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

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IT was a fascinating and action-packed week in the market, though perhaps too action-packed for this time of year.

The news headlines of the week included US Consumer price Index (CPI) and Producer Price Index (PPI) data, local RBA and employment figures, and announcements from China’s Politburo.

While the data itself wasn’t groundbreaking, much of the discussion centred on the finer details and minor variations.

The 10-year yield has surged 80 points since the Fed’s rate cuts began in September. Inflation concerns persist, with core inflation stubbornly high.

The economy shows limited spare capacity in employment, and fiscal stimulus is expected under Trump.

Markets anticipate a rate cut this week, but will Powell signal the end of the rate cut cycle?

In Australia, the RBA opened the door to more dovish monetary policy on Tuesday. However, the door was slightly closed again due to a strong employment report on Thursday showing tightening conditions.

The NAB Business Survey and business turnover were weak, with the public sector providing support.

Liquidity remains positive, supported by seasonal trends, though January could be tricky.

It’s a good time to be cautious with positions and valuations. Market breadth is narrow, and relative valuations are extreme.

Implied volatility is almost non-existent, with Tesla’s surge to $420 and profitless tech stocks keeping pace with the Magnificent 7, indicating frothiness in the market. Google’s new quantum computer chip kept the bulls excited.

Monday’s momentum unwind marked Pure Momentum’s worst day since November 2022, highlighting market vulnerability.

This week, all eyes are on the FOMC and Personal Consumption Expenditures (PCE) data in the US, along with Australia’s Mid-Year Economic and Fiscal Outlook (MYEFO).

US macro and economy

Headline CPI rose by 0.3% (up 2.7% YoY), slightly above consensus. Core CPI also edged up, with a 31-basis point (bp) increase versus the expected 28bp, maintaining a sticky 3.3% over 12 months.

Other highlights include:

• Housing Inflation had its smallest monthly gain since January 2021.
• Core MoM has been stable since mid-year.
• Services Inflation appears on the decline.
• Rent numbers finally aligned with the Zillow Index.
• Super Core remains stubbornly high at over 4%, which should limit the Fed’s ability to keep cutting.
• Goods inflation ticked up after a benign period.

The market is comfortable with the current US CPI story, but persistent core inflation could challenge the Fed in Q1. Goods inflation rising above core services MoM for the first time since May 2023 adds to the discomfort.

With the PCE reading looming next Friday, headline PPI rose a bit higher at 0.4% MoM – surpassing the 0.2% consensus.

This marks the largest monthly gain since February 2023, driven – interestingly – by a spike in egg prices, encouraging a turn to quality and defensives.

Combined with this week’s CPI, the report positions next week’s PCE to only post a modest PCE acceleration, reassuring the Fed that its favourite inflation gauge is on track.

PPI final demand rose 0.4% in November (above the 0.2% forecast), with the prior month revised up to 0.3%. The year-on-year rate increased to 3.0% from 2.6%.

Core PPI was in line at 0.2%, but the annual rate rose to 3.4% from 3.2% after a revision.

Bloomberg noted the surging egg price helped drive some of the beat but indicated other categories suggested a muted increase in the Fed’s preferred PCE measure.

PPI for final demand rose 0.4%, the highest since June, beating the 0.2% estimate. Overall, services costs edged up 0.2% and goods prices (excluding food and energy) rose by a similar amount.

Economists see little change or declines in key service categories, allaying some concerns over recent firming in broader inflation metrics.

Elsewhere, the NFIB US Small Business Survey saw its largest monthly jump ever in November, surging eight points to a three-and-a-half-year high, surpassing the post-2016 election spike.

US initial jobless claims for early December rose by 17k to 242k (versus 220k expected), mainly due to seasonal distortions from the Thanksgiving holiday and wildfires in California affecting around 20k residents.

Insured unemployment claims also trended higher, indicating a cooling labour market.

China

Copper, zinc, and iron ore prices surged after China’s Politburo (the highest political bureau of China’s central governing committee) announced a shift to a “moderately loose” monetary policy for 2025, the first stance change in 14 years.

This announcement on Monday signalled greater easing and a more proactive fiscal policy.

This shift from a “prudent” stance comes as Beijing braces for a potential trade war with the US under President-elect Donald Trump.

