Bonds are ready to do their job again in 2022 — but rising inflation means fixed income portfolios will require nuance. AMY XIE PATRICK explains

An excerpt from this podcast

“Bonds in 2022, in our opinion at Pendal, are about ready to do their job again. 

“Bond yields have sold off significantly for Australian governments, especially at the front end of the curve. 

“That means you have a fatter yield cushion to absorb any bumps in the road – be they economic, be they bottom-up scenarios – that may suddenly hit the Australian economy out of left field. 

“So, bonds are ready to exhibit that negative correlation with equity markets. 

“In terms of composing your portfolio, you should be viewing government bonds as providing that defensiveness in your portfolio, as well as providing that extra layer of income to your portfolio. 

“With regard to credit, we are on the side of quality. We prefer investment-grade debt for our income engines. 

“If you are going to stray into higher yielding, higher-risk assets, we would advise you do that always with an eye on liquidity. If I’m going for more risk, can I get out of that risk quickly enough should the macro environment suddenly become more hostile?”

Bond yields should rise slightly higher next year and will continue to be a strong defensive asset says Pendal’s TIM HEXT in this fast podcast

An excerpt from this podcast

“By the time the Reserve Bank is actually tightening rates, the market has already factored that in. And that’s what we’ve seen this year,” says Tim Hext, head of government bond strategies at Pendal.

“But I think it’s fair to expect bond yields to finish next year slightly higher than where they are now.

The market is looking for official rates to be around 75 basis points higher,” he says.

Hext thinks that is too much.

“With that in mind, bonds are not bad value around the current levels. And of course, bonds are a defensive asset. It’s not the central case scenario but if everything goes wrong, bonds will perform that function,” he says.

“Are you going to make a lot of money out of bonds next year? Probably not. But will they be a good defensive asset given where yields are. The answer is yes.”

Listen to the full podcast above

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

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

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

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

Find out more about Pendal’s fixed interest strategies here

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About Pendal

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

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

Contact a Pendal key account manager

CHINA’S property-led economic slowdown shows no sign of ending. In this week’s The Point podcast, Pendal portfolio manager Amy Xie Patrick explains what that means for Australian investors:

An excerpt from this podcast

“The market assumes the Chinese government won’t let the Chinese economy fall below 5 per cent growth. But I think the pain threshold is lower this time.

“Normally, that’s really bad news for the Australian economy. But Australia’s reliance on resource exports has gotten a lot more muted, especially with respect to China.

“For investors, it means you need to be a lot more region specific when looking at your portfolio construction, especially for a fixed income portfolio.”

The number of “impact bonds” more than doubled in 2021, but demand is still outstripping supply, says Pendal portfolio manager George Bishay in this fast podcast.

Impact bonds provide a financial return as well as a positive impact on the environment or society. The money is ringfenced and can only be used for pre-determined objectives.

In this short podcast George explains how the secondary market in impact bonds is driving performance:

An excerpt from this podcast

“If you are able to get hold of them, [impact bonds] perform very well in the secondary market because everyone wants them,” says Pendal’s George Bishay.

“They outperform vanilla bonds due to this huge demand.

“It’s a really powerful way to deploy capital. The only real negative is the concept of greenwashing – where an issuer comes to market and talks up their credentials only to fall short from an ESG perspective.

“We buy securities from an issuer that has a very good credit rating. That allows for the secondary market activity.”

Investors can expect green innovation to accelerate after the COP26 climate change conference because more countries are seeing that it makes good economic sense, says Regnan’s Maxime Le Floch in this fast podcast

Listen to the podcast above or read the transcript below

Interviewer Sean Aylmer:  Welcome to The Point from Pendal. Fresh from the United Nations climate change summit in Glasgow, I’m talking to Maxime Le Floch, investment analyst at responsible investing leader Regnan. Maxime, welcome back to The Point.

Regnan impact investment analyst Maxime Le Floch: Hi, thank you very much.

Interviewer Sean Aylmer: Maxime, does COP26 in Glasgow get a pass mark?

