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

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

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

Sound obvious?

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

So what’s a good company?

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

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

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

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

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

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

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

“Digitalisation is another irrefutable trend,” Wild says.

Time for equities?

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

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

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

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

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

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

Sectors that look promising

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

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

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

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

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

Insurance companies look relatively attractive.

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

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

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

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

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

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

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

---

About Paul Wild and Pendal global equities strategies

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

Paul manages J O Hambro’s Continental European fund.

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

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

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

Contact a Pendal key account manager here

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

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

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

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

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

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

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

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

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

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

Sectors to watch

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

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

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

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

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

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

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

---

About Paul Wild and Pendal global equities strategies

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

Paul manages J O Hambro’s Continental European fund.

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

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

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

Contact a Pendal key account manager here

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

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

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

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

1. The importance of earnings momentum

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

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

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

2. Monetary policy matters

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

3. The green agenda matters

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

4. The importance of digitalisation

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

5. Supply chains and logistics have changed forever

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

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

---

About Paul Wild and Pendal global equities strategies

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

Paul manages J O Hambro’s Continental European fund.

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

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

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

Contact a Pendal key account manager here

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

---

About Paul Wild and Pendal global equities strategies

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

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

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

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

Contact a Pendal key account manager here

Here are the main factors driving Australian equities this week, according to portfolio manager BRENTON SAUNDERS. Reported by head investment specialist Chris Adams

• Find out about Pendal MidCap Fund

EQUITY markets continue to make gains, even with the US large cap indices held back by a negative reaction to Nvidia leading up to and post its result last Thursday morning AEST.

Nevertheless, the S&P 500 gained 0.9% last week, while the small cap Russell 2000 was stronger at 2.8% and the Euro STOXX 50 was up 3.5%.

Energy markets were weaker as the latest round of negotiations between the US and Iran gave some hope for a resolution, with Brent crude down 5.2% for the week.

Further comments from US President Donald Trump over the weekend that “an agreement has been largely negotiated” which involved opening the Strait of Hormuz leant some substance to this, though as of Monday morning this is still yet to be confirmed.

Long-term bond yields in OECD countries continue to rise. This is getting more attention and raising concerns around the possible structural nature of yield increases relating to generic risk premia and the potential for structurally higher inflation.

Domestically, a weaker employment release saw Australian bond yields and implied interest rate trajectories fall.

In contrast, US implied interest rates continue to rise, with 1.5 hikes now priced in by April 2027, reflecting ongoing concerns around rising inflation.

A fair amount of political and market backlash to the Australian budget spilled over into the week, with particular focus on the new macro prudential implications for real estate.

Gulf conflict

There were headlines over the weekend relating to some potential progress with regard to Iran’s contemplation of the latest US 14-point proposal. The details are as yet unknown.

The major ideological points around Iran’s nuclear capabilities and control over the Strait of Hormuz continue to seem intractable.

Both sides are however under pressure to find a solution, but the offramps remain unclear.

There have been some shipments through the Strait in the last week, but volumes remained close to zero.

Both China and Russia suggested that a comprehensive ceasefire in Iran was imperative, in the wake of Russian President Vladimir Putin’s visit to Beijing.

One of the stories of the week has been the precipitous decline in oil and product inventories in the US and other countries.

It still feels like the world could be sleepwalking into a real supply shortage issue without imminent resumption of Middle Eastern exports.

The US Energy Information Administration (EIA) data showed US crude inventories reduced by 7.9 million barrels last week. Including the strategic petroleum reserve (SPR) drawdown, it’s the largest drop in US crude stocks on record. Gasoline stockpiles also fell 1.55 million barrels.

US policy and macro

US data was mostly more of the same; inflation fears are making policy makers more hawkish at the margin and there was little change to the trajectory of real estate (soft) and labour markets (stable).

Housing

US housing data was mixed (and largely unchanged) but continues to reflect a market that is battling with high mortgage rates.

• Residential starts are looking like being down for the fourth year in succession and declined in April as construction of single-family homes dropped by the most in nearly a year, suggesting builders are growing cautious amid higher mortgage rates.
• The main geographical weakness remains in the South.
• Building permits were stronger but driven by multi-family dwellings, while single-family permits declined.
• MBA mortgage applications fell 2.3% for the week and applications for home purchases were down 4.1%, with prospective buyers pulling back as the US 30-year mortgage rate rose 10 basis points (bps) to 6.56%. This mortgage rate has since moved higher to ~6.7% given the move in the US 30-year bond yield.

The Fed

US interest rate expectations continued to increase, with 1.5 rate rises priced by April 2027 in light of high energy prices and its impact on inflation.

During the week Richmond Fed President, Tom Barkin, said the ability of businesses and consumers to tolerate supply shocks would determine whether the Fed can look through higher inflation without raising rates.

Meanwhile, Chicago Fed President Austan Goolsbee said he’s most focused on a resurgence of inflation against a backdrop of mostly stable employment indicators.

Fed Governor Christopher Waller was notably hawkish, suggesting supporting the removal of the easing bias and tabling the possibility of hikes in the absence of inflation abating.

FOMC meeting minutes from late April were released last week. The commentary was incrementally hawkish – and moderately more hawkish than expected – but given there were four dissenters in the meeting, the content is understandable.

The committee pointed to persistently high inflation and the vast majority saw increased risk that inflation takes longer to get back in target.

New Fed Chair Kevin Warsh was sworn in. He is seen as somewhat of a centrist on rates, but definitely not as dovish as Trump.

Not many have much to say on how Warsh’s likely tack on interest rate policy will differ from recent history. Most think he’s a sensible replacement with, if anything, a slightly hawkish bias.

Employment

Despite job cut announcements at Meta and Intuit, employment data remained fairly unchanged/stable and reasonably strong.

Meta began the first round of its planned 10% workforce reduction, cutting ~8,000 roles as it ramps up spending on AI infrastructure and automation. Management noted that workforce efficiency is needed to fund that capital outlay without eroding core operating margins.

