Reckon you’ve got 2024 figured out? Stay on your toes, because markets could go in any direction this year. Pendal’s head of income strategies AMY XIE PATRICK explains her thinking in our latest podcast

You can also listen to this podcast on Apple or Spotify

An excerpt from this podcast

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Amy Xie Patrick, Pendal’s head of income strategies:

At the start of 2023, the investment base case was a US recession, an inverting yield curve and an end to the inflation fight.

There was optimism about China reopening after the end of zero-Covid restriction policies.

Now, at the beginning of 2024, it couldn’t be more different, says Pendal’s head of income strategies Amy Xie Patrick in our new podcast.

Recession is now nobody’s base case, says Amy. China is the last place people are optimistic about in their world views.

It’s all evidence that investors will need many levers to pull when navigating this cycle, she says.

“Risk number one is that a soft-landing narrative led by the US economic story may not end up being the case,” says Amy.

“The biggest risk is always what’s outside of consensus. It’s not to say that consensus can’t happen, but if the consensus is the case, markets tend to be priced for it. “

Another risk is markets pricing in six Fed cuts, despite data showing resilient growth.

In her new podcast, Amy explains how she is preparing for risks – and opportunities – the market may not be considering.

With interest rates peaking, and depressed valuations, small and mid-cap stocks could be poised to outperform, argues Regnan’s TIM CROCKFORD

• Small, mid cap valuations depressed
• Europe, Japan, Indonesia, Brazil best opportunities
• Find out about Regnan Global Equity Impact Solutions Fund

VALUATIONS of smaller and mid-cap stocks have reached an extreme level in some parts of the world, believes Regnan portfolio manager Tim Crockford.

Global equities investors should be starting to consider allocating to smaller and mid-cap stocks or “SMIDs”, Crockford, who leads the equity impact solutions team at Regnan.

“People have taken money out of equities and much of that has gone from passive investments and systematic strategies, points out Crockford.

“So the $1 billion and $3 billion companies are disproportionately affected compared to the $100 billion or $300 billion company,” he says.

“Our macro view is that it’s going to get worse before it gets better. But financial conditions are likely to start loosening on account of the market speculating that we’ve seen peak rates.

“What the macro environment does is remove a major headwind SMIDs have faced for three years and gives them a bit of a tailwind going into next year, albeit with elevated volatility initially.

“That’s because when liquidity comes back into the market, we should get the opposite effect of what started when financial conditions started to tighten in 2021.

“We expect that to close the relative valuation gap.”

Where to look for SMIDs

There are tens of thousands of “SMIDs” stocks in developed and emerging markets.

So where to look?

Start by looking outside the United States, says Crockford.

“In terms of developed markets, Europe and Japan offers opportunities.

“In terms of emerging markets, it’s places like Indonesia and Brazil.

“In those economies, valuations are still very attractive given where they are in the cycle. There is clear opportunity there.

“We are still looking at interesting companies in the US — and perhaps some companies there will make their way into our portfolio at some point.

“But on a stock-specific basis, the ones we like are still trading on valuations that are a bit less forgiving if we do go into an economic downturn in 2024.”

Look for growth

Beyond geography, Crockford’s team is looking for companies that will show growth over the next 12 months — or where a valuation is so depressed it’s priced for a highly negative drop in growth in 2024.

“We are looking for companies that are able to generate organic cash flows to fund at least part of their growth.

“And the remainder of the funding needs to be covered by debt that isn’t going to burden, or reverse, the positive effects of potential future cash flow growth.”

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About Tim Crockford

Tim Crockford leads Regnan’s Equity Impact Solutions team and is senior fund manager of Regnan Global Equity Impact Solutions Fund. Tim previously managed the Hermes Impact Opportunities Equity Fund after co-founding the Hermes impact team in 2016.

Have investors missed the boat on bonds after they touched 5 per cent in October? No, says Pendal’s head of bond strategies Tim Hext. In this latest fast podcast he explains why.

You can also listen to this podcast on Apple or Spotify

An excerpt from this interview with Pendal’s head of government bond strategies Tim Hext:

For the first time in a number of years, it’s a pretty favourable environment for bonds.

Although they’ve rallied this month, 10-year bonds are roughly around 4.5% in Australia now.