Regnan’s Maxime Le Floch: I think it’s really good progress we’re seeing. Obviously we are nowhere near where we need to be in terms of commitment from countries.

This is what matters for COP (Conference of the Parties to the UN convention on climate change). This is international negotiations where countries are pledging action and trying to coordinate things.

Overall I’m very optimistic that we’ll see an acceleration in action.

First, when you look at the national policies that countries have put together ahead of COP, we were already looking at 2.4 degrees global warming, which is much lower than what we had even back at the Paris agreement in 2015.

So, so there is a ratcheting up and I think this will accelerate.

And one of the reasons is we also have an accelerating cycle whereby those national policy contributions that a country needs to submit – the NDCs (Nationally Determined Contributions which contain a country’s emissions targets strategy) – they used to be on a five-year review cycle, and now they’re on one year.

So already next year countries will have to go back to the COP and show their increased commitments to decarbonisation.

When you look at the texts of the actual Glasgow climate pact, you’ve got a lot more focus on mid-term targets.

It’s not just about net zero by 2050, it’s also about what are you doing now, for the next 10 years, to really implement that into how you produce renewable electricity, how you produce cement, all those industries that need to decarbonise.

I think it’s a good outcome. We’re seeing the US, China in general getting more serious. Of course you still have things that are not perfect. India is trying to push for a watering down of some of the ambitions around coal.

But there is a lot of progress where China and India already are committing to net zero targets. It’s not yet in their national plans, but this is going to accelerate dramatically, I think.

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Interviewer Sean Aylmer: Okay, so that sense of urgency has really come out in the last couple of weeks, which is great. Of course, we’ve paid a lot of attention to it – and the media has paid a lot of attention to Glasgow in in the last few weeks in the run up to it. But it’s really just the pointy end of a much deeper trend, isn’t it?

Regnan’s Maxime Le Floch: That’s right. One of the reasons we see an acceleration at this kind of international event is that we’re seeing that the economics of decarbonisation are getting a lot better.

And so countries are saying it just makes good economic sense to develop renewable energy, to have smart grid technology, electric vehicles, batteries and so on.

I think this is what you’re seeing with countries like China, which has very good technologies in all those domains. They’re saying, actually this could be a very interesting economic opportunity for this country to export.

This is what we think also as investors. Those markets are getting increasingly attractive to generate good financial returns while making an impact in terms of decarbonisation.

We just published last week a piece of research on green innovation. We’re saying there’s a deeper trend here – what we expect to be a new innovation cycle – that will be driven by green innovation.

Already, when you look at patent data, you see that the amounts of green patents within all kinds of global patents, is 10 per cent today, up from 6 per cent 20 years ago.

So there is an acceleration and this is creating a lot of opportunity. And we’re seeing that reflected in the outcomes for COP.

Interviewer Sean Aylmer: So bringing that back to the investor, that means there must be opportunities for investors in that area?

Regnan’s Maxime Le Floch: Yes, exactly. One of the major ways of decarbonising is to bring innovation.

There is a very big technological angle to this. Of course it’s not everything, but it’s a very important angle. And it’s particularly important for investors because innovation brings product to markets, brings revenues and bring profitable growth for those companies. So ultimately good returns.

Cement, for instance, is an industry that has not done much radical innovation. In the last decade it’s been mostly process improvements that are quite incremental.

But we’re seeing new approaches. One of the companies in which we invest, Hoffman Green Cement, has brought to the market radical innovation in the sector – a new kind of cement that doesn’t require the production of clinker, which is really where most of the emissions happen for cement.

Because of that, they can cut emissions from cement by a factor of six.

So it’s very, very radical. And you have to bear in mind that cement is a very big part of the carbon equation. If the cement industry was a country, it would be the third-largest emitting country after China and the US.

Interviewer Sean Aylmer: Okay, so what other general areas are of interest where you think there are technology breakthroughs that have happened or are happening?