Intuit announced ~3,000 roles (~17% of workforce) would be cut as well, citing similar reasoning to Meta regarding a focus on AI spend. US jobless claims were little changed for the week, signalling aggregate layoffs remain muted despite the recently announced job cuts.

Global rates

Concerns around the outlook for inflation are building at central banks globally.

This was clear in the FOMC’s last 8-4 split decision, more hawkish rhetoric from the European Central Bank (ECB) and Bank of England (BoE) and Norway’s Norges bank delivering a surprise rate hike earlier in May, when the market was only ~50% priced.

Every major central bank has seen pricing for their policy rate lift since the Iran war began.

Pricing by the end of 2026 has shifted ~60bps higher for the Fed, ~87bps higher for the ECB, ~54bps higher for the Bank of Canada and 114bps higher for the BoE – for an average increase of 78bps across these major central banks.

The shift in short rates is also reflected in longer dated yields. Across these major economies 10-year yields have risen by an average of 65bps since the Iran war began.

The shift in the curve appears to largely reflect greater inflation uncertainty and the expectation that rates will remain higher for longer.

Australia macro and policy

Employment

Last week’s weak unemployment print surprised the market.

Unemployment increased to 4.5%, versus 4.3% previously and expected by consensus, with some evidence the labour market is feeling the pressure of higher rates and the Middle East shock.

Youth unemployment rose 0.9% to 11.1%.

Both full-time and part-time employment fell, and the decline was concentrated in female employment. Westpac flagged Easter timing as adding noise, but the underlying signal appears genuinely weaker.

The unemployment rate is at a five-year high, although there was some noise in the data and it was not all bad.

Hours worked jumped 0.8% month/month to be 3.5% higher year/year, the highest rate of growth since July 2023.

Nevertheless, this likely rules out the possibility of a June RBA rate hike.

Implied interest rates still show another hike in 2026, but the amount and probability of further hikes have decreased materially in the past month – from 2.5 hikes to one.

RBA minutes

Minutes from the RBA meeting in early May where the board hiked 25bps to 4.35% in an 8-1 vote were mixed.

The board made clear it will tolerate weaker growth and rising unemployment (baseline UR 4.7% by mid-2028) rather than risk inflation expectations de-anchoring after a prolonged period above target. The RBA also acknowledged that it has space to pause and observe.

Given underlying inflation is forecast to stay above 3% until late 2027, and total financial conditions have tightened more in Australia than global peers given rate hikes and currency appreciation, the full transmission lag from hikes in February and March is still potentially to come.

This means the economy could weaken further from here even if rates stay on hold.

The board did explicitly leave the door open to future hikes if the data warrants. The market interpreted this as a potential hold coming for the upcoming meeting.

Federal budget

The 2026–27 federal budget continued to attract criticism.

Given it landed in a high-pressure environment, with inflation at 4.6% and the cash rate at 4.35% after three consecutive hikes, there is a view it is excessive and poorly thought through.

Polling showed as much with a continued rise in One Nation’s numbers, primarily at the expense of the ALP in the last month.

The main points of conjecture have been the impacts on residential real estate – and particularly first-time home buyers – and the impact to trusts.

Auction clearance rates continue to fall against a backdrop of high rates and the partial removal of incentives for residential real estate buyers and investors.

Other data

Westpac consumer confidence rose 3.5% to 83.0 (prior: 80.1, consensus: -1.1%).

• This was a modest bounce from April’s 12.5% plunge, driven by lower petrol prices after the government halved the fuel excise.
• Despite the uptick, the index remains deeply pessimistic and well below the long-run average of ~100, with 85% of respondents expecting further mortgage rate increases.

Consumer Inflation Expectations came in at 5.6% for May, versus the prior month at 5.9%, which is a mild positive for the RBA, but still well above comfort levels.

CBA confirmed it would be passing on the full 25bp RBA hike to variable home loan rates, effective 22 May 2026. Other major banks followed suit, adding to mortgage stress for households already strained by three consecutive hikes.

China macro and policy

Chinese economic data disappointed last week. Retail sales, industrial production and fixed asset investment all disappointed market expectations.

• A lack of consumer confidence and the effects of higher global fuel costs were evident in retail sales, up just 0.2% year/year relative to market expectations for a 2.0% gain.
• This came amid an ongoing decline in house prices – existing house prices fell 0.23% month/month, continuing a prolonged downturn in the housing market. Across China’s largest 70 cities, 49 saw price declines in the month.
• Industrial production of +4.1% year/year fell short of market expectations for 6% growth.
• Fixed asset investment fell 1.6% year-to-date relative to consensus looking for a 1.7% gain.

Broadly speaking, the Chinese domestic economy continues to disappoint expectations, with the export industry remaining the primary support for growth.

Markets

Nvidia result

The world’s biggest company reported Q1 2026 results last Wednesday. It was another “beat and raise” but failed to inspire markets – the stock traded lower before and after the result against the backdrop of a reasonably buoyant semi-conductor sector.

• Nvidia also announced an additional US$80 billion buyback and a dividend increase to US$0.25 per share from US$0.01.
• Management commentary continued to highlight strong AI infrastructure demand, alongside the company’s dominant market position, with Vera Rubin (its next-gen AI computing platform) on track for a H2 rollout.
• This came alongside solid execution in managing supply chain pressures, while maintaining a commitment to mid-70% range gross margins.
• The most notable developments were the newly announced reporting structures, increased attention around their CPU strategy (US$200 billion TAM), and higher capital returns (both buybacks and dividends), which were in focus ahead of the release.

The stock’s reaction is interpreted more as a response to heavy positioning in the stock and semiconductor sector generally. Nvidia’s stock price has had a similar response to the last seven quarterly results on a T+1 basis, despite ongoing beat and raise results.

Australian equities

Broad market moves on the ASX were moderately higher, tempered in the mid and small cap sectors which were hurt by a weaker gold sector (-6%).

Consumer staples (+2.7%), banks (+2.9%) and consumer discretionary (+1.2%) advanced while utilities (-3.7%), communication services (-2.3%) and industrials (-2.0%) lagged.

