Pendal’s emerging markets team explores the latest developments in India and explains why the team remains underweight in the region

MOST emerging markets — particularly those with weaker export bases and greater dependence on external capital flows — go through multi-year positive and negative cycles.

In the up-cycle, incoming capital flows strengthen the currency and depress bond yields, facilitating lower policy interest rates. This drives growth, attracting more capital inflows.

In the down-cycle, outgoing capital flows weaken the currency and raise bond yields, driving policy interest rates higher. This weakens growth and encourages greater capital outflows.

There are many factors to consider in these cycles. But a core component is that in the upcycle, central banks do not need to defend the exchange rate.

India cuts rates, but currency remains weak

In February, the Reserve Bank of India cut its benchmark “repo rate” by 0.25 percentage points to 6.25%, marking the first policy interest rate cut in nearly five years.

(Repo stands for “repurchase agreement” and refers to the cost of borrowing. When banks need money they can sell government securities to the RBI with an agreement to repurchase them at a future date. The repo rate is the interest rate the banks pay on this transaction.)

The RBI’s move signalled a shift towards supporting economic growth amid declining inflation, which stood at 4.3% in January.

However, the decision came against a backdrop of geopolitical tensions, global monetary policy divergence, and volatile financial markets.

India’s appointment of a growth-focused governor, Sanjay Malhotra, was seen as a sign of prioritising expansion over inflation control.

But concerns remained regarding the exchange rate.

The Indian Rupee experienced significant volatility, reaching an all-time low of 87.95 against the US dollar before rallying in mid-February due to aggressive intervention by the RBI.

The RBI reportedly sold around $US6 billion of foreign exchange reserves to stabilise the currency, which gave the Rupee a one-day lift.

But foreign investors have continued withdrawing from domestic markets, with net sales amounting to nearly $10 billion so far this year.

Policy-easing by the RBI has encouraged speculative pressure on the Rupee, making it one of the EM universe’s weakest-performing currencies this year.

This contrasts with currencies such as the Brazilian Real, Colombian and Chilean Pesos and South African Rand, which have all strengthened against the US dollar this year.

James Syme, Paul Wimborne and Ada Chan, fund managers for the Pendal Global Emerging Markets Opportunities fund
Decline in foreign exchange reserves raises concerns

The RBI’s intervention raised another major concern: the decline in India’s foreign exchange reserves.

Reserves fell from a peak of $700 billion in September to about $631 billion by the end of January.

This depletion raises concerns about India’s ability to manage external shocks in the face of capital outflows, rising import costs, and weakening investor sentiment.

The broader economic outlook suggests slowing growth.

India’s GDP growth fell to 5.4% in the September quarter – a seven-quarter low and well below initial RBI estimates.

Weak consumer demand, sluggish private investment, and reduced government spending have contributed to the downturn.

Inflation peaked at 6.2% in October 2024 (driven by rising food prices), but lower interest rates may not be sufficient to revive growth without stronger demand.

Risk of a down-cycle

India is not yet definitively in a down-cycle.

The bond yield curve has barely moved, for example, and currency weakness is not yet driving higher forward inflation expectations.

However, the local-currency equity index peaked at about the same time as foreign exchange reserves, and a poor fourth quarter for equities has been followed by further weakness.

We believe most Indian assets are too expensive to provide a backstop to weakness and the risk of an extended down-cycle is high.

We remain heavily underweight India in our portfolio and defensively positioned where we do have exposure.

 

About Pendal Global Emerging Markets Opportunities Fund

James Syme, Paul Wimborne and Ada Chan are co-managers of Pendal’s Global Emerging Markets Opportunities Fund.

The fund’s top-down allocation process is based on analysis of a country’s economic growth, monetary policy, market liquidity, currency, governance/politics and equity market valuation.

James, Paul and Ada are senior fund managers at UK-based J O Hambro, which is part of Perpetual Group.
 
Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management.

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Here are the main factors driving the ASX this week, according to Pendal’s head of equities CRISPIN MURRAY. Reported by portfolio specialist Chris Adams

A decent US earnings season, bond-yield resilience in the face of higher inflation and continued positive retail investor flows are supporting equity markets.

The S&P 500 gained 1.5% last week, while the S&P/ASX 300 was up 0.5%.

There was limited new developments on tariffs, but we did see building expectations of a potential Ukraine deal post Trump’s unilateral call with Putin.

This remains a complex issue, and even if something was to happen, it will take time.

The market’s breadth is narrowing, which is a concern. Seasonals also turn less favourable from here. However, the underlying liquidity environment appears supportive.

The market has also held up in the face of the first wave of negative headlines on tariffs and there is no evidence of a technical breakdown.

So overall, we believe the market remains in a gradual up-trend.

Australian reporting season has swung into action. Overall, the results so far suggest the economy is holding up – with some small positive signs, notably from Commonwealth Bank and JB Hi-Fi.

Victoria remains the standout weakest state, but everywhere else is performing well.

There are some early signs that some of the higher P/E names are not delivering sufficient upside surprise to sustain their outperformance.

US inflation and economy watch

The key focus for the US economy is the interplay between policy growth and inflation, and how that will affect interest rates this year.

The case for a June rate cut from the Fed relies on Core Personal Consumption Expenditures (PCE) growth being below 2.5%, employment not being too hot, and policy (i.e. tariffs and deportations) not being worse than is currently expected.

Last week’s CPI data for January was poor. In summary:

  • Headline CPI was up 0.47% month-on-month versus 0.30% expected. It was 3.0% year-on-year versus 2.9% expected. 
  • Core CPI was 0.45% month-on-month versus 0.3% expected, and 3.26% year-on-year versus 3.1% expected.

Higher numbers for used cars and airfares drove the surprise – combined, they added 8 basis points (bps) to Core CPI. Communications and insurance prices were also higher, having been soft in recent months.

The market’s initial reaction was negative, with bond yields backing up 10bps. However, the reaction moderated through the week and bonds recovered because:

  1. There is a belief that the seasonal adjustments fail to take fully into consideration the concentration of annual price increase put through in January – that is, it overstates inflation now, then understates it later in the year. Higher communications and insurance prices indicate this.
  2. Some of the beat was driven by “volatile” components (e.g. used cars and airfares), which are not included in the Core PCE – the Fed’s favoured inflation measure. Used car prices appear to be moderating already, based off auction data.
  3. Federal Reserve Chair Jerome Powell’s comments, which signalled he was taking a muted reaction to the data point.
  4. Other measures of inflation look to be easing.
  5. The Producer Price Index (PPI) and import price data was okay – and the combination of these and CPI allows the market to market an accurate estimate of the core PCE data. Using this, the Core PCE is forecast to come in at 0.26-0.29% month-on-month (implying 2.5% to 2.6% year-on-year) versus 2.81% in December and closing in on the Fed’s target inflation of 2.5%. Consensus has Core PCE falling to 2.5% by midyear.

The market is pricing in a 40% chance of a June cut and 50% by July’s meeting. The current implied probabilities for year’s end are 22% no cut, 39% one cut and 39% of two-or-more cuts.date, breaking through technical resistance levels. 