Regnan’s Maxime Le Floch: One of the areas we are very interested in is the area of industrial software.

ON of the areas we are invested in is simulation software. A company like Ansys in the US is really helping accelerate innovation. It enables you as an R&D engineer to run very complex simulations that involve multiple physics.

You can simulate on a computer what would happen to an electric engine, for instance, depending on different scenarios for heat and pressure in real-world conditions.

[The software] helps those engineers run thousands of simulations on a computer instead of resorting to a physical prototype.

So it makes innovation cheaper, more effective, faster. It enables you to also include from the design phase of products, parameters such as environmental impact. So you can optimise for the carbon footprint of the product from the design phase, as opposed to as an afterthought. This would be a very important piece of accelerating innovation we think.

Interviewer Sean Aylmer: Maxime, thank you for talking to the point. That was Regnan’s Maxime Le Floch, investment analyst at Regnan. I’m Sean Aylmer.

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About Maxime Le Floch

Maxime is an analyst with Regnan’s impact investment team. He focuses on Regnan Global Equity Impact Solutions Fund. Maxime has more than 10 years of experience in sustainable investment. Before joining Regnan he was an investment analyst with Hermes where he helped launch and manage the Hermes Impact Opportunities Equity Fund.

Most of Earth’s global CO2 emissions are now covered by net zero targets, which means big new markets are forming. Regnan impact investment analyst MAXIME LE FLOCH explains

Listen to the podcast above or read the transcript below

Interviewer Sean Aylmer: Welcome to The Point podcast from Pendal. Today I’m speaking to Maxime Le Floch, investment analyst at Regnan.

Maxime, the United Nations COP26 climate change summit kicked off in Glasgow this week. Why does COP26 and UN conferences like this matter?

Regnan impact investment analyst Maxime Le Floch:  Well, the UN conferences are really important because climate regulation is an extremely valuable service. But the problem is, it’s a global public good, which means that it requires some kind of international co-ordination to protect it.

Otherwise, there is a risk of a free-rider effect where some countries could emit emissions while others reduce. So the countries need to agree on some sort of globally agreed targets. And this is what they’ve been trying to do with those Conferences of Parties (COPs).

Now the issue is that the current policies – even though they’re getting a lot better and we’ve seen a massive change in the last few years – the current policies put us on track to 2.7 or 3.1 degrees of global warming, which is not enough.

Now with the COP26, this is the time since the Paris Agreement where countries need to update their national plans for reduction in greenhouse gas emissions. So this is why this is really important.

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And I think this year the International Energy Agency has really set the tone, saying that to reach those climate targets there needs to be a lot more action.

For instance, the annual renewable electricity investment need to grow three times by 2030. So there’s a need for a lot more investment. There’s been a lot of investment in clean technology already, but that needs to grow further.

Interviewer: So as an investor, do you hope from COP26 you will see these roadmaps – but also real money – to build the infrastructure and the capability to have a carbon-neutral world in 2050? Which obviously means potentially there’s things to invest in.

Regnan’s Maxime Le Floch: That’s right.What’s really important with those COPs is what is done at the country level in particular. So long-term commitments from major countries, but also particularly the mid-term targets to 2030.

Now we’ve seen massive change very recently. Twomonths ago China committed to net zero by 2060. Also just this week, remarkably, India committed to net zero as well, which was unthinkable just a few years ago.

So this means that 84% of global CO2 emissions are now covered by net zero targets.

This is really important because that then shapes policies for renewable energy, electric vehicles, smart grids – for a lot of those investments. So that’s supportive.

In particular, something that many people expect is more in terms of carbon markets, because that could be a very clear signal for where companies need to go.

Interviewer: Soin a very tangible sense COP26 – if it’s successful – makes companies think differently about climate change and ESG, which obviously has flow-on effects for what you’re investing in or not investing in?

Regnan’s Maxime Le Floch: Yes, it’s really important.

Something I think we need to bear in mind is that there are also deeper forces.

The reason why we are seeing a lot more at the moment is that there’s also a deeper economic force at play here.