Here are the main factors driving Australian equities this week, according to portfolio manager BRENTON SAUNDERS. Reported by head investment specialist Chris Adams

• Find out about Pendal MidCap Fund

THE market is wrestling with the implications of the Iran conflict, which escalated over the course of last week.

Ahead of today’s market drop, the S&P/ASX 300 last week fell 3.3%, underperforming the S&P 500 (-2.0%) and NASDAQ (-1.2%) but holding up better than the Eurostoxx 50 (-6.8%), FTSE 100 (-5.7%) and Topix 500 (-5.7%).

Energy markets have unsurprisingly been the biggest movers so far, with West Texas Intermediate (WTI) and Brent crude oil up 36% and 28% respectively as at the week’s end.

The potential for significant knock-on impacts via energy-related prices and availability depends on the duration of the conflict.

Market expectations for interest rates and inflation also increased.

The US dollar continued to strengthen during the week as part of a “risk-off” trade. The US dollar trade weighted index (DXY) is now 2.9% up from its late January 2026 lows. The Australian dollar fell 1.2%.

Other commodities were mixed. Among base metals, copper was down 4.1% but aluminium was up 7.2%, given Middle East exposure to supply. Lithium fell 3.9%. Gold was down 1.6%, hurt by the prospect of higher rates and a stronger US dollar.

Software had some respite as the din around AI disruption softened. In the US, the software sector has outperformed the semiconductor sector by ~20% since 23rd February. 

It was a lighter week on the macro data side, but such that there was continues to point to a solid economic backdrop for both the US and Australia. 

Bond and rate markets have moved quickly to price the likelihood of higher inflation in the investment horizon and decrease the chance of short-term rate cuts (in the US) and increase the likelihood of short-term rate hikes (in Australia).

US labour markets are mixed – a surprise higher unemployment print on Friday did little to quell Fed Speak, which was incrementally hawkish largely because of the effects of the Iran conflict.

The main consideration for risk asset markets and economies is the duration of the conflict and associated disruptions/dislocations.

Iran

The conflict enters its second week causing major disruptions to all forms of air and sea traffic in the region and energy markets to inflect higher. Oil is now up 54-59% YTD.

There are some signs of fatigue from both sides. The Iranians appear to be running short of missile launch hardware and the Trump Administration appears to be starting to react to equity market weakness and oil price strength. Israel shows no signs of slowing.

The Strait of Hormuz is effectively shut for sea traffic, meaning of the ~20% of global crude that flows through it, around 90% is now choked off. Air traffic in the region is limited.

Oil and gas markets are showing significant first order consequences of the disruption and there is multiple second and third order effects starting to stack up.

For example:

• The price of aviation fuel has surged on the back of fear of shortages in Asia.
• “Crack spreads” – the margin made by refining crude into products such as petrol and diesel – have rocketed (potentially a tailwind for local refiners Viva Energy and Ampol).
• Coal prices have increased as a potential substitute.

Insurance for shipping in the region has dried up and is one of the major causes of the logjam of marine traffic in the region.

The US is planning a combination of marine escorts and insurance in an attempt to alleviate the situation, but this is likely to take more time.

Qatar, the world’s largest LNG exporter, has suspended production at its Ras Laffan Industrial City LNG complex, notwithstanding that most Iranian attacks have focused on US military instalments and civilian infrastructure as opposed to energy facilities in the region.

This has seen LNG prices – and gas prices generally – increase significantly.

The Dutch benchmark gas futures price is up 108% since its December 2025 lows to EUR53/megawatt hour (MwH), versus the 2022 (Ukraine Invasion) peak of EUR70/MwH, which caused major issues in the EU.

Some 9% of global aluminium production comes from the Middle East region – prompting the 7.2% gain.

Risk Asset Health

To date markets have been largely rational and fairly moderate in the interpretation of events.

There are, so far, few obvious signs of distress. This could change if the war drags on. 

Volatility

The VIX volatility index only shows signs of moderate stress and while it has spiked, it remains far lower than 2nd April 2025 (when Trump announced the tariffs) and Covid.

However, underneath this there is higher single stock volatility being masked at the headline level by high dispersion.

The point being is that this needs monitoring.

Credit spreads

At face value credit spreads are stable.

The bit that can’t be easily assessed is private credit stress, where defaults have been rising, with one of the big risks being software private credit on the back of AI disruption.

The market profile of this narrative is reaching high levels with private credit entering 2026 under clear strain, rising default rates, rising restructurings, dividend cuts at business development companies, and growing concern over opaque, floating rate middle market loans.

While losses have so far been contained, defaults and credit erosion have increased meaningfully, particularly among smaller borrowers and retail facing private credit vehicles.

The widespread adoption of the asset class poses a broader market risk if defaults continue to rise.

US Macro and policy

Activity data in the US was solid, with both the ISM manufacturing index and the Fed’s Beige Book indicating fairly broad-based strength.

Labour data was weaker and tax returns lower than expected, questioning the expectations around consumption strength in 1H 26.

The latest Beige Book (information collected on or before February 23) suggests that:

• Economic growth was broadly unchanged, with activity increasing at a slight to moderate pace in the majority of districts.
• AI-related spending was seen as an important driver of economic growth.
• Consumer spending continued to grow although at a slower pace and notably K-shaped. 
• Employment levels were generally stable, and wage growth was also roughly unchanged, continuing at a moderate pace.
• The US ISM continues to be solid and point toward a manufacturing upturn.
• The ISM manufacturing index dipped to 52.4 in February, from 52.6 in January, but came in ahead of the consensus of 51.5.
• One of the most notable parts was the 11.5 point increase in prices paid to 70.5. This is the highest since June 2022 and is a function of the year-to-date increase in oil prices and a delayed boost from tariffs.
• Until recently US employment data has mostly been solid with most interpreting this as the start of an upturn in employment. It is now showing signs of some softness.
• Last week’s data continues to support strong average hourly earnings growth but payrolls data on Friday was unexpectedly weak.
• February 2026 payrolls fell by 92,000, well below the consensus expectation of +55,000. The two-month net revision was -69,000.
• The unemployment rate rose to 4.4% in February, from 4.3% in January, above the consensus of 4.3%.
• Average hourly earnings rose by 0.4%, above the consensus of 0.3%.