With China dominating metal demand, the prospect of rate cuts and increased stimulus spending is a welcome sign for investors seeking stronger economic growth measures.

The Central Economic Work Conference (CEWC) echoed the Politburo’s announcements, focusing on consumption demand as the key priority without providing any novel statements.

The government did announce a widening budget deficit for 2025, and the absence of “fiscal discipline” in post-conference commentary suggests a commitment to achieving economic targets.

More specifics on macro policy and stimulus measures will be revealed at the CEWC and the NPC meeting in March.

A new phrase was used – “enhancing extraordinary counter-cyclical adjustment” – which hints at stronger, unconventional stimulus measures, though details are lacking.

Other macro

Both the Bank of Canada (BoC) and the European Central Bank cut rates by 50bps and 25bps, respectively, which was as expected this week.

The BoC’s consecutive 50bp rate cut, its fifth straight, highlights the urgency to remove policy restrictiveness. Recent policy measures and new tariffs have increased uncertainty and clouded Canada’s economic outlook.

Elsewhere, the Swiss National Bank (SNB) delivered a larger-than-expected cut, Brazil saw a bigger hike, and reports suggest the BOJ may downplay the potential for a hike next week.

Australian economy

At its latest meeting, the RBA Board kept the cash rate target unchanged at 4.35% and the interest rate on Exchange Settlement balances at 4.25%.

While softer-than-expected data was anticipated, the Board made notable changes to its communication.

It now believes “some of the upside risks to inflation have eased” and is “gaining confidence that inflation is moving sustainably towards target.”

Some key phrases that had given a hawkish tone to previous RBA statements were removed:

• “Vigilant to upside risks to inflation” – language used since May.
• “Not ruling anything in or out” with respect to policy – language used since March.
• “Policy will need to be sufficiently restrictive until the Board is confident that inflation is moving sustainably towards the target range” – language used since August.

The Board still isn’t ready to declare victory on inflation, reiterating that it will take time for inflation to reach the target range.

New language highlights that while aggregate demand still exceeds supply capacity, the gap is closing, and the Board is gaining confidence that “inflation is moving sustainably towards target”.

Moving onto employment data, Australia’s unemployment rate dropped to 3.9% in November, the lowest since March.

Employment rose a solid 35.6k, though total hours worked tracked sideways – indicating there is not much spare labour capacity to go around.

The data supports the RBA’s view of a tight labour market, with unemployment expected to average 4.3% in Q4.

The NAB Business Survey noted current conditions are at their weakest since August 2020.

This weakness is broad-based, especially in trading conditions and profitability. Manufacturing saw the sharpest decline with retail also soft. Government spending is driving growth, while private sector conditions are soft.

The ABS Nominal Business Turnover remains flat and CBA Household Spending is growing at low single digits, while household goods are relatively strong.

Markets

It was a softer week for equity markets, which intensified further down the market cap spectrum.

Resources outperformed Industrials and Banks, while Tech stocks were hit hardest by rate concerns and sector rotation.

Financials and Real Estate also struggled due to rate expectations, while Staples remained defensive, and Energy held steady.

Two-year Treasuries rose 15bp, and 10-year Treasuries climbed 25bp.

Oil had a positive week, recovering some year-to-date losses. Most commodities saw slight gains, with gold and Bitcoin leading year-to-date performance.

Interestingly, the ASX 300 underperformed other global indices despite Australia’s resource exposure. The current darling, the Russell 2000, also had a notable decline.

The AUD/USD saw little change, while the DXY strengthened.

There was not a lot of action on the upside this week in Australian markets, with most stocks trading lower. Resource stocks led on the upside and high-priced growth stocks led on the downside

There are a few other market observations that investors should keep in mind:

• NASDAQ breaking 20,000 for the first time on record, with global flows leaving other markets and rushing into US equities.
• December is typically a strong month, especially in the days leading up to Christmas.
• Increasing chatter about the market’s narrow breadth with Tech’s leadership. Is it late cycle or time for new leadership?
• Momentum appears stretched and typically struggles in January.
• We are seeing a period of concurrent earnings and multiples expansion, which is not very common.
• There is currently almost no implied volatility in the S&P 500.
• Corporate executive stock sales have reached an all-time high.

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About Crispin Murray and 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 an independent, 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 here.  