They did briefly touch 5% at the end of October. People may look at that and say, “Oh, I’ve kind of missed it”.

But 4.5% is still very attractive if you believe inflation is going below 3%.

I think we’re still in the territory where if you lock your investments in from a fixed-rate point of view —in other words you buy bonds — you’re likely to do pretty well out of it.

4.5% should turn out to be a pretty good return, because term deposits are creeping up around 5% now.

When I look across the spectrum of what you can buy in bonds, government bonds are around 4.5%, state government bonds 5.25% and bank debt around 6%.

On term deposits, my question to investors would be: Okay, let’s assume term deposits are at 5% and you’re locking yourself into those with no liquidity.

Where do you think on average they’re going to be over the next five or 10 years?”

I think most people would assume they’re going to be a little bit lower, not higher; and that cash rates will come down rather than go up a lot more.

And yet, right now you can lock in, for five or 10 years, rates above 5% in bonds.

The other advantage of bonds is that they’re liquid.

You can sell them anytime. You’re not locked up like you are in a term deposit.

That’s particularly important, that if you saw a sudden sharp sell-off in equities and you’re wanting to buy them — but your money’s locked up in term deposits.

What does worry me is that central banks are driving in a rear-view vision mirror — they’re relying on inflation, and inflation is a very lagging indicator.

So they’re probably going to be a bit too slow to cut rates, because they’ll still be looking at inflation not coming down fast enough in Australia particularly.

That does open the door a little bit for some economic weakness. It’s not a core view, but there’s a higher danger of that.

Apart from that, the soft-landing scenario does look favourable for credit as well, and even for equities — which I think the markets started to factor in a little bit in the last month.

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

Bond yields are hitting multi-year highs. Why is it happening and what’s next? Pendal’s head of government bond strategies TIM HEXT explains in our latest fast podcast

You can also listen to this podcast on Apple or Spotify

An excerpt from this interview with Pendal’s head of government bond strategies Tim Hext:

US and local bond yields are hitting multi-year highs. Why is it happening and what’s next?

Resilience in the US economy is the main factor, says Pendal’s head of bond strategies Tim Hext.

That’s due to the dominance of fixed-rate loans there and Joe Biden’s big-spending government.

Meanwhile the Australian economy is holding up better than expected and the fixed-rate cliff hasn’t impacted as much as people thought.

“I think it’s a good time to be buying bonds,” says Tim. “At the moment you can buy state government debt at 6% yields.

“The cash rate is likely going to 4.35, but I don’t expect it to be well above 5% for the next decade or two.”

Bond investors are rewarding in two ways, argues Tim: the return and thei insurance role.

“If things were to get out of hand, if you get a collapse in equities, if you see major geopolitical disruptions in this heightened risk environment, then bonds should perform their defensive role.

“I do think they’re cheap insurance.”

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

A drug designed for diabetes — and increasingly used in weight control — has the potential to change the economics of not just healthcare, but many other sectors. Regnan’s MAXIME LE FLOCH explains

• GLP-1 diabetes and weight-loss drugs could have broad economic impact
• Find out about Regnan Global Equity Impact Solutions Fund
• Making Money and Making Change: Watch a webinar with Regnan’s Tim Crockford and former RBA deputy governor Guy Debelle

OBESITY has been a major medical problem for decades, and is fast turning into a crisis with forecasts that half the global population will be significantly overweight by 2035.

The US Center for Disease Control and Prevention says one in five children and one-third of adults already struggle with obesity.

Obesity triggers a range of ailments, from diabetes, high blood pressure and heart disease, to sleep apnoea, psychological issues and musculoskeletal conditions. 

The development of GLP-1 drugs — initially for treating type-2 diabetes and now for obesity and weight loss — has the potential to change not just outcomes for patients, but the economics of healthcare, argues Maxime Le Floch, an analyst with Regnan’s impact investment team.

Regnan is a global responsible investing asset manager distributed in Australia through Pendal and Perpetual Group.

It’s very early days, but there is the potential for demand among medical practitioners such as heart surgeons and orthopaedists, he says.

That means investors in healthcare, and beyond, should consider the impact of GLP-1.

“GLP-1 drugs could have a market-wide impact because they have the potential to lower patient populations for a range of conditions.”

Le Floch adds that most of the impact though won’t be seen for several years.