There’s a lot of green innovation accelerating. There are opportunities throughout many sectors for decarbonisation… many opportunities to make processes more efficient and reduce the energy footprint of operations. We often have a good return on investment for companies implementing them.

Those dynamics are really helping the global common action because they make the transition a lot more appealing economically.

And that’s a very powerful force for countries, but it’s a fantastic opportunity for investors.

Interviewer: Does it actually open up the investment horizon with more options now because of things like COP26 pushing companies to become more carbon neutral?

Regnan’s Maxime Le Floch: Yes, exactly. For instance, something we’ve been looking at recently is patents for green technology, where we see that kind of acceleration.

There’s been a lot of growth in those patents which really signals that innovation is accelerating and bringing new opportunities to market.

If you look at global patents in the 1990s, environmental technologies patents were just 6% of global patents. Now they’re 10%.

So they’ve been growing quite a lot.

Some technologies in terms of patent trends have been growing at 20%-30%, over the last decade in things like electric vehicle (EV) charging, autonomous vehicle technology, et cetera.

That really plays into what the International Energy Agency was saying about needing to triple investments in renewable energy.

And you can look at opportunities beyond that. Hydrogen production we need to grow 700 times compared to the level it is today. Public EV charging [needs to grow] 150 times Battery storage technology 170 times.

These are very big markets that are forming and that are accelerating.

So the more we get to net zero target, the more those markets are set to see exponential growth.

Interviewer: FinallyMaxime, are you happy with how COP26 has progressed so far? It was a rocky start with G20 but it certainly has picked up pace since then.

Regnan’s Maxime Le Floch: It has. The move from India was a big step. Something that was holding back some of the discussions was the fact that the old industrial countries were seen as responsible. A lot of things have changed with China and India becoming a bigger part of the emissions equation and they recognise that.

And again, countries like China and India recognise that there’s a cost-benefit equation whereby the cost of mitigation – the cost of reducing emissions, investing in new environmental technology – is reducing dramatically and can give you benefits.

China has very good technology in batteries, electric vehicles, smart grids. These things you can actually export as a country so it makes good business sense.

At the same time, the recognised they are exposed as countries to the physical risks of climate change. That cost is now seen as higher than it used to be and the impact is nearer than expected with issues around extreme weather events accelerating and impacted those countries more.

So it’s a decent start. We are just in the beginning. Let’s hope there’s more tangible action, and in particular commitments.

The commitment by individual countries are particularly interesting to look at.

Interviewer: Maxime, thank you for talking to The Point.

That was Maxime Le Floch, impact investment analyst at Regnan. You’ve been listening to The Point podcast from Pendal. I’m Sean Aylmer.

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About Maxime Le Floch

Maxime is an analyst with Regnan’s impact investment team. He focuses on Regnan Global Equity Impact Solutions Fund. Maxime has more than 10 years of experience in sustainable investment. Before joining Regnan he was an investment analyst with Hermes where he helped launch and manage the Hermes Impact Opportunities Equity Fund.

Investors in Regnan Global Equity Impact Solutions fund are on a journey with diabetes pioneer Novo Nordisk to treat obesity. Regnan’s Maxime Le Floch explains

• 650 million adults are obese
• Novo Nordisk is an early mover in anti-obesity drugs
• Regnan Global Equity Impact Solutions fund is an investor in Novo Nordisk

INVESTORS can spend years looking for a market-leading company in a fast-growing sector that’s innovative enough to withstand challenges and stable enough to grow with demand.

There are not many such companies — though Danish pharmaceutical group Novo Nordisk might be one of them says Maxime Le Floch, an investment analyst with Regnan’s Global Equity Impact team.

“This is the poster child for finding a really strong solution that’s miles ahead of competitors in a fast-growing market,” he argues.

The market? Anti-obesity treatment.

Novo is best known as a pioneer in diabetes treatment, where it holds about 30 per cent of the global market. Its diabetes drugs reached 34.6 million people around the world in 2021.