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US retail sales – implies the US consumer may be softening

January’s headline retail sales came in at -0.9% versus -0.3% expected (-0.4% versus +0.3% expected, excluding autos).

Again, the market is not reading this as a fundamental shift in trend given some mitigating factors:

  1. cold weather and the LA fires
  2. strong holiday season sales, which may have been pulled forward
  3. auto sales affected by low inventories.

It does highlight that the prior 4%+ 3-month-on-3-month annualised run rate in consumer spending was not sustainable and we may be falling back to around a 2% run rate.

This slowing consumer also affected the Atlanta Fed’s GDPNow Q1 2025 outlook, dragging it from 2.9% on 7 February to 2.3% on 14 February. This is now back in the consensus range.

Tariff watch

There were limited new signals last week from the US.

The market focus is on the meaning of “reciprocal tariffs”, with the White House instigating a study on this issue which may not report back till 1 April.

This was taken as a small positive as it is an alternative to “across the board tariffs” and will take time to prepare.

We should still expect other tariff announcements in the next few weeks, with potential targets being critical imports (e.g. pharmaceuticals and semiconductors) to incentivise a shift to domestic supply, and autos which would effectively be targeting Europe.

China appears to have been spared the expected tariffs so far.

There are plans for a meeting between Presidents Trump and Xi, which may help defer this matter, but the issue remains volatile and an increase in the current 10% tariff is still possible.

Australia

The RBA meets on Tuesday and the market continues to price a high probability of a 25bp cut to 4.1%.

Should it cut, the RBA may frame it in cautious terms – a “hawkish cut” – as the risk of a policy mistake is high given that underlying inflation (once adjusted for the one-off subsidies) remains relatively high and the economy seems to be in good shape (with the exception of Victoria).

In this vein, Commonwealth Bank (CBA) updated its customer analysis in last week’s result.

According to the analysis, essential spending is slowing as a result of falling inflation – allowing younger age cohorts to spend more on discretionary items and to start saving again. It also suggests that disposable income is recovering.

The other risk for the RBA is the currency, which is already helping to ease financial conditions and – should it fall further – would add to inflationary pressure.

The last thing the RBA will want to do is look to have eased prematurely and run the risk of needing to reverse course in the future.

Markets

US earnings season is around 80% completed and is positive, with reasonable upgrades, and is on track for 13% year-on-year EPS growth.

While strong, we are now entering a deceleration phase, with consensus bottom-up forecasts suggesting EPS growth drops back to mid-to-high single-digit growth in coming quarters.

However, this is driven by the slowing of Mag7 earnings growth; the rest of the market is expected to accelerate. The remaining 493 companies in the S&P 500 are estimated to have delivered 4% earnings growth in 2024, increasing to 15% in 2025 and 17% in 2026.

We have already seen Mag7 earnings revisions stall.

While the market remains very full value in the US, liquidity remains supportive given the following factors:

  1. On 21 January, the US hit its debt ceiling and cannot issue net new debt. Instead, it must fund itself by drawing down on the general account, which is effectively QE. This is likely to continue through to midyear. This has meant the market has reloaded with liquidity in the calendar year-to-date.
  2. US retail ETF flows remain strong. This year has seen three of the largest daily retail ETF inflows on record. Seasonal trends in ETF flows will get less supportive – January and February are typically two of the strongest months – but still remain okay.
  3. US corporates are now entering their buyback window. Goldman Sachs expects US$1.2T of buybacks this year. The daily flows doubles when window opens from $3b/day to $7b.

Overall, while the market is at high valuations and there are material policy risks, the liquidity that has fuelled it remains supportive.

Australian equities

Industrial and consumer stocks led the market’s small rise last week, mainly as a function of results coming through.

Healthcare was the weakest sector on the back of Cochlear’s downgrade and CSL being softer.

CBA appears to have done enough for now to maintain its high premium, however, other popular names saw muted reactions to decent results – indicating positioning may be getting tired.

Resources have been outperforming this month, up 2.1% versus a 0.5% gain in the S&P/ASX 300. There has been a lot of news flow:

  • Tariffs on aluminium and steel (though the aluminium impact has been muted so far, this is going to be inflationary in the US).
  • A record gold price.
  • Cyclone disruption in iron ore.
  • In lithium, volatility continues, with CATL restarting its large lepidolite operation in China – which you can either read as positive in terms of being in response to market demand, or negative in terms of additional supply. The mine previously accounted for about 10% of China supply, or 3-4% of global supply.
  • China lending growth was strong in January, which is a constructive lead indicator.

About Crispin Murray and the Pendal Focus Australian Share Fund

Crispin Murray is Pendal’s Head of Equities. He has more than 27 years of investment experience and leads one of the largest equities teams in Australia. Crispin’s Pendal Focus Australian Share Fund has beaten the benchmark in 12 years of its 16-year history (after fees), across a range of market conditions.

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

Find out more about Pendal Focus Australian Share Fund  

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A gradual rate cut path over 2025 should support economic growth, meaning investors should think carefully about fixed-income positioning. Pendal’s TIM HEXT and ANZ’s ADAM BOYTON explain in a new webinar

THE Australian economy is strongly placed as cost-of-living pressures recede and market expectations grow for a lower-rates environment – setting the stage for an economic rebound from last year’s tougher conditions.

That was the message from Pendal’s head of government bond strategies, Tim Hext, and ANZ’s head of Australian economics, Adam Boyton, at a Pendal webinar How to prepare for rate cuts in a shifting global economy.

The webinar took place ahead of this week’s Reserve Bank meeting which is expected to start a rate-cutting cycle.

A second cut is expected within the next six months. But Hext and Boyton see the pace of interest rate reductions as gradual due to underlying economic strength.

“The economy isn’t necessarily screaming out for a rate cut the way you typically see when the Reserve Bank starts easing,” says Boyton.

ANZ expects a second 25-basis-point cut in August. Hext says it could come as soon as May.

“We’re looking for just those two rate cuts,” says Boyton. “The reason being that the economy isn’t collapsing, there are signs of the consumer recovering, the labour market has performed remarkably well over the past 12 months … and inflation has eased more than expected.”

Labour market resilience and RBA caution

One factor behind the RBA’s cautious approach is the remarkable strength of the labour market.

“My best assessment is that full employment in Australia is probably between 3.75 and 4 per cent – so you’re close-ish to it. The most recent published thoughts from the RBA are a bit higher,” says Boyton.

Boyton says employment is being supported by jobs growth in health care, social assistance, public administration, and safety, and there is also evidence that the private sector is picking up as the stage 3 tax cuts wash through.

“This story of a resilient labour market is probably one that will play through for most of this year,” he continues.

“Either way, this is a really interesting cycle. We could end this economic cycle with the peak in the unemployment rate not very far at all away from full employment.

“To me, that says a couple of things – firstly, it’s great news for Australians.

“Secondly, it tells me that this is probably going to be a pretty cautious easing cycle from the Reserve Bank.

