Big Beautiful Bill Act” tax bill and a strong US fiscal impulse into 2026 should broaden growth, supporting the case for a gradual move toward neutral policy settings.

Domestically, the ASX 300 fell 1.5% last week, weighed down by a hotter-than-expected CPI print which pushed back RBA easing expectations and pressured rate-sensitive sectors.

Healthcare was the biggest drag, led by CSL’s downgrade, while the tech sector underperformed on renewed regulatory scrutiny.

Within Australia, the RBA is firmly on hold, GDP growth is stabilising, and market leadership is rotating.

Looking ahead, a mix of mega-cap capex, a measured Fed easing cycle, and resilient domestic growth should provide underlying support – reinforcing the case for maintaining balanced portfolios and focus on stock selection after a volatile month.

US macro and policy

The ongoing disconnect between a softening labour market and resilient GDP growth remains one of the key macro puzzles.

Population growth in the US has slowed from around 0.7% per annum in the 2010s to just 0.3% in 2025, with net immigration collapsing since 2023 as policy reforms curtailed inflows.

Despite this demographic drag, activity has remained firm – the Atlanta Fed GDPNow model currently estimates Q3-25 GDP growth at 3.9% (as at 27 Oct 2025).

We have good visibility into US fiscal spending in 2026 driven by the Big Beautiful Bill, providing a tailwind to the economy throughout the year.

At the same time, corporate profitability has continued to rise.

Margins and revenue per employee have expanded sharply, particularly in the technology sector, where the decline in selling, general and administrative (SG&A) expenses has accounted for roughly two-thirds of total margin expansion since 2020.

This combination of slowing employment growth, solid output and widening margins suggests productivity – whether genuine or mismeasured – is quietly improving beneath the surface.

So what does this mean for markets?

The immediate focus has been on the outlook for rates.

While the Fed delivered a 25bp cut last week, Chair Powell’s tone was notably more hawkish than expected.

He stressed that a December move was “far from a foregone conclusion”, highlighting the wide range of views among governors and the growing challenge of operating without reliable economic data amid the full government shutdown.

Pressure is mounting as funding for SNAP food stamps lapses and air traffic controllers miss pay cheques, while key data releases – including durable goods, GDP, and unemployment claims – have been delayed, compounding uncertainty.

The expected terminal rate edged higher to about 3.1%. Markets pared back expectations for a December cut from near certainty to around 60%.

The market interpreted Powell’s remarks as reflecting division in the rate-setting Federal Open Market Committee, rather than a material change in stance.

A December cut remains the base case, with softer labour-market conditions and underlying core PCE inflation now near 2.2-2.3%.

Without fresh data, the Fed’s next decision will hinge on its assessment of downside labour risks rather than hard evidence.

A prolonged shutdown could delay easing into early 2026, but the broader trajectory remains toward lower rates – reinforcing near-term USD support and a higher-for-longer front end, with scope for renewed steepening once clarity returns.

Powell’s hawkish tone may also have been intended to balance a more dovish shift on the Fed’s balance sheet.

The Fed confirmed that quantitative tightening will end on 1 December, with paydowns from mortgage-backed securities now reinvested into Treasury bills rather than allowed to roll off.

The decision follows recent funding market tightness, with repo and Fed funds rates trading above target.

Powell noted that the balance sheet will be held “constant for a time, but not a long time”, with net T-bill purchases and modest balance sheet expansion likely from March.

The adjustment effectively adds another 25bps of easing in liquidity terms, even as the Fed maintains a cautious tone on rates.

Australia macro and policy

Australian economic data last week delivered a strong upside surprise on inflation, reshaping the near-term policy outlook.

Q3 CPI came in well above expectations, with trimmed mean (the RBA’s preferred measure of underlying inflation) rising 1.0% q/q and 3.0% y/y, driven by persistent services and housing cost pressures and sitting at the top end of the RBA’s 2-3% target band.

This effectively rules out any RBA easing in November following Governor Michele Bullock’s comment that a print of 0.9% q/q would be a “material forecast miss”.

The tone ahead is likely to remain hawkish, with inflation forecasts revised higher.

Producer price data released late in the week reinforced this picture, showing upstream cost pressures running ahead of consumer prices.

Barrenjoey noted that construction and services sectors are seeing the broadest cost increases, with over 60% of service industries recording PPI growth above 3% – a dynamic inconsistent with inflation sustainably at target.

This points to cost-push inflation becoming more entrenched, suggesting limited relief from tradeables and little evidence of a deflation pulse from China.

The broader economy remains on a gradual recovery path, with real GDP growth tracking around 2% y/y in Q3, supported by improving private-sector demand and resilient household spending.

Credit growth has stabilised, household disposable income rose 4% y/y aided by wage gains and tax relief, and businesses continue to report solid profitability.