Contact a Pendal key account manager here.

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

In investing – just like in music – real success is found beyond the obvious. China’s Tencent Music is a great example, argues Pendal’s SAMIR MEHTA

• Value to be found in Asian equities if you know where to look
• Tencent Music generating cash and buying back stock
• Find out more about the Asian Share Fund

WHO is the Bob Dylan of music streaming?

That’s the question Pendal’s Samir Mehta posed at the Sohn Hearts & Minds Conference in Adelaide last month.

For most, the answer is obvious: Sweden’s Spotify has revolutionised the way we consume music, dominating developed markets and setting the benchmark for subscription-based streaming.

But in investing – just like in music – real success is found beyond the obvious.

For every Bob Dylan – whose sandpaper voice and sermon-like lyrics changed the face of music worldwide – there’s a Sixto Rodriguez: overlooked by mainstream audiences until an Oscar-winning documentary, Searching For Sugar Man, revealed he had been quietly building a cult following in small but devoted markets.

“Spotify has done a brilliant job in developed markets, but there’s lots of other markets that still have potential,” says Mehta, who manages the Pendal Asian Share Fund.

“What we need to do is search for the Sugar Man of streaming.”

“Music follows exactly the same trends across the world – and the Sixto Rodriguez of streaming is China’s Tencent Music Entertainment.”

With paying subscriber base of 117 million, a market capitalisation of around US$20 billion, over US$4 billion in cash, and revenues in the online subscription business growing at 20 per cent annually, Tencent Music generates almost US$1 billion of cash each year, says Mehta.

They have already bought back US$1 billion of shares and this year’s US$500 million buyback is ongoing.

“Generating cash and buying back stock is not something that you associate with Chinese companies,” says Mehta.

“But there’s been a sea change in attitudes among well-managed Chinese companies and Tencent Music represents one of those; doing exactly what we as minority shareholders want them to do.”

Streaming has transformed the global music industry, replacing one-time purchases of LPs, cassettes, and CDs with stable, long-term subscription revenue.

When Tencent Music was first launched by its parent Tencent Holdings, which retains a 52 per cent stake, some 70 per cent of sales came from so-called ‘social entertainment’ – essentially user-generated karaoke and live music performances.

But after Beijing imposed regulatory changes in 2021 that forced the business to take responsibility for the content on its platform, 78 per cent of revenue is now from traditional online music streaming.

“That is Spotify-like subscription revenues – growing at a clip of 20 per cent per annum,” says Mehta.

“Faced with a regulatory diktat, the company cleaned up and now they proudly proclaim ‘we are now progressing towards a healthy development of China’s online music industry’.

“They are signalling to the government that their business now is well within the requirements of the law that the Chinese government imposes.”

They currently have 117 millio active monthly paying subscribers. A key focus for management is to steadily raise average subscription from the current US$1.5 per month to US$2 over the next 5 years.

Tencent Music generates 42 per cent gross margins – and a nascent advertising revenue stream will only supplement growth, says Mehta.

“You can see the similarities.

Searching for Sugar Man made a cult figure of Sixto Rodriguez. This conference, Sohns Hearts and Minds, is going to do for Tencent Music what the documentary did for Rodriguez.”

About Samir Mehta and Pendal Asian Share Fund

Samir manages Penda’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 Pendal 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 Group

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

• Australian economy is “sluggish”
• Markets pricing up to three cuts by the end of 2025
• Find out about Crispin Murray’s Pendal Focus Australian Share Fund

GLOBAL equity markets had a solid start to December, supported by the increased likelihood of a rate cut at the Fed’s FOMC meeting this week.

Both the S&P 500 (up 1.0%) and Nasdaq (up 3.4%) hit all-time highs during the week, while US Treasuries rallied on relatively benign macroeconomic prints.

Overall, these indicators point to a solid US economy that is seeing an uptick in post-election confidence and activity, but without signs of any reacceleration in inflationary pressures.

There is plenty of interest for followers of international politics, though, with ongoing developments in France, South Korea and the Middle East. The implications for markets are not entirely clear, but it does affect confidence at the margin.

Australia released some mixed economic data points, with the September quarter GDP dominating discussions in both the economic and political spheres.

The Australian economy’s performance remains sluggish – with real GDP growth only slightly positive, due largely to public sector demand and strong immigration, and the per-capita recession continuing.