“If the unemployment rate is 5 per cent or 6 per cent you can cut much more aggressively, because you’re not going to be stoking inflation with a tight labour market.”

Falling inflation and household incomes

Further buoying the economic outlook is the fall in inflation itself – an often-overlooked factor in the economic outlook that plays an important role supporting household incomes and lifting consumer spending as real-wages improve.

“Inflation is an insidious tax on everyone – you go backwards, even if you get a wage increase, in a period of high inflation,” says Boyton.

“The fact that inflation has come down so much is really helpful for household incomes. Prices aren’t going back to where they were – but what it does mean is the wage increase you get this year isn’t going to be eroded by inflation. That will change the dynamic.”

Productivity challenges and Australia’s economic model

But while the near-term outlook is stable, Australia still faces longer-term headwinds, says Hext.

“We talk about the three Ps – population, productivity, and participation,” says Hext.

“Participation is looking good. Population is looking generally good, as it always does in Australia. But productivity has looked pretty bad for quite some time. It’s been going nowhere for almost a decade.”

Productivity means getting more output from existing resources and has been the key driver of economic growth from the industrial revolution to the IT boom of the 1990s, says Hext.

But the poor recent performance puts Australia in sharp contrast to the US economy, which has seen a very strong 10 per cent lift in productivity over the last seven years.

Hext says part of the explanation for Australia’s poor performance is a drift away from being a US-style, dynamic economy to a more government-centric, European-style economy.

“We’ve made some deliberate choices in the last five years in Australia – partly to strengthen our health care system, the NDIS, education. But there is a productivity cost to that which we’re now bearing the brunt of.

“We hear a lot about US exceptionalism – that term is used for very good reason.”

Investment implications

Hext says investors need to remember that when cash rates come down, floating rate investment returns come down – “it’s a mathematical formula”. That means lower returns on investments like term deposits and cash.

“But with bonds, you’re fixing your return – if you buy something with a yield of 6 per cent, you’re earning that 6 per cent for the life of that security. The comparison to me does look compelling.

“Would you be coming out of other asset classes, like growth assets, at this point in the cycle? I think it’s a bit early for that. Equities look to me quite fully valued, but I don’t see any major sort of trouble brewing there.”

He says bonds can also act as an insurance policy in a portfolio.

“The final thing you’ve got to remember is, as much as Adam and I sit here pontificating about the next 12 months, there’s going to be something coming from left field.

“And what bonds do, by locking in your return, is if there is a crisis that comes that none of us are seeing at the moment, that’s going to provide you insurance as your growth assets collapse.

“The way I like to say it is you’re almost getting free insurance and you’re getting a decent return.

“The two together is quite powerful.”

 

Watch the one-hour webinar here. CPD points apply

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

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

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

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

The team won Lonsec’s Active Fixed Income Fund of the Year award in 2021 and Zenith’s Australian Fixed Interest award in 2020.

Find out more about Pendal’s fixed interest strategies here

About Pendal

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

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

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Here are the main factors driving the ASX this week, according to analyst and portfolio manager ELISE McKAY. Reported by head investment specialist Chris Adams

MARKETS have been dominated by political news flow – with almost daily updates on tariffs, which have been used largely as negotiating tools. 

As we navigated through the tariff minefield, noisy macro data, more US earnings, as well as the start of Australian earnings, markets were relatively flat for the week.

The S&P 500 was down 0.23%, while the S&P/ASX 300 was down 0.24%.

US Treasury Secretary Bessent commented that he and President Trump are focusing on lower 10-year US bond yields and expanding energy supply to drive down inflation.

While Bessent does not control the market, this does suggest a very strong political desire to keep rates from breaking through 5% – helpful for markets! 

Robert F Kennedy Jr is another step closer to becoming the Health Secretary after clearing a key senate vote. This has meaningful risk for healthcare names given some of his controversial views on areas like vaccines.

Flows are providing a strong tailwind for the US market, with retail investors so far buying the dip in 2025. The corporate buyback window is also largely open as of last Friday. 

Hedge funds are again buying AI stocks following the DeepSeek sell off on 27 January and the “big four” hyperscaler results (Amazon, Google, Microsoft and Meta), which were broadly bullish on AI customer demand. 

We are also seeing a bullish divergence in the calendar year-to-date, with the S&P 500 up 2.6% despite Microsoft, NVIDIA and Apple (which together make up 20% of the index) all declining 2.8%, 3.3% and 9.1%, respectively. 

This is good for both stock-pickers and the extension of the bull market. 

It was a quiet week on the macro front, with the market looking through a noisy jobs print and instead focusing on the University of Michigan Consumer Inflation Expectations Survey increasing to 4.3%. 

This spooked the market on Friday, in combination with further threats of tariffs from Trump. 

US macro and policy

Jobs

We saw a noisy jobs print on Friday, which supported the view that the US Federal Reserve should be in no hurry to cut rates at its March meeting. 

While the near-term labour market is in good shape, there is potential for some softening later this year, which should support a recommencement of the rate-cutting cycle.

January payrolls increased by a weaker-than-expected 143k (versus consensus at 175k), likely dragged down by strike action and adverse weather. There was a 100k upward revision to prior months. 

As a result, three-month average private sector job creation has accelerated to 237k, which is above the pace that should keep the unemployment rate stable. 

After peaking at 4.25% in July 2024 and sitting within a 4.1-4.2% band for the past six months, the unemployment rate fell to 4.01% in January 2025 (versus consensus at 4.1%). 

While the trend for jobs is currently accelerating and the ISM data is supportive of near-term growth, there are a few headwinds which may result in softer readings later this year: 

  • Hiring indicators are muted and DOGE-led policy changes are also a headwind.
  • Around 60,000 government workers (2% of the federal civilian workforce) are reported to have accepted a “deferred resignation” package effective September 2025, a program originally targeting 5-10% of the workforce. 
  • Hiring freezes and headcount reduction programs at some government agencies may further weigh on upcoming job reports.

Wages

Average hourly earnings rose by 0.48% month-on-month (versus consensus at 0.3%) in January, but this appears to be affected by weather – with a decline in average hours likely triggered by some workers being unable to make it to work due to heavy snowfall. 

The quarterly Employment Cost Index (ECI) remains more important for the Fed. 

The JOLTS quits rate continues to point to weaker underlying wage growth and, therefore, softer services inflation ahead. 

ISM survey data

The Services ISM dipped from 54 to 52.8 in January, driven by weakness in new orders and business activity. 

The New Orders Index declined from 54.5 to 54.3 – a seven-month low – suggesting that worries about immigration and trade policy under Trump are overriding optimism on potential tax cuts or deregulation. 

Meanwhile the Manufacturing ISM increased to 50.9 from 49.2, its highest level since September 2022, driven by strong new orders and production. 

It is not yet clear whether this upturn is a lasting improvement or a temporary boost from purchases bought in anticipation of tariffs. 

Both ISMs saw improvement in their employment indices, reflecting near-term positivity for labor markets.  