Momentum is shifting from public to private demand, but the persistence of upstream price pressures implies the RBA will need to keep policy restrictive for longer – with any easing now unlikely before mid-to-late 2026.

Hyperscale capex

Last week saw large hyperscalers Microsoft, Amazon and Alphabet all report an acceleration in cloud growth rates, with Microsoft noting that revenue growth is now constrained by capacity rather than demand.

Capex expectations were lifted across the board (including Meta), with each signalling higher investment in FY25 and FY26 to expand AI and cloud infrastructure.

Remaining Performance Obligations (“RPO”) – contracted services that have not yet been delivered or recognised as revenue – across the group of companies have surged to over US$1.2 trillion, up nearly 100% year-on-year, highlighting demand running well ahead of supply.

This backlog provides a powerful lead indicator for continued hyperscale capex through 2026, underpinning sustained demand for data centres, semiconductors, and power infrastructure.

The acceleration in bookings reflects customers locking in long-term AI and cloud infrastructure commitments, particularly multi-year microchip and compute contracts.

Because these obligations must be fulfilled with physical infrastructure, RPO growth provides a forward-looking indicator for hyperscale capex.

Investment bank advisory firm, Evercore have done work showing that the ratio of trailing twelve month (TTM) cloud bookings to TTM capex has improved materially, suggesting that rising investment is being driven by demand signals rather than speculative build.

In practical terms, strong RPO momentum implies that hyperscale capex will remain elevated through 2026 as providers expand data centre capacity to service backlog conversion.

Sustained RPO growth offers some confidence in the durability of cloud and AI infrastructure investment, providing visibility into the broader hyperscale spending cycle that anchors data centre construction, semiconductor demand, and power infrastructure growth.

Given the sheer scale of spending, which now exceeds US$400 billion annually, and the circular financing deals emerging, many have drawn parallels with the fibre build-out of the late 1990s.

During the dot-com boom, roughly 80% of the fibre cables installed remained “dark” even four years after the market peaked.

By contrast, today’s AI infrastructure cycle currently sees demand running well ahead of supply.

While the numbers sound extraordinary, history suggests this cycle may have further to run.

Past technology revolutions saw investment impulses peak at between 2–5% of GDP.

Generative AI investment, by comparison, is still around 1% of GDP, implying we remain in the early innings of this build-out.

Importantly, these cycles typically precede productivity booms by several years, reinforcing the view that the current phase is about capacity creation rather than return realisation.

There are several implications for markets, including how record capex reshapes sectors (for example, real estate and utilities) and creates entirely new ones such as “neo-clouds.”

Data centre construction has already overtaken office development in the US, while power demand from data centres is set to rise more than 10% per annum through 2040 — highlighting a structural shift in capital flows and infrastructure priorities.

The labour market implications are less certain. Anecdotes abound:

• Amazon reportedly reduced 10% of its head office workforce, citing AI productivity gains
• a major shipping company lifted shipments per employee by 1.5x, implying a ~30% reduction in headcount
• and a mortgage lender claimed sixfold efficiency gains in underwriting, saving US$40 million annually

Yet, as technology investment firm Coatue and others note, many of these “AI productivity” stories are hard to disentangle from cyclical utilisation effects or rate-driven cost cuts.
In some cases, the gains may be as much about management narrative as machine learning.

Still, early evidence suggests productivity uplift is real, even if uneven.

Academic studies and company anecdotes converge on an estimated 25–30% productivity boost from AI adoption – gains that, if sustained, would meaningfully influence GDP growth, labour market dynamics, and ultimately the trajectory of interest rates.

Over the long term, history offers some reassurance that humans and markets adapt; more than 60% of jobs performed today did not exist in 1940, underscoring how technological shifts tend to reallocate rather than eliminate work.

US-China trade

The long-anticipated meeting between President Trump and President Xi produced exactly what markets were hoping for — stability, not escalation.

After 90 minutes of talks, both sides signalled a commitment to maintain the status quo of “managed decoupling.”

China framed the outcome as a one-year trade truce extension, with Trump to visit Beijing in April and Xi invited to Washington in 2026. Key deliverables included:

• Xi’s pledge to curb fentanyl exports in exchange for Trump cutting the related tariff from 20 % to 10 %.
• Suspension of China’s planned rare-earth export restrictions, matched by Trump’s decision not to impose 100 % tariffs.
• Removal of certain entity-list designations and port fees, and a commitment by China to purchase more U.S. soybeans.
• A framework for renewed dialogue on chip exports and potential U.S.–China energy deals.

In aggregate, US research firm Strategas estimates the package equates to roughly US $16 billion in tariff relief and signals a return to deal-by-deal pragmatism rather than confrontation.

Markets read the outcome as a tactical de-escalation, mildly supportive for global cyclicals and commodities.