About 422 million people worldwide have diabetes and 1.5 million deaths are directly attributed to the disease each year, says the World Health Organisation.

Novo is now developing medical treatments for obesity, which is closely linked with diabetes.

The WHO reports 650 million adults are obese (1.9 billion are classed as overweight) and some 4 million die each year from obesity.

However anti-obesity medication is almost non-existent. “It’s a new category,” Le Floch says.

Novo Nordisk launched its new “Wegovy” injectable anti-obesity drug in the US last June and expects to launch in Europe later this year.

A pioneer in diabetes treatment

Novo Nordisk’s heritage dates back to 1921.

After hearing of the discovery of insulin in Canada, Danish Nobel laureate August Krogh and his wife Marie — a doctor living with diabetes — convinced the researchers to allow production in Denmark.

The first patients were treated in March 1923.

Suddenly diabetes was no longer a death sentence. The original company grew quickly and merged with a competitor.

By 2022 Novo Nordisk was a global leader in the treatment of diabetes.

“It’s very innovative in finding new treatments,” Le Floch says. “It is improving outcomes in terms of co-morbidities, in particular cardiovascular and hypoglycaemia.”

Treatments for diabetes, which is a condition of having too much glucose circulating in a person’s bloodstream, have evolved over time, from daily injections to weekly injections, from the use of syringes to the use of pens.

That’s Novo Nordisk’s base business.

Treating weight-loss

“Over the past few years Novo Nordisk has started working on new treatment pathways using glucagon-like peptide 1 (GLP-1) and realised it had very good outcomes not just for diabetes but also for weight loss,” Le Floch says.

GLP-1 drugs treat type 2 diabetes, the most common form of the disease which affects 380 million people globally.

“They explored that outcome and it led them to develop anti-obesity medication that’s revolutionary. The cardiovascular profile for the treatment looks very compelling as well,” Le Floch says.

Anti-obesity medication

Obesity and diabetes go hand-in-hand. People with a higher body mass index are more likely to develop diabetes.

Humans are getting heavier, according to a range for government funded and private studies. Greater calorie intake, confusion over what’s nutritional and general inactivity are mostly to blame.

It isn’t a challenge just for the health system but for many sectors across the economy.

For example, in June last year, the Levi Strauss boss Chip Bergh told analysts that during COVID around one-third of customers’ waist sizes had changed. In Levi’s case it was a positive because people had to buy new clothes.

But mostly it’s a negative and the health sector is at the forefront of the fight against expanding waistlines.

Novo Nordisk is moving towards treating the source as well as the symptoms, Le Floch explains.

“For some people reducing food isn’t enough to reduce their body mass index. Now there is a treatment pathway …. And the weight loss benefits are very compelling.”

Covid link

People who have contracted COVID may also be more likely to suffer from diabetes, according to early studies.

“That’s not totally proven yet but certainly the potential is there. In France, medical authorities realised that many of the people who ended up in emergency care because of COVID also lived with obesity,” Le Floch says.

Medication for obesity is under-served.

“Anti-obesity medication is almost non-existent, or at least very, very small. It’s a new category,” Le Floch says.

“Novo Nordisk is investing in clinical trials to prove further the benefits of its treatment. It could end up in a new market where there aren’t many solutions and there is a massive opportunity.

“That’s the investment case for Novo Nordisk. Not just treatment of diabetes but attacking the source of the disease, opening up a whole new market.”

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About Maxime Le Floch

Maxime is an analyst with Regnan’s impact investment team. He focuses on Regnan Global Equity Impact Solutions Fund. Maxime has more than 10 years of experience in sustainable investment. Before joining Regnan he was an investment analyst with Hermes where he helped launch and manage the Hermes Impact Opportunities Equity Fund.