The market has brought forward the likelihood of the RBA’s first cash rate cut, though future CPI prints remain key.

Australian equities didn’t follow international markets higher, however, with the S&P/ASX down 0.2% for the week.

Technology (up 1.7%) and Consumer Discretionary (up 1.8%) continued their strong performance, while the weakest sectors were REITS (down 2.6%), Utilities (down 1.3%) and Energy (down 1.0%).

Fed commentary watch

On Monday we heard from Christopher Waller, a member of the Federal Reserve Board of Governors, whose remarks were regarded as dovish and risk friendly.

Waller discussed the case for a cut versus a skip in December, saying that “at present I lean toward supporting a cut”.

He also said he would be paying close attention to JOLTS (the employment report), as well as November CPI/PPI inflation and retail sales, and would shift to favour a skip if the data “surprises to the upside” and “alters my forecast for the path of inflation”.

Elsewhere:

• Mary Daly (San Fransisco Fed President) said an interest rate cut this month isn’t certain but remains on the table for policymakers.
• Adriana Kugler (Fed Board member) expressed optimism about the economy, saying inflation appears to be on a sustainable path to the central bank’s 2% goal.
• John Williams (New York Fed President) added that more rate cuts are likely needed “over time”
• Fed Chair Jerome Powell said that the FOMC can “afford to be a little more cautious” on moving policy toward a neutral setting given the current strength of the economy.

In summary, Federal Reserve officials indicated that they expect the central bank to continue cutting interest rates over the next year, but stopped short of saying they were committed to making the next reduction in December.

US economy

We saw an early read on Black Friday retail sales, with Mastercard’s SpendingPulse reporting that 2024 sales rose 3.4% compared with last year. Online retail sales increased 14.6% while in-store sales were up marginally (0.7%).

On Tuesday, we saw the release of the Institute for Supply Managements Manufacturing PMI, with the latest reading increasing to 48.4 from 46.5. While this indicator showed continued weakness in factory demand, it did exceed Wall Street’s 47.5 forecast.

Various components of the index indicated improvement on the previous month and, importantly, the forward-looking New Orders component showed increasing business confidence, with an expansionary 50.4 print.

There was a big focus on employment data last week, starting with the Job Openings and Labor Turnover Survey (JOLTS) – it confirmed recent labour market trends, where tightness in the jobs market is easing but remains in good shape overall.

The JOLTS data surprised to the upside, with overall job openings rising 372k to 7.74 million in October 2024. While this has come back from a peak of 12 million, it is still elevated when compared to pre-pandemic levels.

The JOLTS Quit tally rose 228k, taking the quit rate to 2.1% – the highest since May. The quit rate is important as it shows workers are confident leaving current employment and seeking a new job, making it a good predictor of future wage growth.

Initial jobless claims for the week ending 30 November rose by 9k to 224k (versus consensus at 215k) mostly on volatility around the Thanksgiving holiday, which came five days later than last year.

Cost-cutting measures announced at Boeing and Stellantis suggest jobless claims will rise through year-end and into mid-January.

The most anticipated data release of the week was the November non-farm payroll Employment Report on Friday.

Headline payroll growth bounced higher to 227k versus 36k in October, but the latter was affected by hurricanes and strikes. The unemployment rate ticked up to 4.2% from 4.1%.

This data was regarded as solid and as expected, but without too much upside surprise to stoke any fears of reaccelerating inflation.

Importantly, if the Fed wants some insurance against unemployment rising further, it is likely to cut rates by 25 basis points (bps) again in December as indicated in recent Fed board speeches.

We are still to see CPI data before the Fed meeting, but the market is already pricing most of a 25bp cut for December and up to three more cuts for calendar 2025.

Australian economy

There were a few mixed data points for Australia last week:

• Similar to the US, early indications on Black Friday sales showed solid performance. National Australia Bank’s transaction data showed overall spending was up 4% year on year.
• Official retail trade data from the ABS rose 0.6% in October, beating expectations of 0.4%. Annual growth increased to 3.4%, which is the highest rate since May 2023. Within components of this release, growth in discretionary spend categories was particularly strong.
• Credit growth in October 2024 rose 0.6% for the month and 6.1% year-on-year, which is the fastest pace since May 2023.
• Residential building approvals bounced up 4.2% month-on-month in October 2024 to 185k annualised, which is the highest level since December 2022.
• CoreLogic’s November house price series showed national house prices increased just 0.1% in the month – the weakest Australia-wide result since January 2023. There was large divergence across states, with Brisbane and Perth still growing well but down from previous high levels. Sydney was just below the national average, but Melbourne’s property (and economic confidence) woes continue.