For Australia, the temporary easing of rare-earth tensions may weigh on prices in the short term, but the meeting reaffirmed the strategic importance of diversifying critical-mineral supply chains outside China — a long-term structural positive for producers such as Lynas and Iluka, which remain central to Western supply-chain resilience.

The de-escalation between US and China could also be supportive for the Aussie dollar.

Despite a sharp decline in the US dollar through the first half of 2025, AUD/USD has failed to benefit – a notable divergence for a traditionally high-beta “shock absorber” currency.

Unlike past crises where the Aussie dollar rebounded 40–50% within a year, it has made no net progress since the 2024 US election.

The difference lies in the nature of this shock: a trade-war-driven slowdown that disproportionately affects Australia’s China-linked export base.

With global growth, employment, and inflation indicators now stabilising, the worst appears over, and the Aussie dollar is well positioned to stage a gradual recovery, supported by improving geopolitical tone following the Trump–Xi summit and narrowing rate differentials as the RBA ends its easing cycle.

Macquarie Group, for example, expects it to rise to US$0.67 by end-2025 and US$0.70 by end-2026.

Equity market flows and rotation

Equity market flows in the US through the past week suggest that activity levels remain high, but conviction in a directional outlook remains low.

Gross trading volumes saw the largest increase in nearly seven months, with short sales in macro products (primarily ETFs and index futures) slightly outpacing long buys.

ETF short interest rose a further 7% on the week (+8.7% month-on-month), led by small-cap, industrial and credit exposures.

At the same time, single-stock activity remained net positive for a ninth week out of ten, led by short covering in Information Technology – the largest in four months – as investors rotated back toward mega-cap AI names following strong results from Amazon, Apple and Alphabet.

In contrast, financials flipped to the most net-sold sector after six weeks of buying, while consumer names were under pressure as more companies flagged signs of a spending slowdown.

Market positioning remains elevated but cautious – gross leverage declined slightly to 215% (96th percentile over 3-years), but net leverage lifted to 53% (48th percentile over 3 years). This indicates that funds are staying busy but not taking a directional view on markets.

The long/short ratio of 1.65x sits near multi-year lows, reinforcing that markets are still trading on relative value rather than macro conviction.

Notably, the put-call skew in the Mag7 complex inverted for the first time since December 2024, signalling extreme optimism and the potential for short-term consolidation as positioning becomes one-sided.

Across ETFs and factor strategies, the chase for growth remains evident – momentum products have seen six consecutive weeks of inflows while minimum-volatility ETFs continue to experience outflows.

This suggests retail investors are adding risk despite a more cautious institutional positioning.

Flows into broad tech and AI-infrastructure themes have persisted, while selling has emerged in semiconductors and rare earths after outsized gains.

Overall, flow data point to a market that remains liquid and well-hedged, with rotation playing out within equities rather than into equities.

Investors are trimming exposure to sectors leveraged to a cutting cycle — such as small caps, cyclicals, and rate-sensitive financials — and rotating back toward structural growth leaders in technology and AI.

This supports a view that the market’s resilience is being driven more by positioning and capital concentration in mega-cap tech than by broad-based confidence in the macro outlook.

Markets

In Australia, there was meaningful dispersion across sectors and factors.

A hotter-than-expected CPI print unsettled rate-cut expectations and drove a sharp style rotation, with Value and Profitable Growth factors outperforming while Momentum lagged.

The shift suggests investors are favouring earnings visibility and balance-sheet strength over macro beta, consistent with a more cautious sentiment backdrop.

Low Volatility and Quality factors also underperformed as the inflation surprise weighed on defensives.

Overall, the pattern points to a market that remains fundamentally resilient but more selective, with rotation now favouring quality Value and large-cap Growth over crowded Momentum trades.

At a sector level, we saw strength in energy (particularly uranium), consumer staples (on trading updates from Woolworths and Coles) and resources.

The U.S. government signed a strategic partnership with Westinghouse to invest >US$80 billion in building nuclear reactors as part of a broader effort to secure an energy supply chain and advance alternative energy research.

This initiative signals a long-term commitment to nuclear power, which is expected to drive sustained demand for uranium.

For uranium miners, the flow-through impact is significant: higher reactor build-out translates into increased uranium consumption, supporting stronger pricing fundamentals and incentivizing production expansion.

In the medium term, this could tighten supply-demand dynamics and bolster valuations across the uranium mining sector.

ASX-listed uranium miners like Boss Energy and Paladin rose on the news.

Meanwhile, rare earths names Lynas and Iluka fell as China rare earths export restrictions being were delayed 12 months following the Trump / Xi meeting.

The pullback in gold sparked debate over whether the sharp price reaction reflected panic selling or technical flows.

Trading data shows it was largely momentum-based selling by systematic and quant funds as stretched positioning unwound.

By late October, momentum indicators had normalised, suggesting the worst of the unwind is complete.