A new Trump Administration, mass restructuring of Japanese corporates, artificial intelligence and weight loss drugs are just some of the trends that will drive global equities in 2025, says Pendal’s CHRIS LEES

• Global mega-trends resetting investing
• Mid-caps set to benefit
• Find out about Pendal Global Select Fund
• Watch a Pendal webinar covering the outlook for global equities and emerging markets

AS THE biggest global election year in history comes to a close, a range of new opportunities – and risks – are emerging for global equities investors in 2025.

Just after the US election, Pendal Global Select fund manager Chris Lees joined a live webinar with Pendal Global Emerging Markets Opportunities fund manager Ada Chan to discuss the major trends affecting investors.

You can watch the full webinar here. 

Below are Chris Lees’s key points. Click here for Ada Chan’s insights.

The Trump effect

“Our assumption is that Trump 2.0 will be slightly different from Trump 1.0 and will probably be quicker to make some deals,” says Lees.

Mid-cap stocks are already beneficiaries.

“There are a lot of really exciting mid-cap stocks around the world, in many geographies, in many sectors, where earnings have come through the last few years but share prices haven’t done much because global markets have been obsessed with the Magnificent Seven [technology stocks],” Lees explains.

“Partly the better performance from mid-caps is a result of the Trump election, because the new Administration will be very business friendly.

“We are also seeing a better performance from the financials and cyclicals. I think that is sustainable.”

Japanese restructuring

Opportunities in Japan involve corporate restructuring, Lees says.

“Japanese corporates are embarking on western style restructuring and seeing huge earnings growth and huge revenue growth. That’s the excitement in Japan – politics is much less the driver.

He calls it a regime change, and it was triggered by the Japanese stock exchange writing to companies telling them to restructure to get their price-to-book values above one.

“The threat is they will be de-listed [by the exchange] and no CEO wants to be delisted. It’s a powerful stick,” Lees says.

“There’s a whole generation of really, really exciting new Japanese restructuring opportunities for global investors.”

Second generation GLP-1 drugs

Lees calls the development of GLP-1 drugs, better known as weight loss drugs, a “genuine regime shift”.

“Humankind has never had these before … and when you get a regime shift you tend to overshoot.”

He says investors in Novo Nordisk and Eli Lilly, the manufacturers of first generation obesity drugs, have done well. But the side-effects of the drugs, including gastro issues, vomiting and diarrhea, are negatives. There is also too much weight loss from muscle, and not enough from fat.

“The next generation of weight loss drugs is what we are most excited about. The are 20 plus next generation anti-obesity drugs in phase one, two or three trials. Eli Lilly and Novo Nordisk have about half of them, but the others are owned by some really exciting mid-cap companies,” Lees explains.

 “They have less side effects and more of the weight loss is from fat. So that whole market will evolve.”

Artificial intelligence

On artificial intelligence, Lees says the big question is who is going to make money, apart from chip maker Nvidia?

“At the moment, the majority of profits have gone to one stock. Can we find other stocks that can use AI to become inherently more profitable for shareholders?” he asks.

“The bear case for AI is that in the history of technology, successful tech is better, faster, cheaper. But AI isn’t better, faster cheaper because …. Its three to five time more expensive to do an AI driven search than it is a regular Google search.”

“Don’t be wholeheartedly positive, because this technology currently is slower and more expensive. It’s fascinating.”

Find out more about Pendal Global Select Fund

About Chris Lees and Nudgem Richyal

Chris Lees and Nudgem Richyal are senior fund managers of Pendal Global Select Fund. The pair have been working together as investment managers for more than 20 years.

Chris has more than 32 years of investment industry experience. He joined Pendal Group’s UK-based asset manager J O Hambro Capital Management (JOHCM) in 2008 after spending 19 years at Baring Asset Management, ultimately as head of its global sector team.

Nudgem has 22 years of industry experience, joining JOHCM with Chris in 2008. He was previously an investment director with the Global Equity Group of Baring Asset Management, where he worked closely with Chris since 2001.

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About Pendal Global Select Fund

Pendal Global Select Fund is a global equities portfolio with a distinctive, yet proven approach. It is a ‘quantamental’ fund combining quantitative and fundamental investing with decades of experience.