Many commentators point to the volatility and large revisions the data frequently undergoes, but this is a weak print, nonetheless.

It should help offset some of the strength in inflation data, with respect to forward interest rates.

In that vein, it is worth noting that a $10 increase in oil prices roughly results in a 30-40-basis-point increase in headline personal consumption expenditures (PCE) inflation.

The gasoline price is up materially year-to-date but still in the range of the past four years (as of 5th March 2026).

Elsewhere:

• US Tax refunds are only up 10% year-to-date versus the +30% expectation. Given a fairly widespread expectation of accelerated tax return driven-consumption in 1H CY26, this needs to be watched.
• US Non – Farm Productivity remains strong and increased at an annualised rate of 2.8% in Q4, above the consensus of 1.9%.
• January retail sales were down -0.2%, albeit slightly above consensus and mostly unalarming as sales ex gasoline were up +0.3%.

Comments from various Fed members and officials became incrementally more hawkish in the wake of the Iran conflict and despite the weak jobs print on Friday.

Oil and its impact are clearly a major issue for the committee now. 

Both Michelle Bowman (Fed Vice Chair for Supervision) and Neel Kashkari (Minneapolis Fed President) noted that their expectations on inflation have changed in recent days.

New York Fed President John Williams struck a more dovish tone, noting that the market response at that time had been muted and still pointed to further rate reductions.

Macro and policy Australia

There was something for everyone in terms of interest rate expectations last week, with a weak household consumption number offset by a strong GDP print.

• Q4 real GDP jumped 0.8% quarter/quarter and revisions lifted year/year to 2.6%, the best since Q1 2023. The composition was messy, but a strong beat nonetheless.
• Corporate profits increased a strong 5.8% in Q4 2025.
• The Household Spending Indicator (HSI) increased 0.3% month/month in January 2026, slightly below the +0.4% expected after December 2025 retraced by -0.5% month/month.

Also, housing prices continue to be strong as a national average up 9.9% year/year and rents up 5.6%.

Bond yields and interest rate expectations both rose because of this and the rise in oil prices.

Most expect the RBA to raise rates in May if not March – which is now considered “live”.

Markets

While near-term uncertainty remains high, “captive liquidity” can help markets. Retail investors via ETFs and trend following investors continue to “buy the dip” as economic liquidity remains high. Market movements in the last while need to be seen against this backdrop i.e. markets are still fully functional. 

US software had a materially better week and has outperformed semi-conductors by 20% since 23 February 2026 – still way below 2025 relative levels, but a significant improvement.

It felt like AI disruption took a bit of a back seat as the market’s understanding of the threat to Software continued to evolve.

This helped the S&P/ASX 300 Information Technology sector gain 2.4%, beaten only by Energy (+8.7%). There was a part reversal of some of the outperforming sectors year to date, like Banks (-3.2%) and Resources (-5.2%)

Here are the main factors driving Australian equities this week, according to portfolio manager BRENTON SAUNDERS. Reported by head investment specialist Chris Adams

• Find out about Pendal MidCap Fund

US reporting season kicked off with a strong showing from the major banks.

Their earnings were helped by robust capital markets and loan growth against a backdrop of decent cost control.

Markets were solid last week. The S&P500 gained 1.7% and the Nasdaq lifted 2.1%, while the S&P/ASX 300 rose 0.4%.

The ongoing US Government shutdown made for another quiet week on the data front.

The economic impact of the shutdown – along with the threat of China tariff escalation – contributed to lower bond yields.

Weak labour data had the same effect on yields in Australia.

Expectations for rate cuts increased moderately in both the US and Australia after a sustained period of markets reducing estimated cuts.

Elsewhere, the International Monetary Fund raised global GDP forecasts and noted the US tariff impact had been less severe than initially expected.

US-China trade tensions escalated with Beijing further limiting rare earth exports to the US.

Some signs of risk in the system started to show up with examples of over-leveraged corporates coming to grief and affecting counterparties – notably US auto parts maker First Brands. 

There were also some signs of increasing delinquency rates in the US, with a few regional banks impacted.

Volatility has also ticked moderately higher. This is focused mostly in financials, where implied option volatility has moved materially higher.

Credit issue concerns caused major US banks to give back almost all the performance generated earlier in the week from strong earnings beats.

That said, we note that credit spreads remain benign and are not sending a warning signal.

Finally, the gold price increased 8.5%, helping the ASX higher. Iron ore and uranium stocks also featured strongly.

US macro and policy

Federal Government shut down

After 19 days, the US government shut down is now the fourth-longest in history and the longest since 2018-19.

There is a paucity of data as a result, which makes assessing the economy more problematic. 

Some 750,000 federal employees have been furloughed. Most essential services continue but many civilian workers are unpaid.

The impasse remains around the Democrats wanting an extension of the Affordable Care Act subsidies (set to expire at year end) and the Republicans wanting a “clean” continuing resolution without policy add-ons.

Neither side is yielding.

The shutdown is estimated to reduce GDP by 0.1–0.15 percentage points per week.

Economic data

There was a positive data point for US homebuilding with an increase in US homebuilder sentiment.

The latest monthly survey of the US National Association of Home Builders showed confidence rising from 32 to 37.

There was an improvement in the current sales component of the index and a bigger increase in future sales. This demonstrates how the recent rate cut improved sentiment.

This momentum should continue with two more rate cuts expected to come in 2025. 

Regionally the picture continues to diverge. There are patches of strength in the north-east of the US and real weakness in the south and south-east.

There was a rebound in the health of manufacturing in New York state.

The Empire State Manufacturing Index increased to 10.7 in October, up from -8.7 in September. The consensus had been -1.8.