Momentum traders remain net long, while retail investors continue to hold substantial positions — pointing to stabilised positioning but limited fresh buying power unless macro catalysts, such as lower yields or a weaker USD, emerge.

REITS were down 4.3% last week, following the surprise Q3 inflation read, with the largest fall in residential developers Mirvac (MGR, 5.9%) and Stockland (SGP, -5.6%).

The stock price moves were exaggerated relative to actual moves in interest rates – bank bills rose +0.14bps to 3.64% and 3 year swaps +0.14bps to 3.48%.

It is worthwhile noting that bank margins have contracted by a similar amount over the course of calendar 2025, so weighted average cost of debt is not really rising

Meanwhile the residential market is strong. Last week, small cap residential developer, Cedar Woods, reported Q1 residential landsales that are up 17% versus last year. Sales on hand increased 15% over the past quarter and now represent over 90% of management’s forecast settlements for FY26.

Western Australia made up most Cedar Woods’ sales for the quarter with average house prices in Perth >30% in the past two years. Southeast Queensland continues to make up most of the balance, with that region having shown similar price growth dynamics to WA.

Mall REITS actually benefit from modest hikes in inflation – about 70% of specialty rents are linked to CPI and Scentre Group (SCG) has recently reported rising occupancy levels at 99.7%.

AGM season is well underway with trading updates alongside quarterly results.

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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. 

Contact a Pendal key account manager here

As demand for AI accelerates, every part of the market will see businesses that win and lose. The trick is telling the difference. ELISE MCKAY explains

• AI spending already at 1 per cent of global GDP
• But there will be winners and losers in every sector
• Find out about Pendal’s Australian share funds

ARTIFICIAL intelligence is rapidly maturing into a durable part of the business landscape, with adoption spreading across industries and reshaping how companies operate, argues Pendal’s Elise McKay.

Despite bubble talk in some quarters, AI-related capital-spending already accounts for about 1 per cent of global GDP notes McKay, portfolio manager for Pendal Horizon Sustainable Australian Share Fund.

After recently meeting with a range of CEOs and technology leaders in the US, McKay is convinced the scale of spending marks a structural shift that will reshape industries, drive long-term productivity gains and create wide gaps in company performance.

However investors will need to carefully distinguish between companies that will adapt – and those that cannot.

“Demand for AI is accelerating – and generative AI tools are already changing how well-established businesses are operating,” says McKay

“But there are going to be winners and losers in every sector.

“The key for investors is building a framework that allows us to think about who will be a winner versus who will be a loser.”

Unprecedented capital investment

History shows capital deployment of this scale ultimately drives industry change and higher labour productivity.

“The questions investors need to be asking about generative AI is not just how big the investment cycle will be and how long it will last – but also what are the flow-on impacts to different parts of the market?

“Where will it take investments from? Where will it cause other sectors to grow?

“Where will it create entirely new sectors?

“And the biggest unknown is to what extent labour markets adjust – how are people retrained, re-educated and do they need to find new roles?

“All this creates change – at the heart of what we do as investors at Pendal is anticipate change, looking at these structural forces and how they create dispersion in outcomes.”

Portfolio opportunities

Infrastructure spending alone creates direct opportunities, says McKay.

The scale of AI investment is creating persistent supply-demand imbalance with businesses reporting a structural shortage of AI compute capacity.

Power use by data centres, the facilities that house the servers and cooling systems required for AI compute, is projected to grow 165 per cent by 2030 compared to 2023 levels.

That means US electricity demand, after years of flat lining, is now growing by around 2.5 per cent annually, with Europe also accelerating, requiring significant new transmission and an additional 20,000 trained workers.

Enterprise adoption lags capability

But while the infrastructure is being built at speed, there are emerging signs that some companies are struggling to use it effectively, says McKay.

Academic studies indicate AI’s potential to lift labour productivity by 25 to 30 per cent, but just 5 per cent of companies are reporting positive returns from agentic AI implementations – where AI systems take actions autonomously.

AI excels in domains with clear success criteria like writing software or following documented procedures, but where nuanced work and human judgment is required, success rates drop.

The risk of getting implementation wrong is material, and companies that deploy AI agents poorly risk customer backlash, says McKay.

“There’s been a lot of focus on the long-term viability of software, but we think the critical factor is whether incumbents can evolve effectively to adapt to the new AI-driven world.”

Identifying AI winners – a framework

McKay says distinguishing genuine AI opportunities from hype requires assessing how companies approach implementation across five interconnected areas.

The starting point is strategic intent. Successful companies align their AI investments with existing competitive advantages rather than treating the technology as a standalone initiative.

But strategy must be accompanied by capability – meaning quality data, skilled technical talent, and the right computing infrastructure to develop and deploy AI solutions at scale.

The third factor is execution including leadership commitment, organisational culture, and frontline teams prepared to implement AI tools in practice.