Instead of following the crowd, portfolio managers Chris Lees and Nudgem Richyal focus on “fat tail” winners in the distribution of stock returns.

These are the long-term compounders, stocks in early-stage growth or those undergoing transformation or recovery.

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About Pendal

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

Our experienced, long-tenured fund managers have the autonomy to offer a broad range of investment strategies with high conviction based on an investment philosophy that fosters success from a diversity of insights and investment approaches.

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.

Contact a Pendal key account manager here

In a new short video, Pendal Global Select portfolio manager CHRIS LEES outlines the themes driving his team’s investment decisions in 2024

• Anti-obesity theme is revealing winners and losers
• Trend from mega-caps to mid-caps
• Find out about Pendal Global Select Fund

THERE are ten major themes driving global equities investing right now, according to Pendal portfolio manager Chris Lees.

In his latest quarterly video (watch below), Chris briefly outlines each theme and how he and Pendal Global Select Fund co-manager Nudgem Richyal aim to take advantage.

Chris and Nudgem remain enthusiastic about the biotech theme, buying a mid-cap stock with positive new drug results in the anti-obesity space.

But he also warns investors to be aware of anti-obesity losers among snacking stocks and consumer staples.

“It’s also becoming bad news for the healthcare sector. So we would expect the healthcare sector to deteriorate to red lights as well.”

Chris sees a tech-driven bull market continuing to broaden away from mega caps into midcaps — a trend he predicted he spoke about in February.

“The technology sector’s got positive fundamentals and positive trend, but it’s now expensive and we would expect other cyclical sectors above it to start improving.”

Chris says he and Nudgem are now “80 per cent bullish and 20 per cent bearish”.

In this video, Chris also outlines three possible scenarios — and their likelihood — going forward.

Watch the video above.

Find out more about Pendal Global Select Fund

About Chris Lees and Nudgem Richyal

Chris Lees and Nudgem Richyal are senior fund managers of Pendal Global Select Fund. The pair have been working together as investment managers for more than 20 years.

Chris has more than 32 years of investment industry experience. He joined Pendal Group’s UK-based asset manager J O Hambro Capital Management (JOHCM) in 2008 after spending 19 years at Baring Asset Management, ultimately as head of its global sector team.

Nudgem has 22 years of industry experience, joining JOHCM with Chris in 2008. He was previously an investment director with the Global Equity Group of Baring Asset Management, where he worked closely with Chris since 2001.

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About Pendal Global Select Fund

Pendal Global Select Fund is a global equities portfolio with a distinctive, yet proven approach. It is a ‘quantamental’ fund combining quantitative and fundamental investing with decades of experience.

Instead of following the crowd, portfolio managers Chris Lees and Nudgem Richyal focus on “fat tail” winners in the distribution of stock returns.

These are the long-term compounders, stocks in early-stage growth or those undergoing transformation or recovery.

---

About Pendal

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

Our experienced, long-tenured fund managers have the autonomy to offer a broad range of investment strategies with high conviction based on an investment philosophy that fosters success from a diversity of insights and investment approaches.

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.

Contact a Pendal key account manager here

Get set for a 2024 that flips the script on the story of 2023, with the end of big tech outperformance and a resurgent Japanese yen. CHRISTOPHER LEES explains

• Magnificent Seven peaking
• Japanese yen set for recovery
• Find out about Pendal Global Select Fund

The outperformance of America’s Magnificent Seven tech megacaps will come to a halt in 2024, paving the way for a return to market leadership for small and midcaps stocks, says Pendal’s Christopher Lees.

Big tech dominated markets in 2023, with the so-called Magnificent Seven – Amazon, Apple, Google, Meta, Microsoft, Nvidia and Tesla – collectively outperforming global equities by 73 per cent.

But as the earnings and price performance of the tech stocks begins to peak, the market baton is set to be passed back to a fast-recovering small and mid-caps sector, says Lees, who manages Pendal’s Global Select fund. “2023 was an extraordinary year.