This suggests a positive trend in manufacturing output will be maintained into the fourth quarter.

The three-month average of the general business conditions component rose to its highest level since April 2022. It is consistent with annualised growth in manufacturing output (excluding autos) of roughly 2%.

Elsewhere, the Michigan consumer sentiment index dipped to 55 in October, down from 55.1 in September.

Fed speak

The overall tone of comments from Fed spokespeople suggests broad support for continued easing.

However officials remain divided on the appropriate pace, given trade uncertainty and labour market conditions.

Governor Christoper Waller, for example, is backing another rate cut while urging caution. He suggests quarter-point increments and believes the Fed must “move with care”.

On the other hand Governor Stephen Miran is advocating a larger, half-point rate cut, noting that trade tensions are increasing downside risks.

Fed Chair Jerome Powell has indicated conditions may warrant rate cuts, but remains cautious due to persistent inflation and labour market uncertainty.

He also indicated the Fed might stop shrinking its balance sheet in coming months, representing a potential shift in quantitative tightening policy.

US Interest Rates

Implied rate expectations have increased to slightly more than two cuts priced by year end, due to growth concerns related to the shut down and increasing nervousness in equity markets.

US markets have close to five more cuts still priced by late 2026, taking the reference rate to 2.8% from 4.105% currently implied.

The next Fed rate decision on October 28-29 is expected to cut another 25 basis points to a range of 3.75% to 4%.

US-China trade

There was further re-escalation of tensions, with Beijing putting more restrictions around the export of rare earths and rare earth magnets to the US and Washington threatening to increase tariffs by 100%.

Both of those outcomes would be bad for markets, but in the interim the expectation is for talks and extensions of the imposition of tariffs from the US in the hope of a deal.

There are concerns China is only prepared to accept a deal on its terms and is prepared to manage the consequences of not reaching agreement.

In the interim, more deals and funding continues to flow to rare earth producers – and critical minerals generally – with talk of an alliance between the US and EU on policies around rare earths and China.

Israel-Hamas cease fire

The previous weekend saw the long-awaited announcement of an Israel-Hamas ceasefire, allowing for aid to flow and hostage exchange.

The agreement is tenuous and has a much bigger ambition around the ultimate demilitarisation and reconstruction of Gaza.

Estimates are for as many 50,000 military personnel to oversee peace and security in the region, which is a big ask.

Apart from the obvious humanitarian need for this process, some market observers point to this – and a possible Ukraine-Russia cease fire – as two cornerstones for the Trump administration in the pre-amble to the 2026 mid-term elections.

Based on history, Trump is highly likely to lose control of the House of Representatives.

IMF global growth

In a bright spot, the IMF upgraded its global GDP forecasts, noting the US tariff impact had been less than initially expected.

Expectations for 2025 were revised up to 3.2%, compared to 3% in July. The forecast for 2026 remains at 3.1%.

However these figures remain below the pre-Liberation Day forecasts, reflecting headwinds from protectionism, labour supply shocks, and fading temporary supports like the front-loading of trade.

Developed countries are forecast to grow 1.5% in 2025 and 2026.

The US forecast was lifted to 2% in 2025 and 2.1% in 2026, helped by strong real income growth and better-than-expected private sector responses to tariffs.

The Euro area is expected to grow 1% in 2025 and 1.2% in 2026, while Japan is forecast to grow 1.1% and 0.6% respectively.

Australia macro and policy

Economic data

Australian data was mixed last week.

Unemployment increased to 4.5% after a smaller-than-expected increase of 15,000 jobs. This put unemployment above the RBA’s peak forecast of 4.3%.

Business conditions in NAB’s monthly survey remained steady at +7.6 in September.

Dwelling commencements fell 4.4% in the second quarter. This was the biggest quarterly fall since Q3 2023, driven by a fall in new private sector house commencements.

This is against the run of play with annualised numbers up 9.2%.

Australia interest rates

Commentary suggests the Reserve Bank remains cautious about inflation risks. But weaker employment data shows the RBA is walking a tightrope of inflation versus employment.

Weaker labour data saw expectations increase to slightly more than one cut priced by the year’s end.

The market has close to two more cuts still priced by mid-2026, taking the reference rate to 3.1%, down from 3.6%.

The next RBA interest rate decision is scheduled for Melbourne Cup day on November 4.

Markets

US Q3 Earnings

Leading into earnings season, Goldman Sachs noted consensus expectations on year-on-year S&P 500 earnings growth had decelerated to 6%, down from 11% in the previous quarter.

This was partly due to a smaller FX tailwind and higher tariff payments.

Consensus expects S&P 500 sales growth will slow from 6% in Q2 to 4% in Q3. Customs duties in Q3 totalled $93 billion, a 33% increase relative to Q2.

Companies are generally expected to maintained profit margins near recent levels, but substantial margin expansion seems unlikely.

The consensus Magnificent Seven EPS growth rate of 14% in Q3 is half the pace of realised earnings growth in Q1 and Q2.

AI-related capex spending has been a key issue in recent weeks. Hyperscaler commentary regarding AI demand and capex spending will be critical to the durability of the AI trade.

Consensus estimates imply hyperscaler capex growth will remain robust this quarter at 75% year-on-year but slow sharply to 42% in Q4 and to roughly 20% in 2026.

However, AI capex spending has consistently exceeded bottom-up estimates in recent quarters.

Banks were the first to report, with most delivering strong results and earnings beats.

The message was broadly reassuring about the state of the US consumer, risks to credit quality and the overall outlook for earnings and returns.

Loan growth is picking up, helped by AI-linked capex and some easing in underwriting standards.

However most large banks have small exposure to sub-prime borrowers, where market concerns are focused.

Earnings reports from consumer finance companies will provide more detail here.

Liquidity and risk markers

The First Brands issue was followed by US regional bank Zions Bancorporation disclosing $60 million in loans were unlikely to be repaid and JP Morgan CEO Jamie Dimon warning of more “cockroaches”.