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University of Michigan Consumer Sentiment Survey

The latest survey suggests concerns about the economy and inflation are growing among consumers, with the February 2025 preliminary reading dropping from 71.1 to 67.8 – well below consensus at 71.8.

This probably reflects Trump’s threats to impose sweeping tariffs. 

The consumer expectations component (which is 60% of the index) is now running at 69.3 for 1Q25, which is consistent with year-on-year growth in consumption declining from 3.2% in 4Q to 2.0% in 1Q. 

It will be important to keep an eye on this in an environment of policy uncertainty as a lead on US consumer spending.

Somewhat concerningly, consumers’ inflation expectations increased to a 15-month high of 4.3% (from 3.3% previously). 

Tariffs

A busy week on tariffs underscored the dynamics of current trade policies and the unknown impact on the economy, as well as the purpose of tariffs as a negotiating tool versus a means to protect domestic trade. 

Over the past week, we have seen China tariffs implemented, while the initial measures on Canada and Mexico were walked back. What we know is that this uncertainty increases volatility. 

Events in chronological order:

  • 1 Feb: The US announced 25% tariff on all imports from Canada and Mexico, citing concerns over illegal immigration and drug trafficking. A further 10% tariff applied on Canadian energy exports into the US, as well as a 10% additional tariff on imports from China. All were to be effective from 4 February.
  • 3 Feb: Tariff implementation delayed for Canada and Mexico for 30 days. Mexico committed to deploying 10,000 National Guard troops to guard its border. Canada agreed to appoint a “fentanyl czar” and enhance border security measures.
  • 4 Feb: The China 10% tariff was implemented. This is not expected to have a meaningful impact on aggregate prices alone, given imports are about 10% of consumer spending and China accounts for some 14% of total imports. In retaliation, China imposed largely symbolic 10% tariffs on US crude oil, agricultural machinery and vehicles, plus a 15% tariff on coal and LNG. China also announced export controls on rare earth metals and initiated an antitrust investigation into Google.
  • 5 Feb: The US removed the “de-minimis” rule on parcels from China into the US, which previously exempted imports worth $800 and under from customs duties. This has the effect of increasing prices for US consumers purchasing inexpensive items from China, primarily affecting e-commerce players like Temu and Shein.
  • 6 Feb: The Federal Reserve Bank of Boston released a study estimating an inflationary impact of 0.5-0.8% on Personal Consumption Expenditures (PCE) from tariffs.
  • 7 Feb: Trump announced plans to implement reciprocal tariffs this week to match duties that other countries (e.g. China, India, the EU, south-east Asia) have imposed on US goods.

With regard to China, the US measures and retaliation from Beijing look like the opening moves of ongoing negotiations with President Trump that seek to address structural trade issues, supply chain security and technology.

 US productivity growth

Productivity grew at a 1.2% annualised rate in 4Q 2024, in line with consensus, and 1.6% year-on-year. This is largely consistent with the pre-Covid trend of a touch below 2%. 

It remains to be seen how the deployment of Gen-AI solutions will impact the world’s labour force and influence productivity growth. The hope is that commercial deployment of AI will drive productivity growth over the medium term, which countries like Australia need.

AI and data centres capex goldrush continues

Results for the big four hyperscalers (Amazon, Google, Microsoft and Meta) wrapped up last week.

Their collective 2025 capex budgets have increased to US$296bn, up 13% from estimates at 31 December and 34% from estimates at 30 June last year. 

The market was initially expecting a $150-175bn capex for 2025 before Gen-AI became a thing in January 2023.  

This suggests that the US$125-150bn uplift is purely AI, with the rest being vanilla data centres or business-as-usual capex.   

An additional 8-10% increase is expected heading into 2026.

Capex investment as a percentage of revenues for these players has now increased to more than 20%, which is almost double its historical levels and also significantly greater than oil industry peak investment.

So, is this bubble territory or is this sustained by long-term demand? 

It is too soon to tell, but commentary from Amazon, Microsoft and Google on their most recent earnings calls discussed capacity constraints in meeting customer demand for AI, underpinning their capex investments. 

Meanwhile, Trump’s US$100-500bn Stargate initiative is underway. Last week, OpenAI said it has now sent proposals to US states looking for sites to build five-to-ten 1GW+ data centres. 

 

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Australian macro and policy

Retail sales for December 2024 were ahead of expectations, down 0.1% month-on-month (versus consensus at 0.8%) and up 4.6% year-on-year – the fastest since March 2023. 

Product discounting and Cyber Monday falling into early December were key contributors, particularly for discretionary retail. 

All eyes are on the RBA meeting next week to see if we will finally start our rating-cutting cycle. 

If so, this could signal the bottom for the Melbourne housing market, which fell another 0.4% month-on-month in January. 

UK macro and policy

The Bank of England cut rates 25 basis points (bps) to 4.5%. 

While the cut was as expected, the commentary was more dovish than expected, with two members (including the previously hawkish Catherine Mann) voting for a 50bps cut instead. 

Global markets

So far, 61% of corporates (or 72% of the S&P 500 market cap) have reported. EPS growth has been stronger than expected in aggregate (up 12% versus 8% expected) and across the median (up 7% versus 6% expected). 

Real US GDP growth of 2.3% in 4Q24 supported a 5% increase in revenues and profit margins expanded about 50bps to 11.6%. 

Communication Services (up 29%), Financials (up 23%) and IT (up 21%) have grown the fastest, while energy declined 33%. 

We note that Goldman Sachs estimates that every 5% increase in the US tariff rate would reduce S&P 500 EPS by about 1-2%.

Earnings growth divergence between the Mag 7 and the rest of the market is converging. This is good news for extending the bull market.

  • Mag 7 earnings grew 36% in 2023 and 36% in 2024 (estimated) versus -4% and 3% for the remainder of the market.
  • In 2025, the consensus expects the Mag 7 to grow earnings 16% versus 9% for the rest of the market. In 2026 expectations are for 17% (Mag 7) and 13% (rest of the market).

As noted earlier, the divergence between the S&P 500 (which is up 2.6% year-to-date) and Microsoft, Nvidia and Apple is also good for both the bull market extension and stock pickers. 

Trading flows

After five straight weeks of selling, hedge funds were net buyers of US equities every day last week and at the fastest pace since early November, as single stocks saw the largest net buying in more than three years.

Info Tech was by far the most net bought sector, while Consumer Discretionary was net sold for a seventh straight week and is by far the most net sold US sector on a year-to-date basis.

Net buying has returned to AI for eight consecutive sessions, suggesting that hedge funds have started leaning back into the AI theme post the DeepSeek sell-off on 27 January.

Gross equities exposure is very high, which is supportive for market positioning. 

Fundamental longs significantly outweigh macro shorts, so if the market sells off, those shorts will need to be covered creating demand on the way down.   

Interestingly, retail involvement in the market has reached record levels to start the year, proving that at least some one is prepared to buy the dips even if institutional investors are more cautious. Some key stats:

  • The largest retail buy imbalance (difference between buy and sell orders) in the history of the Goldman Sachs dataset (starting in 2019) took place on 17 January at $5.0bn. The second largest retail imbalance took place on Monday (3 February) at $4.9bn. Tuesday (4 February) was the fifth largest retail imbalance of $4.2bn.
  • Four of the top five retail imbalances in the Goldman Sachs dataset took place in the last two weeks (i.e. buying the dip).