McKay says investors should also look for evidence of measurable returns and disciplined capital allocation, not just rising AI spending. Companies must demonstrate that investment translates into productivity gains or revenue growth rather than simply higher costs.

Finally, governance and risk management protect against implementation failures that may damage reputation or breach regulatory requirements.

“The build out of the internet and the electric motor peaked at around 1.5 to 2 per cent of GDP per annum – we are still not there yet with AI. This kind of capex creates opportunity and change.

“We know humans are adaptable – 60 per cent of jobs today didn’t exist in 1940s. So as this general-purpose technology gets built out, new opportunities will emerge.

“The question is: how do we as equity investors take advantage of that opportunity?”

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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. 

Contact a Pendal key account manager here

What does a lift in September-quarter inflation mean for rates? Pendal’s head of government bond strategies TIM HEXT explains

• Browse Pendal’s fixed interest funds

AUSTRALIA experienced a surge in inflation last quarter.

Headline inflation printed at 1.3% and trimmed mean (or underlying) was 1% for the three months to September.

This was slightly higher than expectations of around 0.85% for trimmed mean.

The annual numbers look more dramatic because the very low headline prints from last year’s electricity subsidies drop out.

Headline went from 2.1% to 3.2%. Underlying only moved from 2.7% to 3%.

Either way the media headlines are easy to write: “Inflation above the RBA target band”.

No doubt many will now be calling for the end of the rate-cutting cycle.

Next week the Reserve Bank will need to revise up its year-end forecasts for inflation from 2.6% trimmed and 3% headline to more like 2.9% and 3.3%.

This rules out any cuts this year.

But we must be forward looking.

What about 2026 ?

The good news is that inflation will moderate in Q4 and early 2026.

Early estimates put headline and underlying closer to 0.5% and the pace to move back to RBA target.

The full monthly numbers – which will be released from November onwards – will give us an early picture.

If employment remains weak the Reserve Bank would be back in play. 

The key will be the interaction between a stronger consumer and employment.

It’s too early to call the end of the rate cut cycle and we still expect Australian rates to converge with US rates nearer 3% by mid next year.

A breakdown of Q3 CPI

For those interested in the breakdowns, below we explain where the main source of inflation is coming through.

 1. Housing

Almost half of the headline inflation increase came from housing – even though it makes up only 22% of the CPI basket.

The Bureau of Statistics singled out dwelling prices as a key mover:

“Over the past 12 months project home builders have responded to a subdued new home market by increasing incentives and promotional offers to entice new business.

“In the last three months, a slight uptick in demand has seen project home builders in some cities reduce promotional offers and raise base prices.”

At 7.5% weight this pickup alone added 0.1% to CPI.

Property rates went up 6.3% as annual council rate rises are pushing up well ahead of inflation, adding 0.2% to the CPI.

Electricity prices were up 9% on the quarter as subsidies were removed and annual price reviews kicked in.

2. Recreation and culture

Travel prices have picked up over the quarter, up almost 3%. This added almost 0.2% to CPI.

3. Goods prices

Goods prices were up 1.3% on the quarter and are now at 3% over the year.

However, stripping out volatile items like food and tobacco the pace is nearer 2%.

If car prices resume a moderating trend then good prices should settle back towards the usual pace of 1-1.5%.

What it means for borrowers and investors

The RBA will need to talk tough on inflation in next week’s statement.

Question after question will be asked about the end of the rate cycle, or even when will the first tightening be. This is a kneejerk reaction.

Similar to the US, we think this is a short-term surge in inflation.

While new dwelling inflation will stay tight – helped by the government yet again stoking demand more than supply – other area are less of a medium-term concern.

By mid next year inflation should be back at 0.5 to 0.6% per quarter, comfortably within the RBA band.

Employment will then dictate if more cuts are to come.

As short rates move above cash we will be using the opportunity to lengthen duration.

 

 

If you’d like to hear more about how Pendal’s Income & Fixed Interest team is positioning for this environment, please contact us through our accounts team

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About Tim Hext and Pendal’s Income & Fixed Interest boutique

Tim Hext is a Pendal portfolio manager and head of government bond strategies in our Income and Fixed Interest team.

Tim has extensive experience in banking, financial markets and funding including senior positions with NSW Treasury Corporation (TCorp), Westpac Treasury, Commonwealth Bank of Australia, Deutsche Bank, Bain & Co and Swiss Bank Corporation.

Pendal’s Income and Fixed Interest boutique is one of the most experienced and well-regarded fixed income teams in Australia.

Find out more about Pendal’s fixed interest strategies here

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About Pendal

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

In 2023, Pendal became part of Perpetual Limited (ASX:PPT), bringing together two of Australia’s most respected active asset management brands to create a global leader in multi-boutique asset management with autonomous, world-class investment capabilities and a growing leadership position in ESG.