This has seen some concern about the degree of leverage in the system, manifesting mainly in the performance of the financial sector, with US major banks giving back almost all the stock gains made in the wake of strong results earlier in the week.

A large amount of incremental credit extension has been to Non-Depository Financial Institutions (NDFIs) such as mortgage-credit intermediaries, private equity, business-credit intermediaries and consumer-credit intermediaries.

The biggest part of this lending comes from commercial banks – the big four US banks hold about half of this.

This funding is then extended from these intermediaries into a raft of end-user sectors including corporates and consumers.

In Australia the collapse of two credit-related funds held on a number of investment platforms caused issues for a number of product and fund vendors.

Macquarie Group agreed to make clients whole on one of the funds (at a cost of $321 million), and began reducing the number of funds eligible on its superannuation platform.

This played into the question around risk in the financial sector more generally, with the ASX financial sector in aggregate mirroring the underperformance US financials.

Most other risk metrics in the market relating to credit and liquidity remain reasonably benign.

For example, the Goldman Sachs Total Financial Conditions index remains near its lowest level since mid-2022.

For the most part, credit spreads remain fairly mundane and supportive of markets. They rose moderately last week, but well within the normal range of movement.

The volatility index (VIX) has risen, with the concerns in US financials and credit more broadly seeing the largest increase in implied volatility in the banking sector for some time.

This has not yet coincided with a big move lower in markets, but is a warning signal of the potential for contagion.

The gold price is probably the most notable of the widely followed macro indicators that is potentially suggesting bigger issues ahead.

A mostly younger demographic of buyers continue lining up around the block to buy gold at ABC Bullion in Sydney’s Martin Place.

Australian equities

The ASX trailed a strong US market over the past week with the ASX300 up 0.4%. The ASX50 rose 0.7%, the S&P/ASX Midcaps 50 shed 0.7% and the ASX Small Ordinaries retreated 0.5%.

Resources led the way, up 3.4% helped by the ASX Gold Index (+9.2%) and strong performances from BHP (BHP +3.3%), Rio Tinto (RIO, +4.6%), Fortescue (FMG +5.3%) and South32 (S32, +2.5%).

The losers were mostly in the growth space with IT down 4.4% and consumer discretionary falling 1.8%.

At a stock level, there was a fair bit going on, helped by the start of AGM confession season.

Here are the main factors driving Australian equities this week, according to portfolio manager BRENTON SAUNDERS. Reported by head investment specialist Chris Adams

• Find out about Pendal MidCap Fund

THE approval of President Trump’s Big Beautiful Bill and stronger-than-expected US labour data saw bond yields move higher, imputed US interest rate cuts push out, and inflation expectations increase last week.

US two-year bond yields rose 14 basis points (bps) to 3.88% while 10-year yields were up 6bps to 4.35%.

Equity markets closed the week up 1.8% in the US (S&P 500) and 1.0% in Australia (S&P/ASX 300). Calendar year-to-date, those markets are up 7.5% and 7.1%, respectively, on a total return basis. 

Many equity indices are making new all-time highs, with the S&P 500 having rebounded 26% from the April/Liberation Day low.

Commodities had a reasonable week, but in the wake of the ceasefire with Iran – and a possible Gaza ceasefire – the heat has come out of the oil/energy markets.

It’s by no means an “all clear” on the Middle Eastern geopolitical front, but there is significant spare OPEC capacity that can be used to keep a lid on prices.

This is important for inflation, especially within the context of the issues central banks are facing globally.

We are seeing a material rotation within equity markets, probably exacerbated on the local bourse by trading activity around the end of financial year.

This saw notable moves last week away from banks, insurers, growth stocks, gold miners and other FY25 winners towards value stocks, resources and FY25 losers.

US macro data and policy

Most of last week’s developments were supportive for markets, with approval of the tax bill and strong headline labour data being the biggest drivers.

Activities data was mixed – while reasonable at a headline level it was weaker in composition, with softer demand and employment components offset by expectations and manufacturing.

The Big Beautiful Tax Bill 

This was a big win for President Trump. After just getting approved in the Senate earlier last week, the bill – to the surprise of many and despite all Democrats voting against it – passed the House of Representatives on the first attempt.

It was signed into law on Independence Day.

This should be broadly supportive for markets, if not the US budget deficit and the US dollar.

US labour data

US June non-farm payrolls came in strong at 147k jobs, ahead of 110k expected by consensus.

However, compositionally, the government sector accounted for most all of the beat while private payrolls were weak.

The unemployment rate also dropped to 4.1%, driven by lower participation rate.

Despite strength in payrolls, wage growth moderated – with total private hourly earnings growing at 0.2% versus 0.4% prior and below consensus expectations of 0.3%. This suggests little sign of labour market tightening.

There has been some focus on the “neutral employment rate” – the payrolls growth required to keep the unemployment rate unchanged.

The primary inputs into this are population growth and labour force participation, both of which have had wild gyrations through the Covid and post-Covid era.

The US requires a rising immigration rate to offset a declining population of working age.

This highlights the importance of potential consequences from possible changes to immigration policy under the Trump administration for employment, labour market tightness and inflation.

Work by Deutsche Bank suggests that the near-term breakeven rate is around 100k new jobs per month.

However, this could fall to as low as 50k per month, based on potential scenarios around labour force participation and population growth rates.

This suggests that wage costs have a high likelihood of being inflationary under most moderate economic conditions.

Elsewhere, JOLTS job openings rose to 7,769k in May from 7,395K in April and was well above the 7,300K consensus.

The jump in total job postings is at odds with a broad range of other indicators suggesting a waning appetite among businesses to hire more workers.

This discrepancy may be due to some businesses advertising jobs in order to replace workers that have unauthorised immigrant status.

The private sector quits rate edged up to 2.3% in May, from 2.2% in April, but remains in line with last year’s average.

Other US data

The US ISM Services Index rose to 50.8 in June, up from 49.9 in May and just ahead of the 50.6 expected by consensus. 