How they work

Danish company Novo Nordisk (which Regnan invests in) and global pharmaceutical giant Eli Lilly are the two dominant manufacturers of GLP-1 drugs. 

They mimic glucagon like peptide-1 (GLP-1), an incretin hormone that’s released after eating.

“GLP-1 drugs slow gastric emptying, increases satiety and reduces appetite,” Le Floch says.

“They also reduce glucagon and increase insulin secretion, at the level of the pancreas, which underpins glycaemic benefits in diabetics. It’s essentially a key regulator of the body’s response to eating.”

New studies

Demand for GLP-1 is strong and keeping up supply is already a challenge.

The health benefits from recent studies could further exacerbate the supply challenge.

“There was a recent study on cardiovascular risk using NovoNordisk’s GLP-1, and the results were far better than expected. The reduction in cardiovascular risks were in line with cardiovascular drugs.

“There was also a recent trial on chronic kidney disease. The trial was stopped early because of the success of GLP-1.

“Does this mean we will need less kidney dialysis?” Le Floch asks.

The health benefits, if proven, are obvious.

The impact on the healthcare industry — and everyone operating in it from clinicians to suppliers of medical devices and artificial joints — could also be enormous, Le Floch argues.

Beyond healthcare

And it goes beyond healthcare.

US retail giant Walmart recently said it saw “a slight pullback in overall basket” due to GLP-1 drugs slowing food-shopping demand.

“And that comment comes very early in the GLP-1 lifecycle,” Le Floch says. “Less than one per cent of the US population has been on some kind of GLP-1 drug.”

Some food categories are particularly exposed to the impact of GLP-1.

For example, 20 per cent of US adults account for 70 per cent of ice cream consumption, and 9 per cent account for more than a third of confectionary consumption.

“We are still in the early days of obesity treatment getting widely adopted.

“But if people take the drug, change their eating habits, and decrease their risk of developing medical conditions associated with obesity, that could have a real impact on the wider economy.”

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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.

China’s political and economic policies have a huge impact on Australia. In this new podcast, Pendal’s head of income strategies AMY XIE PATRICK explains the latest factors affecting investors

You can also listen to this podcast on Apple or Spotify

An excerpt from this podcast

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Amy Xie Patrick, Pendal’s head of income strategies:

Why doesn’t Beijing pump stimulus into the Chinese economy as other countries do?

“We have to remember that the Chinese political system is not a democratic system, and its principles are very socialist at heart,” says pendal’s head of income strategies, Amy Xie Patrick

“A very classic characterisation of the Chinese style of socialism is they don’t believe in ‘helicopter money’.

They believe money going directly into people’s pockets isn’t the way to common prosperity. Instead, everyone should toil in order to achieve that prosperity.

However, now we’re reaching a point where the drag from the Chinese property story is so severe that they kind of have to choose a lesser of two evils.

Lately you’ve been hearing that some of the government bodies have been proposing a larger fiscal deficit in 2024. The amounts being thrown about are not that large, but I think it’s a signal that the government is on the cusp of considering more direct-to-consumer stimulus, at least just to keep the current positive momentum going for China.

AI developers need power-hungry computer chips. Companies developing more energy-efficient chips are poised for strong growth. MAXIME LE FLOCH explains

• Climate concerns from AI energy use
• New tech can improve efficiency
• Find out about Regnan Global Equity Impact Solutions Fund

SELLING shovels in a gold rush has become a bit of an investing cliche, but it’s an apt description of German-listed Aixtron SE, which makes equipment for the semiconductor industry.

The rapid growth of artificial intelligence technology is driving demand for semiconductors, the fundamental components of all computing devices.

Fast-growing AI chip-maker Nvidia is a prime example.

However, soaring demand for computing power is also causing the problem of high energy consumption and growing carbon emissions.

Aixtron is at the forefront of trying to solve this problem.

“Artificial intelligence doesn’t exist in the ether — it requires computing power from a vast infrastructure of data centres,” says Maxime Le Floch, an analyst with the Regnan Global Equity Impact Solutions fund.

“So there has been a boom in the demand for data centres, and one of the derivatives of that growth is the need for more semiconductors.

“One of the technologies that can help solve the issue of high energy consumption and carbon emissions in the semiconductor industry is the use of compound semiconductors like gallium nitride, where Aixtron is a market leader.