Contact a Pendal key account manager

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

• Find out about Pendal Focus Australian Share fund
• Find out about Pendal Property Securities Fund

Earnings optimism, easing trade tensions and expectations of US rate cuts continue to support equity markets.

The S&P 500 gained 1.9% last week and the Nasdaq added 2.3% – their 34th record highs for the year.

While equity markets are responding positively to strong earnings, overall investor sentiment remains mixed.

Investors are hoping we’re at the early stage of the economic cycle, especially with the US Federal Reserve beginning to cut rates.

But there’s anxiety we might be late in the cycle – particularly if AI-driven returns fall short, capex doesn’t broaden out or more credit defaults emerge.

Despite markets hitting all-time highs, sentiment still reflects a degree of caution and fear.

While the government shutdown continues to limit US data releases, the Consumer Price Index was published on Friday night, since it’s a critical reference point for federal and financial contracts.

September CPI rose 0.3%, with the core measure up 0.2% month-on-month. The consensus forecasts were +0.4% and +0.3%, respectively.

The yield on US 10-year Treasury bonds finished the week at 3.99%, down 20bp since the government shutdown began almost a month ago.

CNN polling suggests President Trump’s approval rating has lifted a tad since the shutdown began. Another poll shows most Americans favour the shutdown.

Markets continue to expect two US rate cuts in 2025 – 25bp next week and 25bp in December.

In Australia the ASX200 gained 0.2%. Energy (+5%) led the market on a jump in oil prices (Brent crude +7.6%), assisted by US sanctions on two large Russian producers.

Gold had an interesting week, suffering its biggest drop in five years, though it’s still up 57% this year.

US macro and policy

Available data points painted a mixed picture.

The September CPI miss versus consensus was mostly driven by shelter – particularly Owners’ Equivalent Rent (OER) – a measure of how much rent a homeowner would pay to live in their own property.

OER rose 0.13% while rent increased 0.19%. These are the smallest monthly increases since November 2020 and March 2021, respectively.

OER seemed like a large historical outlier compared to 0.38% in the prior month and the 12-month range (+0.27% in May and +0.41% in July).

It’s a huge component of the index, accounting for 26% of overall CPI, 33% of core CPI, and 44% of core services CPI.

The headline CPI gain was the third-biggest sequential increase this year (behind January and August), but the details do not give cause for concern about a persistent reacceleration in inflation.

Among the components that rose the most in September, the majority look as though they were one-offs – for example a 4.1% gain in petrol prices contributed 12bp to the headline.

Meanwhile we saw the October Philadelphia Fed Non-Manufacturing Activity index at -22.2, weaker than the prior month (-12.3).

• This index of general business activity for firms in the Philadelphia region slowed as new orders and sales fell into negative territory.
• The new orders index fell to -17.4, the first negative reading since June. Sales fell to -2.4, the lowest level since May.

Elsewhere, a weekly index of US mortgage applications fell -0.3%, edging lower for the fourth consecutive week.

House purchases were down 5.2% after falling 2.7% the prior week, according to the Mortgage Bankers Association survey.

The average 30-year fixed rate was 6.37%, versus 6.42% in the prior week.

US housing activity is still subdued, despite lower mortgage rates and a cumulative underbuild of an estimated 2-to-3 million since 2010.

Credit

Credit stress is easing, despite some high-profile company failures over the past few weeks.

Bankruptcy filings in the US – a leading hard-data point for credit – are turning down quite sharply.

There are some areas of weakness, in particular autos where 90-day delinquency rates on car loans are picking up. We note the recent credit issues were related to autos (ie First Brands, Tricolor).

However General Motors delivered a stronger result last week and raised EPS guidance. The stock was up 15%, its second-best day since emerging from bankruptcy in 2009.

US GDP and rates

At a broader level, US GDP growth estimates continue to be solid. The Atlanta Fed GDPNow measure is tracking Q3 GDP growth at a seasonally-adjusted annual rate of just under 4%.

Rising stock and property prices have significantly boosted household net worth from $56 trillion in 2009 to $167 trillion at the end of June.

This surge in asset values has been a major driver of the current economic cycle.

Notably, the top 10 per cent of earners now account for nearly half of all consumer spending, highlighting how wealth concentration is shaping demand.

Another area of concern is around the narrowness of US capex. There is basically no growth in corporate capex outside of AI.

With weaker employment growth – and notable areas of weakness such as housing / ex-AI capex – the Fed has shifted its focus from inflation to underpinning the economy. It’s expected to be supportive with rates policy, even with stocks at all-time highs.

At the same time the current strategy for managing the US fiscal deficit and large debt burden appears to be “running the economy hot”, aiming to increase tax revenues at a faster pace than interest payments and overall debt growth.

All else being equal, this is a generally positive set-up for US equities, with strong earnings, broader support, low supply and favourable policy settings.