Approximately 60% of S&P 500 corporate buyback window is now open as of Friday until 16 March, with about $1.2 trillion of buying expected across 2025. 

Australian market

The S&P/ASX 300 was down 0.24% last week, with Resources catching up year-to date and Healthcare lagging. Reporting season really starts picking up from this week.

Copper rallied 4.5% (up 12% CYTD) on anticipation of further China stimulus and risk of supply disruption from unrest in the Democratic Republic of Congo. 

This supported further outperformance from our precious metals names.

About Elise McKay and Pendal Australian share funds

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

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

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

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

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

Contact a Pendal key account manager here

Investors should be ready for any scenario as Trump weaponises trade tariffs. But it would take a lot to disrupt the big China e-commerce stocks, argues Pendal’s SAMIR MEHTA

HUMAN psychology permeates investing.

In fact, several profitable businesses are driven largely by addiction, from cigarettes and alcohol to gambling, social media and — dare I venture — online shopping.

If you can get consumers hooked on your product or service, that is the ultimate bonanza.

A decades-long war on drugs, conducted globally, still raises a philosophical question: should we restrict supply or constrict demand?

Under the second Trump administration, tariffs and TikTok are front of mind. How much impact have previous rounds of tariffs imposed on Chinese goods?

I’d like to offer a quick snapshot, focusing on four big Chinese online shopping platforms.

Amazon pioneered online shopping by connecting consumers to goods through a convenient platform. China, the world’s factory, was the primary source for supply. 

Yet in 2024, four Chinese companies (AliExpress owned by Alibaba, TikTok by Bytedance, privately held Shein, and Pinduoduo-owned Temu) shipped goods internationally, worth almost $US 200 billion (up 90% year on year). Of that, approximately $45 billion was sent to the US.

In the US, the ‘de minimus’ threshold (whereby goods valued below $800 can enter the US without payment of duties or taxes) also helped.

High inflation pinched consumers, incentivising them to look for bargains – exactly what these Chinese platforms thrive on. But the most instrumental part, in my opinion, are their business models.

Their ability to access vast swathes of Chinese overcapacity in manufacturing, use efficient cross-border supply chains, operate on a consignment or semi-consignment centralised model while pricing goods 20-40% below Amazon, make them potent competitors.

Temu, for example, launched its online shopping in late 2022. In 2023 and 2024, it sold a staggering combined $70 billion worth of goods across the world.

Another linked datapoint – Meta reported approximately $9 billion of incremental advertising revenues from Asia Pacific customers, helped – in no small part – by spends from these four companies driving app downloads and customer acquisition.

On February 1, President Trump imposed — and almost immediately suspended — a 25% tariff on all goods from Mexico and Canada (only 10% on oil) while goods imported from China will have an additional levy of 10%.

We await the outcome of an expected call between Trump and Chinese president Xi Jinping this week to find out if tit-for-tat US-China tariffs will be paused as they were for Mexico and Canada.

For now, the China tariffs have removed the ‘de minimus’ loophole which benefited these Chinese companies in the past.

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In 2024, China’s trade surplus hit almost $US1 trillion.

Will a new round of potential tariffs dent China?

In anticipation of such an eventuality, Temu and Shein had already modified some of their operational procedures towards bulk shipping, diversifying logistics and expanding the their U.S. network.

Ironically, as TikTok’s future hangs in balance, Americans have flocked to another Chinese app: Xiaohongshu.

The broader point here is that when a product provides a value proposition far superior to American alternatives, tariffs might temporarily alter – but not permanently change – human behaviour. Only a complete ban can achieve it, as in the case of banning Chinese electric vehicle imports.

But for products sold by the Chinese online platforms, neither do they disrupt a high-value domestic industry nor are there big lobbies that clamour for protection.

In China, there is a proverb – “水滴石穿” (shuǐ dī shí chuān) – which translates loosely to “dripping water wears through stone”.

Only time will tell if the allure of cheap, convenient app-based shopping can be stopped by the walls of tariffs.

About Samir Mehta and Pendal Asian Share Fund

Samir manages Pendal’s Asian Share Fund, an actively managed portfolio of Asian shares excluding Japan and Australia. Samir is a senior fund manager at UK-based J O Hambro, which is part of Perpetual Group.

Pendal Asian Share Fund aims to provide a return (before fees, costs and taxes) that exceeds the MSCI AC Asia ex Japan (Standard) Index (Net Dividends) in AUD over the medium-to-long term.

Find out about Pendal Asian Share Fund

About Pendal

Pendal, part of Perpetual Group, is a global investment management business focused on delivering superior investment returns for our clients through active management. 

Contact a Pendal key account manager.

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

GLOBAL equity markets have been mixed, with US shares uncharacteristically underperforming European and Asian markets.

Both the S&P 500 (-1.0%) and Nasdaq (-1.6%) were dragged down by the emergence of the low-cost China-based AI platform DeepSeek.

Treasuries benefited from increased equity market volatility and tariff announcements, as well as a benign FOMC meeting outcome. US ten-year government bond yields fell 7 basis points (bps).

Despite this uncertainty, indicators point to a solid US economy that is seeing steady growth without signs of any reacceleration in inflationary pressures.

Other central banks such as the European Central Bank (ECB) and the Bank of Canada continued cutting rates in response to slowing inflation and domestic weakness.

In commodities, safe-haven gold rallied to all-time highs while oil prices drifted lower. Other commodities were mostly flat for the week.

In Australia, the December quarter Consumer Price Index (CPI) surprised to the downside on both headline and underlying measures.

Despite some pockets of elevated inflation, it led the market to believe that the Reserve Bank of Australia may cut rates at its upcoming February meeting.

Australian equities followed other non-US markets higher, gaining 1.5% (S&P/ASX 300) and finishing January close to record highs.

Healthcare (+2.7%), Technology (+2.0%) (especially non-AI related) and Consumer Discretionary (+4.2%) had the strongest performance, while the weakest sectors were Utilities (-4.5%), REITS (-0.4%) and Energy (-0.1%).

Australia macro/economy

The latest CPI update clearly grabbed the most attention, but the week began with the publication of the NAB Business Confidence Survey for December.

It showed that conditions had improved from November but were still weak and tracking below the long-term average. It confirms the current cautious and pessimistic mood among many businesses.

December quarter CPI was highly anticipated by financial (and political) watchers due to its implications for the RBA’s next move. 

Overall, it was clear that inflationary pressures continue to ease – maybe a touch quicker than previously expected.

At a headline level, the CPI rose 0.2% quarter-on-quarter (QoQ) – versus expectations of 0.3% – and 2.4% year-on-year (YoY) versus the 2.5% expected.

Importantly, this is now lower than the RBA’s most recent December forecast in November’s Statement of Monetary policy of +2.6%.