The increase was mostly in the expectations component, with weakness in the services employment and prices components

This suggests services activity has stabilised but is not likely to make a large incremental contribution to inflation.

The US ISM Manufacturing Index printed 49.0 in June, rising from 48.5 in May and marginally ahead of the consensus at 48.8.

In the detail, it appears that manufacturing production and imports have recovered from the worst of the tariff disruption with some modest price inflation – but that demand was soft, with weaker new orders and employment.

US Consumer Spending fell 0.3% in May, which was weaker than expectations – as was personal income growth at -0.4% versus +0.3% consensus. Revisions were also lower.

That said, May’s spending fall was driven by a 7% decline in spending on autos following a binge of auto buying in April, so there is some noise in the numbers.

US Mortgage Applications rose by 2.7% for the week ending 27June, with gains in both refinancing (+7%) and new home applications (+0.1%) as 30-year fixed mortgage rates fell.

The US housing market remains weak in most quarters, which is something only lower interest rates and mortgage rates can rectify.

US interest rates

Expectations around rate cuts moderated during the week and bonds sold off modestly in the wake of the Trump tax package approval and stronger-than-expected labour data – both of which point towards increased likelihood of an inflation increase.

President Trump again ramped up rhetoric around replacing Fed Chair Powell for not cutting rates, calling for his resignation – with Treasury Secretary Bessent seemingly seen as a preferred option.

Powell himself attributed the slower pace of rate cuts to uncertainty around the impact of tariffs.

The Fed’s June Summary of Economic Projections (SEP) for the year ending 2025 has a median estimate of rates at 3.9% versus 4.5% currently.

This is more or less in line with current market implied rates.

There have been moderations in the likelihood of July and September rate cuts, with close to no chance of a July rate cut given data flow and developments in the last week.

Tariff update

Tariff information is flowing thick and fast and in the days before the 9July deadline.

Several countries and regions are working towards framework agreements (e.g. EU, China, UK, India) before 9 July, with a view that extensions can continue until US Labour Day (1September) while the details are finalised.

Trump has threatened to impose full sanctions on any countries failing to meet the deadline.

Developments include:

• Canada scrapping its proposed digital tax, a sticking point in negotiations with the US.
• Indonesia announced it is set to sign a trade and investment pact with the US this week.
• The US announced an agreement with Vietnam, with the minimum tariff rate at 20%, down from 46% under the Liberation Day rates, and no tariff on US imports. There are higher tariff tiers for goods with Chinese-produced content. The US is specifically looking to counter moves by Chinese companies to reroute exports to the US via other countries to avoid maximum tariffs.
• The Administration seem to be suggesting that there is some “wriggle room” around the 9 July deadline and that although there is a relatively small number of deals signed, there are a number in the offing, notably with India. Japan continues to dig its heels in and is attracting the ire of Trump.   
• The process of applying Section 232 tariffs – linked to national security and being used as a means of circumventing legal challenges – is notionally well advanced and should be finalised by the end of US summer. This affects steel, lumber, copper, Al and semiconductors.

Australia macro data and policy

There is less ambiguity around the interest rate trajectory in Australia than in the US.

The domestic economy is in reasonable shape, though some segments are still weak as consumers are saving the additional disposable income flowing from interest rate cuts.

An expectation of two to three further rate cuts from the RBA in CY25 appears reasonable and should be supportive of both the economy and asset prices.

The market is pricing close to three 25bpts cuts by year’s end, though the probability of an August rate cut has decreased from 90% to 70% in the past week.

Housing

The Cotality Home Value Index rose 0.6% in June, with gains in every major mainland city.

Darwin led the list, rising 1.5%, with Canberra up 0.9%, Sydney 0.6%, and Melbourne 0.5%.

RBA Governor Bullock made it clear in May that rising house prices would not prevent rate cuts. That said, record-high house prices might stir discomfort in some quarters.

Residential building approvals rose 3.2% in May, softer than consensus expectations of 4.0%.

They are running at an annualised rate of 183k, which is a recovery from a rate of 177k in April, which was the lowest level since August 2024.

Retail sales

Retail sales rose 0.2% month-on-month in May, below an expected 0.5%.

The year-on-year rate slowed from 3.8% in April and is the slowest since November 2024.

Retail sales over recent months show momentum is still fading. This seems to confirm that consumers continue to save the proceeds from interest rate reductions to date.

China macro and policy

Beijing announced further population growth stimulus measures and a new programme to remove excess capacity from some manufacturing sectors, which the steel and iron ore markets interpreted favourably.

However, the economy remains challenged by low nominal GDP, PPI deflation, weak property prices and declining middle-income employment and wages growth.

Markets

Sector rotation

There was a significant rotation to value sectors and stocks that kicked off smartly with the start of July.

Trading associated with end-of-financial-year fund distributions has been elevated in the local market and contributed to a significant relative bounce in the FY25 losers across the June month-end.

In contrast, the big winners from that period were sold heavily post month-end.

While the drivers may have been different, we saw a similar trend in US equities, where the rotation from momentum to value was among the largest and sharpest in the last five years.

In Australia, this manifested in strong gains among the miners against a backdrop of modest improvements in iron ore, lithium and coal prices – some of which was driven by the Chinese government announcement to crack down on excess capacity in sectors like steel.

US equities

The breadth of the recent 25% recovery has been one of the narrowest on record.

While this still bodes well for markets, the next phase will likely be a broadening in the recovery and slowing in momentum which normally follows narrow rebounds.

The US quarterly reporting season begins on 15 July, with the S&P 500 trading at 22x price/earnings and expecting 4% year-on-year quarterly earnings growth, versus the 12% growth delivered in Q1 2025.

Weaker earnings growth expectations are being driven by commodity and cyclical sectors.

Tariff-driven margin compression for FY26 is the largest risk.

Most companies have been indicating that tariff increases will be largely absorbed through the supply chain with little evidence of tariff-driven price increases seen so far and many large US retailers vowing not to increase prices.

Australian equities

The S&P/ASX 300 eked out small successive gains most days to end up 1% for the week.