Australia macro and policy

It seems the economy has evolved differently than the Reserve Bank forecast in August, with stronger household consumption and stickier inflation.

This has brought into question where the neutral rate lies, but the labour market is clearly slowing with unemployment up 50bp to 4.5%

Data from recruitment website Seek shows softness in the labour market with applications per job advertisement at elevated levels, albeit leveling out.

And in a surprise to nobody, data shows house prices continue to rise, now up eight months in a row.

At the five-city aggregate level, values have risen 0.9% over the past 28 days – the strongest growth since October 2023 – assisted by the federal government’s 5% deposit scheme and the prospect of further rate cuts.

China macro and policy

China’s Q3 GDP beat expectations at 4.8% year-on-year, driven by strong exports and industrial production.

But domestic demand remains soft as retail sales and investment lag.

The property market continues to weigh on sentiment, with house prices falling in most cities except Beijing and Shanghai.

China held its 15th five-year policy plenum, covering 2026 to 2030.

The high-level snapshot shows a focus on enhancing technological self-reliance and growing the domestic market in the next five years, to insulate the economy from foreign pressures while building a sustainable engine for growth.

Further detail is likely following the “Two Sessions” in March next year.

Japan

Japan elected its first female prime minister, Sanae Takaichi.

She is seen as a market friendly, right-leaning figure, likely to increase government spending including a plan to increase defence spending from the current 1.2% of GDP to 2% by 2027.

While a positive, it will add to Japan’s already high debt levels.

Commodities

Rare earths

The US and Australia signed a $8.5 billion rare earths deal designed to reduce reliance on China for critical minerals.

The deal includes joint investments in processing facilities and plans to invest $1 billion over the next six months.

The announcement had a mixed impact on Australian rare earth stocks, with Lynas (LYC) up and down, but Australian Strategic Materials (ASM) gaining 20%.

Unsurprisingly, US rare earth stocks fell on the news.

Gold

It was a volatile week for gold, falling 5.4% over the week – its biggest drop in five years.

Gold is still up 57% this year and 6% below its all-time high.

Key drivers include central bank purchasing after the Russia/Ukraine war, seizure of Russian overseas reserves, rising geopolitical tensions and lower interest rate expectations.

Speculative buying also seems to be a major driver. We saw the highest ever quarterly ETF flow into gold in the third quarter.

ETF share of gold demand has risen 900 per cent in 2025 to nearly 20 per cent of overall demand.

While the US dollar-debasement trade is often cited, firmer bond yields would appear to contradict that theory.

Interestingly, the strongest correlation over the past two years appears to be between gold prices and Japanese government bond yields.

Oil

Oil prices surged last week.

WTI crude jumped 5.6% to US$62 and Brent rose to US$66, primarily due to aggressive new US sanctions targeting Russia’s two biggest oil companies, Rosneft and Lukoil.

 

 

These firms account for nearly half of Russia’s crude exports and about 5 per cent of global supply.

The sanctions freeze company assets in the US, ban American business dealings and threaten secondary sanctions on foreign banks and refiners that continue trading with them.

US equities

Earnings have been doing the heavy lifting in 2025 in terms of driving equity market returns, taking over from the price-earnings expansion that dominated much of the previous two years.

The three-month changes in forward revenues and earnings expectations remain very strong.

However, it’s worth noting that analysts surveyed by FactSet believe the Mag 7 is likely to post collective earnings growth of 15% in the third quarter of 2025 – more than double the 6.7% growth of the “Other 493”.

Longer-term, declining net US equity supply conditions since 2011 have probably contributed to US equity market resilience in the face of various shocks.

At the end of the day, US$1.5 trillion in annual defined benefit/contribution payments by households and employers must end up invested somewhere.

All the money that hasn’t made its way into the equity market is going into other assets, including private credit and private equity.

It’s recently been noted there are far more private equity funds in the US than there are McDonald’s restaurants.

If anything blows up in the private space (provided it isn’t systemic), we may see more money back in public markets.

Elsewhere, retail participation in stock markets remains elevated.

One way to gauge retail investor activity is by tracking the volume of stock trades executed through off-exchange platforms that cater to clients like Robinhood.

These trades are on track to account for half of total market volume this year – the first time they’ve reached that level.

US earnings season

It’s still early, with fewer than a third of S&P 500 companies reporting, but 85% have delivered positive surprises – the best showing in four years.