Similarly, the Core (or trimmed-mean measure) CPI was up 0.5% QoQ versus expectations of 0.6% and up 3.2% YoY versus the 3.3% expected.

Notably, there continues to be a divergence in Goods versus Services inflation in the Australian economy.

The annual Goods inflation of +0.8% (driven by lower electricity, fuel and new dwelling prices) is now the lowest since 2016, while annual Services inflation remains elevated at +4.3%.

Services inflation was mainly driven by high rents, healthcare and insurance costs in the quarter – though some of these components are showing signs of slowing. As an example, rents continue to see annual inflation of +6.4%, however, the latest quarterly read was only +0.6%.

Government subsidies partially distorted numbers, but overall, they were interpreted as giving the RBA latitude to begin reducing the cash rate with the first cut even as soon as the February meeting.

Commentators noted that, due to the RBA board’s reduced schedule, the next meeting after February’s would be early April – potentially in the middle of a Federal election campaign.

Several economic forecasters moved their first rate cut expectations from mid-2025 to this month. This is now reflected in the market pricing a February cut at over 90% probability, with a total of at least two further cuts over the remainder of 2025.

We also note some recent work done by Macquarie Macro Strategy on the drivers of labour productivity in Australia. Headline productivity has slumped since 2021 and is running well below trend, prompting much handwringing in recent times.

However, Macquarie’s work suggests that the mining and public sectors are responsible for much of the decline:

  • The mining sector has delivered a compound annual growth rate (CAGR) of -0.1% labour productivity since 2002, albeit in a highly cyclical pattern.
  • The public sector (which includes health and social assistance, education and training, public administration and safety) has had 0.3% CAGR since 2002.
  • However, the rest of the private sector (ex-mining) has had 1.1% CAGR since 2002 and, while having fallen from its highs, remains largely on its long-term trend growth trajectory.
US macro/economic

As widely expected, the US Federal Reserve’s FOMC kept rates on hold, but both the statement and Chairman Powell’s press conference were scrutinised for any markers on the future trajectory of rate moves.

The January statement described the unemployment rate as having “stabilised at a low level in recent months”, where previously it had “moved up but remain[ed] low”.

Additionally, inflation was described as remaining “somewhat elevated” where previously it was said to have “made progress”.

These were interpreted as slightly hawkish, with a small increase in the two-year yield as a result.

However, Powell stated in his press conference that these changes were not intended to send a signal, but merely clean up the language of the statement.

He also added that he still thought policy rates were “meaningfully restrictive”.

So overall, following a slightly hawkish statement with a dovish press conference, there was little net news and the FOMC is seemingly willing to wait for more economic data and details of President Trump’s policies before deciding its next course of action.

The market is pricing in just under two cuts for the remainder of 2025.

In other data:

  • Weekly initial jobless claims dropped to 207k, from 223k, and below the consensus of 225k.
  • US Personal Income and Spending saw real consumption rise by 0.4%, which was above the consensus of 0.3%.
  • The Employment Cost Index (ECI) – the Fed’s key measure of wages – rose by 0.9% in December quarter, in line with the consensus, and takes the annual rate to 3.8%.
  • Q4 GDP was a respectable 2.3% annualised. The GDP deflator rose 2.2%, which was less than expected.
  • US PCE inflation came in muted in December – as signalled by the CPI and PPI – for the second consecutive month.

In summary, the US economy registered a solid 2024 with decent growth in consumption and employment, while inflation continues to moderate. This reinforces Chairman Powell’s comments that policy rates are in a “good place”.

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Other macro/economic

The Trump administration followed up on prior threats and announced tariffs on its top three trade partners.

Canada and Mexico will face 25% tariffs (but only 10% on Canadian oil), with an additional 10% for China on top of existing tariffs.

It is unclear if there are any exceptions that will be carved out, though those countries are expected to respond with their own retaliatory tariffs.

In Europe, the ECB governing Council lowered borrowing costs for a fifth time since June to a rate of 2.75%.

The Council expressed confidence on declining inflation, while the major concern has now shifted to the anaemic growth in the Eurozone.

This was highlighted by the largest economy in Europe – Germany – announcing its GDP had contracted by 0.2% in the fourth quarter, which was more than expected.

The Bank of Canada reduced rates by 25bps but suspended all future guidance due to the uncertainty of trade tariffs imposed by the US.

Markets

Some high-level themes:

  • The “January barometer.” January was a good month for equities, which has typically been a good indicator of S&P returns for at least the next six months. When January is positive, the average six-month return of the S&P 500 is 6.9%, versus only 0.6% otherwise.
  • Gold. The threat of tariffs and global policy uncertainty has pushed gold to an all-time high again and is now threatening a technical “breakout” to the upside. The AUD gold price is over $4500/ounce.
  • US reporting season. About 163 S&P 500 companies (40% by market cap) have reported 4Q results, with aggregate Sales growth up 4.9% and Earnings growth up 11.3% – surprising by 1.0% and 5.8%, respectively. Companies are beating on both the top and bottom lines, suggesting strong underlying fundamentals.
  • DeepSeek and AI. The recent release of the Chinese-based supposedly low-cost, open-source large language models has challenged the leadership position of the US tech giants. While the accuracy of the claims is still being debated, it did lead to sharp moves in AI related stocks with Nvidia experiencing the largest single-day drop in market cap in share market history (-$US589 billion – just under $1 trillion AUD).
  • The “Mag 7”. This handful of companies dominate US and international share markets, leading to global ramifications if any of them struggle to perform. From a technical standpoint, Nvidia has breached some key levels which may further dampen sentiment on the stock and sector in the near term.

Global equity indices with relatively smaller listed technology sectors, such as the UK FTSE100 (~1%), S&P/ASX 200 (~3%) and the EuroStoxx 600 (~6%), may be relative beneficiaries on any continued AI uncertainty.

In Australia, equities had a decent return for the week, capping off a solid start to 2025.

REITs, Utilities and Energy were the weakest sectors, with Tech (especially non-AI tech) and Consumer Discretionary continuing their strong 2024 returns.

About Rajinder Singh and Pendal’s responsible investing strategies

Rajinder is a portfolio manager with Pendal’s Australian equities team and has more than 18 years of experience in Australian equities. Rajinder manages Pendal sustainable and ethical funds, including Pendal Sustainable Australian Share Fund.

Pendal offers a range of other responsible investing strategies, including:

Part of Perpetual Group, Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management. Responsible investing leader Regnan is now also part of Perpetual Group.

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China’s DeepSeek technology has changed how markets think about AI investing. Pendal’s ELISE MCKAY explains

MARKET volatility sparked by new AI innovations from China underscores the benefits of taking an active approach to portfolio management, argues Pendal’s Elise McKay.

Chinese start-up DeepSeek rocked the tech world last month by releasing an AI model with similar performance to market leaders like OpenAI’s ChatGPT but built at a fraction of the cost.

The free, open-source model was developed without access to the kind of high-end Nvidia graphical processing units that power similar systems.