“Gallium nitride chips have a much better energy efficiency than traditional silicon.

“It’s 10 times the voltage of traditional silicon — that’s a huge improvement in energy efficiency.”

This improvement in energy efficiency can reduce the energy consumption of a data centre by 20 per cent, leading to a 10 per cent reduction in data centre operating expenditure, says Le Floch.

These are important advances.

A single prompt in chatGPT consumes hundreds of times more energy than a single google search.

Training the underlying AI model for ChatPGT3 generated 550 tonnes of carbon emissions.

Aixtron is a supplier of “deposition” machines which “deposit” thin layers of high-tech material on computer chips during their manufacture process.

Traditionally made of pure silicon, semiconductors are now increasingly made with two or more elements to improve performance and efficiency.

Aixtron has a 90 per cent market share of the systems that make these so-called compound semiconductors.

“It makes a lot of economic sense for the industry to move to compound semiconductors and Aixtron is dominant,” says Le Floch.

Use in electric vehicles

The firm is also a leader in silicon carbide used in power electronics that manage electrical energy in electric vehicles.

“There’s a move in electric vehicles to silicon carbide inverters that can withstand much higher voltage and temperature than traditional silicon and Aixtron is the leader in this,” says Le Floch.

“Hyundai reported they were able to improve the range of their EVs by 5 per cent just because of the efficiency gains of silicon carbide inverters.

“That’s a big improvement that can either be used to increase range or reduce the size of the battery, which means a lower cost vehicle that uses fewer materials and has better energy efficiency.”

Market drivers

Le Floch says Aixtron is benefiting from the confluence of multiple adoption curves — the rapid growth of AI, the search for more energy-efficient semiconductors, the adoption of EVs and the car industry’s migration to silicon carbide.

Gallium nitride semiconductor demand is growing at 50 per cent per annum, while silicon carbide growth is 30 per cent, he says.

Powerful structural trends like AI and EVs create their own environmental challenges and require changes in the value chain to solve problems like energy efficiency, says Le Floch.

“Companies that can provide compelling solutions for these kinds of problems typically experience very strong growth and long term, compounding earnings.”

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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.

You can also listen to this podcast on Apple or Spotify

An excerpt from this interview with Pendal’s head of government bond strategies Tim Hext:

After the latest inflation numbers, you’re probably thinking “so far, so good” on rate rises and the economy.

No evidence yet of a sharp slow-down and fixed mortgage holders seem to be adjusting ok to higher rates, partly due to strong employment.

Though we’re only halfway through the six-month fixed-rate cliff period, points out Pendal’s head of government bond strategies TIM HEXT in this latest fast podcast.

What’s next for investors?

“It’s a very mixed picture and with managing money, you’ve got to respect that for now,” says Hext.

“The mega trends are probably on hold for the next six to 12 months, but we’ll be keeping a very close eye on everything to see what emerges.”

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

Looking for exposure to AI? Go beyond big tech and look for companies using the technology to improve efficiency or build competitive advantage, says senior Pendal global equities analyst SUE SCOTT

• AI transforming business
• Look for productivity, product winners
• Find out about Pendal Concentrated Global Share Fund

THERE’S little doubt artificial intelligence technology has the potential to revolutionise the way business is conducted.

But for investors, finding the ultimate winners from AI is a challenging task.

Much of the early AI excitement this year has focused on the big tech firms that are developing the technology and the systems it runs on.

But for investors looking for a longer-term play, Pendal’s Sue Scott says a better approach may be to find the businesses succeeding in deploying AI in their own operations.

“There’s a lot of hype factored into what AI means for future earnings,” says Scott, senior investment analyst for Pendal Concentrated Global Share Fund.

“But our focus has been looking at the companies where AI is being successfully used as a tool for productivity and product development.”

Example one: copper mining

Scott says one early success has been at Freeport-McMoRan, one of the world’s largest copper miners, which has been able to drive higher production by deploying AI to recommend operational improvements.

“Freeport was asking the question ‘how do we get more out of what we’ve got, without spending a huge amount of capex?’ says Scott.

“They started with one mine in Arizona, trying to learn about AI and machine learning and what it could do to enhance their existing systems.

“They brought in the site operators, AI developers, and metallurgists to work together on training an AI model to make recommendations on setting mill processing rates.