• Netflix’s Q3 2025 earnings results were mixed. It reported strong revenue growth and remains on track to post its best quarter for advertising sales. But it missed earnings expectations due to a one-time tax expense in Brazil cutting margins to 28%, versus guidance of 31.5%.
• Tesla’s 3Q 2025 record deliveries and revenues were above expectations, though margin compression (5.8% versus 9.6% year-on-year) weighed on EPS, impacted by lower prices and reduced regulatory credits.
• General Motors beat consensus estimates for EPS, EBIT and revenue. Volumes were ahead of expectations with North America the bright spot. The company raised FY25 EPS, EBIT and operating cash-flow guidance with management reaffirming capex and battery joint venture forecasts. The company also lowered its FY25 gross tariff impact.
• Intel’s Q3 2025 earnings results marked a strong turnaround. The chip-maker beat both revenue (+3%) and earnings expectations with strong demand for AI compute. However, Q4 gross margin guidance was 36.5% (down from 40% in Q3), due to product mix and Altera deconsolidation.

Australian equities

The ASX trailed the US market, dragged down by Materials (-2.1%). This reflected a fall in gold prices which saw gold miners Newmont (NEM, -15.2%), Ramelius Resources (RMS, -12.9%), Genesis Minerals (GMD, -12.8%), Evolution (EVN, -10%) and Northern Star Resources (NST, -9%) as the five weakest stocks in the ASX 100.

Energy (+5%) did best on the back of a 10.4% gain in Woodside Energy (WDS). Lithium stocks Pilbara Minerals (PLS, +20.5%), IGO (IGO, +9.4%) and Mineral Resources (MIN, +7.6%) were also among the week’s strongest.

Stock news was dominated by the AGM season.

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What does today’s jump in monthly unemployment data mean for investors? Pendal’s head of government bond strategies TIM HEXT explains

• Browse Pendal’s fixed interest funds

THE RESERVE BANK has a dual mandate: keep inflation under control and promote full employment.

Usually the two move in tandem. When more people have jobs, wages go up, and inflation tends to increase.

But right now we’re seeing inflation tick up, while employment is too weak to meet labour supply – which pushes unemployment higher.

It’s not a repeat of the stagflation we saw in 2022-23 – but it may unnerve some.

Today’s release of the September employment numbers show job growth (15,000 jobs) as expected.

But the unemployment rate picked up from 4.3% to 4.5% — a level not seen since November 2021.

This is on a seasonally adjusted basis. On a trend basis it remained at 4.3%. Participation picked up, causing supply of workers to outpace job creation.

Is it a trend?

Now, one month in a volatile series does not a trend make. And survey-based employment reporting is becoming more volatile.

Unfortunately for the RBA, the October report won’t arrive until after its next meeting on Melbourne Cup Day – a meeting that takes place the week after third-quarter CPI is released.

So the RBA will go into the meeting with unemployment 0.2% higher than its year-end forecast of 4.3% — and trimmed-mean (or underlying) inflation likely 0.2% higher than forecast at 2.8%.

We therefore have conflicting rules of thumb.

Generally an upwards unemployment revision of 0.2% would lead to cuts, while a 0.2% revision in inflation would leads to a hike (or at least no cut). 

Quite the dilemma!

Of course, we will wait and see what inflation brings.

Rate-cut expectations

In the meantime, markets are pricing a November cut at 70%, up from slightly under 50% pre data.

A cautious RBA might give it one more employment report and delay a cut till December.

However, December 9 is a bit late to impact the hoped-for pick-up in Christmas spending.

At Pendal we still hold the view the RBA would like to cut in November to give the consumer a boost.

Prior to today we thought a 0.8% or lower Q3 inflation number would be needed and 0.9% would be problematic. After today a 0.9% could even bring the RBA to the table.

Our forecast for Q3 trimmed-mean inflation remains at 0.8%, while a number of forecasters we respect are at 0.9%. So it’s unlikely markets can push the rate-cut odds much higher than 80% near term.

For longer-dated bonds there is more scope to rally back to the low end of recent ranges at 4%, but as always that will depend on global rates.

Into 2026 though we still expect the Australian economy to pick up as tax cuts, rate cuts and improving confidence in housing bring back the good old wealth effect.

Near term, given pricing, we have shifted long duration positions from the front end to the back end of the curve, though we will respect recent ranges. 

 

If you’d like to hear more about how Pendal’s Income & Fixed Interest team is positioning for this environment, please contact us through our accounts team

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About Tim Hext and Pendal’s Income & Fixed Interest boutique

Tim Hext is a Pendal portfolio manager and head of government bond strategies in our Income and Fixed Interest team.

Tim has extensive experience in banking, financial markets and funding including senior positions with NSW Treasury Corporation (TCorp), Westpac Treasury, Commonwealth Bank of Australia, Deutsche Bank, Bain & Co and Swiss Bank Corporation.

Pendal’s Income and Fixed Interest boutique is one of the most experienced and well-regarded fixed income teams in Australia.

Find out more about Pendal’s fixed interest strategies here

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About Pendal

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

In 2023, Pendal became part of Perpetual Limited (ASX:PPT), bringing together two of Australia’s most respected active asset management brands to create a global leader in multi-boutique asset management with autonomous, world-class investment capabilities and a growing leadership position in ESG.

Contact a Pendal key account manager