McKay — an investment analyst and portfolio manager with Pendal’s Australian equities team — says the innovation demonstrates that AI can be trained and run on older, less-powerful chips that are free from US export controls.

It also challenges long-held assumptions that AI dominance requires billons of spending, access to cutting-edge semiconductors, and massive energy use.

The market reaction was swift. Nvidia, the leading supplier of AI chips, dropped 17 per cent in a single session before rebounding 9 per cent the next day as investors grappled with the implications.

Pendal equities analyst Elise McKay
Pendal equities portfolio manage and analyst Elise McKay

“We are early in game for generative AI, so it’s too soon to tell how this will play out,” says McKay.

“But what we do know is that the day-one market reaction is not necessarily reflective of the medium-or longer-term outlook. It is important to look through the noise.”

Need for active management

Market uncertainty about how AI will play out has echoes of the evolution of the COVID pandemic and the impact of GLP1 weight-loss medications such as Ozempic.

“Volatility is a reflection of the unknown — and uncertain situations can create opportunities as we get clarity,” she says.

McKay says the violent market reaction triggered by DeepSeek’s innovation reinforces the need for investors to ensure they are taking an active approach in how their money is managed.

“It demonstrates how the increasing influence of passive money in equity markets is creating these opportunities for active managers,” she says.

“Nvidia was down 17 per cent one day and up 9 per cent. That throws up opportunity for an active manager prepared to take advantage of those kind of liquidity events.”

Transformative technology

Investors can look to the past for hints on how these changes are likely to play out.

McKay points to Jevons’ Paradox – named for English economist William Stanley Jevons who observed that coal consumption increased through the 1800s despite rapid improvements in steam engine efficiency, challenging the belief that improved technology would reduce resource use.

Pendal equities analyst Elise McKay

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The argument? More efficient systems are more cost-effective for users, which increases their adoption.

“Same with AI – if it’s cheaper, we’re going to be using more of it,” says McKay.

Economic growth, productivity effects

Greater AI adoption has the potential to lift global growth as businesses and individuals find new ways to boost productivity, says McKay – and falling AI costs could reshape how that value is distributed across society.

“Cheaper AI shifts power away from the handful of hyper-scalers who could previously charge a premium for access. Open-source models mean a wider range of people can use it. It democratises access.”

That could mean a broadening of market leadership away from the Magnificent Seven tech leaders such as Nvidia and Meta.

“Expanding breadth from the Magnificent Seven to the broader tech space is generally good for a bull market continuing, because you need that breath to extend.”

For Australian equities, the impact remains unclear.

“Australia is a reasonably early adopter of technology – particularly cloud computing – so I’m excited to see how Australian companies embrace generative AI.

“It’s still early days, but we’re on the precipice of something exciting.”

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

The door is wide open for modest rate cuts as inflation settles back to around 3 per cent, argues Pendal’s head of government bonds, TIM HEXT 

AUSTRALIA’S latest quarterly inflation figures offer good news to both the Reserve Bank and the Albanese government.

Headline CPI came in at 0.2% for the quarter, now 2.4% year-on-year (yoy). Trimmed mean inflation, our version of underlying inflation, came in at 0.5% and 3.2% yoy.

In November, the RBA had forecast inflation at 2.6% and trimmed mean at 3.4% for the end of 2024, so these numbers are a 0.2% improvement on recent expectations.

More important, though, is the significant improvement in several key areas that show it is not just a story of government subsidies artificially lowering inflation. Subsidies directly likely only kept trimmed mean inflation around 0.1% lower as the large falls are trimmed away.

New dwelling costs were one of the poster children for runaway inflation through the pandemic. Labour shortages and massive homebuilder subsidies saw 10% annual growth for several years.

Prices have now plateaued and even slightly fell in the quarter, as it has shifted from a sellers’ market to a buyers’ market. These constitute 8% of the CPI basket so they can make a big difference.

The other key area of housing is rents, which are 6% of the CPI basket. These went up only 0.6% on the quarter and were dampened by a 10% increase in rental assistance to the 1.5 million people who receive it.

Nevertheless, the underlying pulse for rents is now heading nearer 5% than the 8-10% of the past few years. These two key areas are partly behind services inflation, falling from 4.6% to 4.3%.

If services (two-thirds of CPI) can settle around 4% with goods prices (one-third of CPI) nearer 1%, then the RBA should be more confident of medium-term inflation being within its 2-3% target, albeit more at the top end of its range.

Finally, as you would expect with falling inflation, the number of components rising faster than 3% is now down to 37% from around 85% in late 2022.

This graph, courtesy of NAB, shows that only 42% of items are over 2.5%. This is not weighted, but speaks to the breadth (also called diffusion) of price disinflation.

 

All this leaves the door very wide open for an RBA cut in February. The market is now 90% priced and has another rate cut priced by May and a third by August.

We agree with the first two, but caution against pricing too many more beyond that.

Inflation will push back nearer 0.7% in Q1 CPI, due in late April. However, large government spending here, both Federal and State, will continue to keep a solid footing under growth and employment.

The RBA will need to do a twist around its estimate of full employment.

Its rates-on-hold narrative was based on excess demand versus supply in employment markets, given the 4% unemployment rate. Its estimate for full employment, where demand and supply are in balance, was nearer 4.5%.

However, with wage growth moderating to 3.5%, it points to full employment being nearer the current levels of 4%. Expect some commentary on this.

We continue to favour steeper curves and modest overweight duration positions, focusing on one to three-year part of the government yield curve as we expect both short-term bond yields to fall, while longer-end bond yields may rise or stay the same.

If not for the high level of uncertainty out of the US, our long duration views would be more confident.

Perhaps the biggest sigh of relief on the release of today’s numbers will have come out of Canberra.

A pre-election rate cut, possibly even two, would be welcomed by young people living in the mortgage belts, and often swing seats, of Australia.

In what is shaping up as a close election, any good news on the cost of living will be grabbed by Albanese and Chalmers.

 

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

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

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

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

The team won Lonsec’s Active Fixed Income Fund of the Year award in 2021 and Zenith’s Australian Fixed Interest award in 2020.

Find out more about Pendal’s fixed interest strategies here

About Pendal

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

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

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Pendal equities analyst RACHEL FOLDER recently joined Livewire Markets to discuss her picks and predictions for the year ahead

SMALL-CAPS analyst Rachel Folder recently joined other Aussie fund managers for Livewire’s 2025 Outlook Series to discuss the outlook for Australian shares in the year ahead.

Despite a resurgence of risks and the impact of political changes in the US last year, Rachel says the market’s current state is strong and that things are looking “pretty good” for 2025. 

In the full interview below, Rachel reveals:

  • Her top pick for growth in 2025
  • An industry set to break out
  • A stock she would avoid
  • A contrarian stock idea
  • A stock she would choose if she could hold just one in her portfolio this year.

See more on Livewire Markets

About Rachel Folder

Rachel is an investment analyst with Pendal’s Smaller Companies team, providing fundamental analysis on a range of companies within the ASX ex-100 universe.