“The result was a significant 5 per cent increase in production and a lift in copper recovery rates.”

Fed by sensors on the mine’s trucks, shovels and machinery, the AI model adjusts settings every hour to maximise production from different types of ore.

Over five years, Freemont will unlock the equivalent of one new processing facility in additional copper production.

Example two: solar panels

A second example of successful AI deployment is at French oil and renewables giant Total Energies, which has a target of switching its global service station network to solar power.

“Total operates in about 60 countries and runs thousands of service stations and they’re well on the way to achieving the solar goal,” says Scott.

“But during the project they realised that a lot of the places they operate were not covered by high satellite imagery — which is critical to working out a site’s solar potential.

“What they did was partner with Google to use generative machine learning models to develop a tool to measure solar potential in specific areas where there was no high-quality satellite imagery.

“The tool can also be used estimating the potential output of solar panels on private houses or on commercial and industrial sites.”

Higher productivity and earnings

AI is an important factor for investors to consider because it has the potential to lift productivity and earnings across industries.

“But some companies will be faster than others,” says Scott.

“Freeport has been working on this for five years. This isn’t a new thing. But it will incrementally improve as the technology improves.

“Our investment philosophy is always to own the dominant players in any particular market.

“To keep that edge, it’s important for us to see that they’re at least looking at these kinds of technologies.

“In a world where you’ve got supply chain issues, inflation, and margins under pressure, companies that can extract productivity from very little investment — which is what Freeport have done — are going to have an edge when it comes to profitability.

“They are the sorts of companies we like to invest in.”

Investors should also be mindful of the critical role of a company’s chief technology officer.

“The role of chief technology officer in any company is becoming increasingly important — and not because not just because of AI, but also because of the threat of cybersecurity.

“It’s also becoming increasingly important to have technology expertise at a board level as well.”

 

 

 

As the Albanese government prepares to issue Australia’s first sovereign green bonds, Pendal’s head of credit and sustainable strategies GEORGE BISHAY and ESG credit analyst MURRAY ACKMAN explain the issues in our latest fast podcast

You can also listen to this podcast on Apple or Spotify

An excerpt from this interview with Pendal’s head of government bond strategies Tim Hext:

The Albanese government is getting ready to launch Australia’s first sovereign green bonds, which are designed to fund public net-zero projects.

As with all new green bond issuances, investors will be looking to make a good return and a positive impact.

When it comes to impact, investors should be looking “additionality” in the projects funded by Albo’s green bonds, say Pendal’s head of credit and sustainable strategies George Bishay and ESG credit analyst Murray Ackman.

What does ‘additionality’ mean?

“Is it actually a step change?,” asks George. “Is it just refinancing an old project or is it a new project?”

Pendal’s team will be looking closely at additionality when considering the federal government’s issuances, which should be able to support bigger, riskier projects.

“We’re wanting to see projects that bring about some kind of revolutionary change,” says Murray.

“For example, we’ve seen in the US the Inflation Reduction Act has created a market for hydrogen by subsidising it significantly.”

In this short podcast, George and Murray explain more about green bonds and what investors should be

About George Bishay, Murray Ackman and Pendal’s Income and Fixed Interest boutique

George Bishay is Pendal’s head of credit and sustainable strategies. George has managed dedicated sustainable fixed interest portfolios for more than a decade.

He has worked across fixed income, credit and money market portfolios in investment management, credit analysis and dealing roles for more than 20 years.

In 2019 George was awarded the Alpha Manager status by Money Management publisher FE fundinfo.

Credit ESG analyst Murray Ackman joined Pendal’s Income and Fixed Interest team in 2020 to provide fundamental credit analysis and integrate Environmental, Social and Governance factors across credit funds.

Murray has worked as a consultant measuring ESG for family offices and private equity firms and was a Research Fellow at the Institute for Economics and Peace.

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

The team’s awards include Lonsec’s Active Fixed Income Fund of the Year (2022) and Zenith’s Australian Fixed Interest Manager of the Year (2020).

Regnan Credit Impact Trust is an investment strategy that puts capital to work for positive change.

Pendal Sustainable Australian Fixed Interest Fund is an Australian bond fund that aims to deliver performance alongside positive environmental and social outcomes.

Contact a Pendal key account manager