Midcaps were the biggest movers on a market cap basis (S&P/ASX Midcap 50 +2.2%).

At a sector level, resources (+2.3%) and REITS (+3.0%) were the biggest winners at the expense of banks (-1.6%), insurers and growth stocks.

The domestic economy, and potential rate cuts, augur well for mid and small caps. But investors need to be selective about what they buy, argues portfolio manager BRENTON SAUNDERS

• Domestic macro-outlook positive for mid and small caps
• REITs, select retailers and quality growth companies to benefit most
• Find out about Pendal MidCap Fund

THERE is now a helpful macro tailwind for domestic focused companies driven by the prospect of more interest rate cuts and high fiscal spend, says Pendal portfolio manager Brenton Saunders.

“The main issue outstanding, from a domestic perspective, is valuation. That’s a constant nagging question in the back of investors’ minds”, he says.

The S&P/ASX200 in recent days has hit a new record and some stocks, notably market leader Commonwealth Bank, are trading are historically high multiples.

Domestic outlook

“The international landscape remains complex, but the domestic economy is panning out pretty well,” Saunders says.

“We are through the election and companies that don’t have unanswered questions around tariffs can be reasonably confident about the second half of 2025, particularly if the playbook sees a couple more rate cuts.”

Sustainable, self-funded growth companies

With that macro-economic backdrop, what types of stocks should investors be looking for?

“It comes back to a few key thematics. Companies with reliable growth, that are self-funded, in growth parts of the economy,” Saunders says.

“We will play the interest rate cycle through selected REITs (real estate investment trusts) and growth stocks that have longer duration and benefit from lower discount and interest rates.”

He nominates tracking company Life 360 and software group Technology One as examples of well-run, high-quality companies with a positive, sustainable earnings outlook. Buy now, pay later group ZIP is another example.

“ZIP is growing very strongly, and it currently has very low penetration in the US so there is opportunity,” Saunders says.

Discretionary retailers

Discretionary retailers should also benefit from the interest rate environment, but Saunders cautions investors need to be discerning about what they buy.

“In this space you need to be a little bit more circumspect. Apparel is very tough. There’s a lot of discounting and plenty of competition. There’s also a couple of new apparel and sportswear retailers wanting to come to Australia.”

By contrast, car dealership group Eagers Automotive has done very well in 2025 and should benefit from lower interest rates, Saunders says.

“There have been two specific things going on in that stock. The biggest one is BYD volumes, and secondly, margins haven’t fallen as precipitously as expected in both new and used car sales.”

REITs

The real estate investment trusts (REITs) benefit from lower interest rate cycles, Saunders says, and should do well in the second half of the year. He says investors are slightly wary of data centre operators, in part due to outsized capital raisings last year and early this year.

“Also, the pace of writing new contracts stalled somewhat with the advent of the Deep Seek AI platform. This caused hyper-scalers like Microsoft to pause and rethink their infrastructure intensive approach.”

Life360, Technology One, Zip and Eagers Automotive are held in various Pendal portfolios.

The price of gold has seen an uptick in recent times, but how much higher can it go? Portfolio manager BRENTON SAUNDERS explains

• ASX gold index up 20% this year
• Two stocks to watch: Capricorn Metals and Genesis Minerals
• Find out about Pendal MidCap Fund

GOLD is up more than 40 per cent over the past year and plenty of analysts see more records ahead.

Can it keep going? And how best to gain exposure through the ASX?

“Gold is being helped by elevated inflation and strong liquidity,” says Pendal portfolio manager Brenton Saunders

Brenton manages Pendal MidCap Fund and is also a geologist with experience in gold mining and gold-related equities investing.

While no one knows for sure how far gold will run, Saunders notes that the rising price has “very quickly repaired some of the issues with balance sheets in the gold sector and elevated dividends in some cases.

“Gold companies have very high profit leverage to higher gold prices. This makes them very cash generative and, in turn, they become acquisitive.”

Saunders has long been an advocate for selected stocks in the ASX-listed gold sector.

“Gold has worked well in our portfolio.

“The gold price is up 9 per cent in Australian dollar terms year-to-date and the ASX Gold Index is up around 20 per cent. That’s been incredibly helpful to our portfolio.

“We have held positions for a long time, and it has all come together in the last three months.”

Stock examples

Saunders highlights several ASX gold stocks held by Pendal’s midcap fund including Capricorn Metals (ASX: CMM) and Genesis Minerals (ASX: GMD).

“Capricorn is a reliable, low-cost, highly cash-generative producer permitting a new project in the Murchison to effectively double production by FY 2027-28,” says Saunders.

“Strong gold price exposure and growth make it an ideal midcap stock. 

“Genesis has taken the best of the successful Saracen (ASX: SAR) team and packaged them into a high-growth, very well-run WA gold company.

“The company is turning a series of highly systematic acquisitions in WA, made at lower gold prices, into an integrated production complex with strong growth and cash flow.”

Opportunities in cyclical industrials

Elsewhere, market focus has turned to opportunities in ASX-listed cyclical industrials, Saunders believes.

“Some stocks are looking quite attractive on a valuation perspective and cyclical headwinds associated with high interest rates are starting to abate.

“In some cases it comes down to company specifics. If stocks can address specific issues they can do well.

“During results season Domino’s Pizza Enterprises (ASX: DMP, not held in Pendal MidCap Fund) was an example. They have started to address some of the headwinds they’ve had in the last couple of years and the market was very receptive to that.”

Wall Street’s recent earnings season was reasonably strong and the current reporting season in Australia has “so far been strong too”, Saunders says.

“The share market has been strong so far this year. Share price appreciation has been relatively broad-based, though the main drivers are banks, gold stocks and consumer discretionary stocks.”

Saunders is also closely watching how potential Trump administration tariffs might impact ASX stocks.

A number have potential exposure but there is limited clarity of how and where tariffs will land.

“So far what markets were most worried about hasn’t really eventuated, and investors have just gotten on with it.”