But we expect the Magnificent Seven to start underperforming the overall index in 2024. This really could be the beginning of a new trend change – a ‘vice versa’ where small and mid-cap stocks outperform mega caps,” says Lees.

Lees – speaking above via video update to holders of the Pendal Global Select fund – says 2024 is shaping to provide a number of ‘vice versa’ performances when compared to 2023.

Apart from the end big tech’s outperformance, the year is also likely to be characterised by a peak in US market outperformance as emerging markets take the lead, and renewed strength from the historically weak Japanese yen.

These changes have profound implications across equities, fixed income and currency markets, says Lees.

“In 2023, the US improved and emerging markets deteriorated. That’s one of the first things we think might be a vice versa in 2024 with the US economy slowing and emerging market earnings recovering.”

Lees says emerging markets inflation rates are falling and emerging market interest rates still have quite a way to come down. Meanwhile, cyclical indicators in emerging markets are recovering very strongly.

“We expect emerging market earnings to recover very strongly as well,” he says.

“So you put those two things together, the prospect of falling interest rates and accelerating earnings growth in emerging markets and that’s why we think emerging markets will perform much better in 2024 than they did in 2023.”

Lees says another change could come from the end of historical weakness in the Japanese yen, which is trading at a 50-year low relative to other major currencies.

“The Bank of Japan was the last central bank with negative interest rates. Many people think that will change in 2024.

“Recently we’ve seen the Fed do a dovish pivot on interest rates and we’ve seen the Bank of Japan loosening yield curve control.

“Both of those we think are early warning signs and very, very bullish for the Japanese yen in 2024.”

Find out more about Pendal Global Select Fund

About Chris Lees and Nudgem Richyal

Chris Lees and Nudgem Richyal are senior fund managers of Pendal Global Select Fund. The pair have been working together as investment managers for more than 20 years.

Chris has more than 32 years of investment industry experience. He joined Pendal Group’s UK-based asset manager J O Hambro Capital Management (JOHCM) in 2008 after spending 19 years at Baring Asset Management, ultimately as head of its global sector team.

Nudgem has 22 years of industry experience, joining JOHCM with Chris in 2008. He was previously an investment director with the Global Equity Group of Baring Asset Management, where he worked closely with Chris since 2001.

* Source: JO Hambro, Morningstar universe – Global Large-Cap Growth Equity funds, Lipper survey – Sector quartile ranking: IA Global, and Lipper Global Equity Global domiciled in the UK, offshore Ireland, or offshore Luxembourg. Lipper ranking is from A GBP Class. Please note that these performance figures have not been calculated in accordance with the Financial Services Council (FSC) standards. 

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About Pendal Global Select Fund

Pendal Global Select Fund is a global equities portfolio with a distinctive, yet proven approach and a 17-year track record of outperformance. Since its inception, the underlying strategy (JOHCM Global Select Fund) has delivered top-decile performance in Lipper and 2nd decile in Morningstar.*

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This presentation has been prepared by Pendal Fund Services Limited (PFSL) ABN 13 161 249 332, AFSL No 431426. It is not to be published, or otherwise made available to any person other than the party to whom it is provided. PFSL has appointed J O Hambro Capital Management Limited (JOHCML) as the investment manager of the Fund. JOHCML is a wholly owned subsidiary of Perpetual Limited and a related party of Pendal Institutional Limited. Pendal Institutional Limited has appointed JOHCML as its authorised representative (Representative number 001280039) under its Australian Financial Services Licence.

PFSL is the responsible entity and issuer of units in the Pendal Global Select Fund (Fund) ARSN: 651 789 678. PFSL has appointed J O Hambro Capital Management Limited (JOHCML) as the investment manager of the Fund. JOHCML is a wholly owned subsidiary of Perpetual Limited and a related party of Pendal Institutional Limited. Pendal Institutional Limited has appointed JOHCML as its authorised representative (Representative number 001280039) under its Australian Financial Services Licence.

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About Pendal

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