Previously, Rachel was an Investment Analyst covering smaller companies for NAOS Asset Management and First Sentier Investors, where she began her career in their graduate program.

Rachel holds a Bachelor of Commerce (Actuarial Studies and Financial Economics) from the University of New South Wales and is a CFA Charterholder.

Pendal is an 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 the ASX this week according to portfolio manager JIM TAYLOR. Reported by investment specialist Jonathan Choong

DESPITE much anticipation for the new US President’s policies, which marked the beginning of a new direction for the country, last week was notably quiet with minimal market impact.

Early White House statements aligned with pre-inauguration rhetoric on immigration, energy, trade and tariffs, causing little market movement except for China tariff news affecting resources.

Economic data was sparse and the Federal Reserve (the Fed) remains in blackout ahead of the FOMC meeting at the end of January. US bonds rallied 15-20 basis points (bps) from recent highs.

A broadening of market strength will be a key indicator of market health, but it might be too early to call yet. We saw a few days of broad strength punctuated by one day, led by mega tech.

The Fed is widely expected to leave rates unchanged at 4.25-4.50% on 29 January, with a 25bp rate cut in March having a probability just below 30%.

Rate cut expectations for 2025 remain stable.

Last week saw the replacement of Fedspeak with “Trumpspeak”, where President Trump – at Davos – demanded global interest rate cuts and urged Saudi Arabia and OPEC to lower oil prices. Here, he emphasised the vast oil and gas reserves for the US.

Trump also signed off a slew of executive orders, with the most relevant to markets including:

  • Return to office: All executive branch employees must return to in-person work, with necessary exemptions.
  • Tariffs: Trump emphasised an America First trade policy, proposing a 10% tariff on China due to fentanyl issues, and hinted at tariffs on the EU for “fairness”.
  • TikTok: Trump suspended the Protecting Americans from Foreign Adversary Controlled Applications Act for 75 days to reassess its impact on national security and TikTok. He suggested the US should get half of TikTok’s value, threatening high tariffs if China disagrees.
  • Infrastructure: Trump announced a $500 billion private sector investment in AI infrastructure, with OpenAI, Softbank and Oracle’s Stargate project planning to create more than 100,000 US jobs. The first of 20 data centres is under construction in Texas.
  • Energy: Trump’s agenda focuses on lowering energy costs – urging US companies to increase oil drilling i.e. “drill baby drill”. The transition to supermajors has improved efficiency and cash discipline, but its future under the new regime is uncertain.

On another note, the breakout release of Chinese developed AI assistant DeepSeek garnered significant attention for its sophistication, rivalling US mega-tech generative AI at a fraction of the cost. This has raised concerns about the massive spending of mega-tech companies on AI and, in particular, chipmaker Nvidia – more to come next week.

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US macro and policy

Initial jobless claims rose to 223k, above the 220k consensus. Continuing claims increased to 1,899k – well above the 1,866k consensus.

WARN layoff announcements in November and December were 22% higher than the first 10 months of 2024. WARN data are very closely related to layoffs in one-to-two months’ time.

Indeed’s job postings remained unchanged after hitting a four-month low in December, suggesting laid-off workers may struggle to find new positions quickly. Some see these factors as pointing to a continued rise in initial claims to 250k by March, which could help the Fed lean towards further rate cuts.

On the growth front, the Atlanta Fed’s GDPNow model estimates Q4 growth at 3.0%. The 2025 growth consensus is 2.1%, up from 1.8% prior to the election.

Cleveland Fed data shows that underlying rental growth aligns with private sector data (such as Zillow) when excluding new leases.

Existing home sales rose to 4.24 million in December (above the 4.20 million consensus), with a 2.2% increase in Q4. The average mortgage rate on existing homes is about 4%, compared to 7% for new mortgages, contributing to sluggish sales.

Local macro and policy 

It was a particularly quiet macro week in Australia, with the only notable datapoint being that consumer confidence is slowly grinding higher.

In New Zealand, headline CPI rose 0.5% quarter-on-quarter in Q4 2024, with annual growth steady at 2.2% (within the Reserve Bank of New Zealand’s (RBNZ) 1-3% target).

This was slightly above RBNZ’s forecasts but aligned with consensus expectations. The surprise came from tradables prices, while non-tradables were lower than expected.

Measures of core inflation also showed ongoing signs of disinflation, with the ex-food and energy measure easing to 3.0% annually. The weighted-median and 30% trimmed-mean measures also decelerated to 2.6% and 2.5%, respectively.

Eurozone macro and policy

Eurozone economic data continues painting a bleak picture – particularly for Germany, which is often considered a canary for Europe.

Since 2017, Germany’s industrial production has fallen 15% (2.3% annualised). Car manufacturing has dropped to 1985 levels, with exports at 1998 levels.

The decline has been attributed to demographics, the green transition, and years of underinvestment. A recent study suggests that EUR600 billion in public investment over the next decade (1.5% of GDP) is needed for education and transport.

To the UK, productivity growth fell from 2.22% annually (1998-2007) to 1.12% (2011-2019), a decline known as the “productivity puzzle.”

China

The yuan strengthened notably alongside equity markets after President Trump told Fox News he would rather not impose tariffs on China-made goods.

He added that the tariffs represented “one very big power over China” and that Beijing did not want tariffs to be implemented.

Markets

Fourth quarter earnings season for the S&P 500 is off to a strong start, with both the percentage of companies reporting positive surprises and the magnitude of those surprises above 10-year averages.

Overall, 16% of S&P 500 companies have reported Q4 results, with 80% exceeding EPS estimates – above the 10-year average of 75%. Earnings are 7.3% above estimates, slightly below the five-year average but above the 10-year average.

The Q4 year-over-year earnings growth rate rose to 12.7%, which is the highest in three years.

Financials led the positive surprises, boosting the overall earnings growth rate, while Energy saw downward revisions.

If the 12.7% growth rate holds, it will be the highest since Q4 2021 and will also mark the sixth consecutive quarter of growth.

Seven of the eleven sectors in the S&P 500 reported year-over-year growth, with six showing double-digit increases such as Information Technology, Financials and Health Care. Energy was the only sector with a double-digit decline.

Looking ahead, analysts expect earnings growth of 11.3% and 11.6% for Q1 and Q2, respectively, and 14.8% overall for 2025.

The forward 12-month P/E ratio is 22.2, above both the five and ten-year averages.

More than 100 companies, including some of the Mag 7, are reporting this week. Market implications include shorting of companies near the $4.5 billion market cap cut-off, anticipating MSCI World deletions.

 

About Jim Taylor and Pendal Focus Australian Share Fund

Drawing on more than 25 years of experience investing in top-performing Australian companies and a background in accounting, Jim manages our Long/Short Fund and co-manages our Imputation Fund. He is a Chartered Accountant with membership of the Australian Institute of Chartered Accountants.

Pendal Focus Australian Share Fund is managed by Crispin Murray. The fund has beaten its benchmark in 14 years of its 18-year history (after fees), across a range of market conditions. Find out more about Pendal Focus Australian Share Fund here.

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

Contact a Pendal key account manager here