The most watched economic release was the September quarter National Accounts, which showed GDP rising just 0.3% quarter-on-quarter, below the 0.5% consensus expectation.

Of most concern was the decomposition between the public and private components of the domestic economy, which showed that almost all of the economic growth was from the Government sector.

This continued a trend of weak Private sector demand over recent quarters.

Public sector demand has now risen to 29% of GDP, which matches Covid-19 emergency spending levels and represents some of the highest levels seen over the past 60 years – and this is before any new spending associated with the Federal election.

Aside from government spending, the only other support to the economy has been strong immigration levels.

Once this is accounted for, GDP per capita contracted for the seventh straight quarter, which is significantly worse than most of our international peers.

This softer GDP print saw the market move from pricing only one RBA cut to three by the end of 2025, with the first cut fully priced by April 2025.

Other global macroeconomic developments

Oil: OPEC+ delayed an output hike for a third time as the oil market faces a looming supply surplus that’s weighing on prices. The group will start increasing production in April instead of January and unwind cuts at a slower pace, in line with expectations

China: China’s top leaders plan to start the annual closed-door Central Economic Work Conference (CEWC) next Wednesday to map out economic targets and stimulus plans for 2025. Market watchers are looking/hoping for more concrete confidence building measures, particularly given Chinese property market concerns.

Europe: Traders are trimming their European Central Bank rate-cut wagers, though rates markets still have a cut still priced for 12 December – and a further five for 2025.

Geopolitics: Government instability in France and South Korea and the collapse of the Assad regime in Syria is not helping investor confidence outside of the US.

Markets

We are in a seasonally strong point for markets. Only once since 1928 has December been the worst month of the year performance-wise.

Historically, November and December are particularly strong return months in US Election years.

We see similar themes looking at the first month following Trump’s election victory in both 2016 and 2024.

There has been strong performance in risk-on cyclical sectors (Financials, Consumer Discretionary, Industrials, Small Caps), with weakness in defensives (Healthcare, Real Estate) and China-related (Materials) areas.

The Tech sector has performed a touch below the S&P 500 on both occasions.

We do note sentiment is getting very toppy, with Equity ETF flows more than two standard deviations above their average back to 2017.

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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:

• Pendal Sustainable Australian Share Fund
• Crispin Murray’s Pendal Horizon Fund
• Pendal Sustainable Australian Fixed Interest Fund
• Pendal Sustainable Balanced Fund
• Regnan Credit Impact Trust
• Regnan Global Equity Impact Solutions Fund

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.

Contact a Pendal key account manager here

Australia’s latest GDP figures suggest the door for rate cuts has opened further, writes Pendal’s head of government bond strategies TIM HEXT

• Why bonds, why now? Pendal’s income and fixed interest experts explain
• Browse Pendal’s fixed interest funds

THE Australian economy grew by only 0.3% in the September quarter, once again falling behind population growth.

We managed only 0.8% growth for the year, yet the RBA still thinks demand outstrips supply.

The September quarter GDP numbers were always going to be more interesting than most.

Tax cuts and government subsidies were hitting consumer pockets and the big question was whether they would be spent or saved. For now, it appears consumers have been happy to pocket the extra money.

Spending by business and consumers once again flatlined and per capita consumption fell by 2% over the year.

The only growth we could find was, once again, the government – which now comprises almost 28% of GDP, up from around 23% for most of the past 50 years.

The graph below, courtesy of Westpac, highlights this extraordinary return of big government.

Source: Wages grow 3.5 per cent for the year | Australian Bureau of Statistics

The national accounts also provided more information around wage pressures. As the high wage outcomes of 2022 and 2023 have faded from view, these are easing quickly.

Average earnings per hour moderated to 3.2%yr, from 6.5%yr in the June quarter. This is consistent with recent wage data at 3.5%.

We have weak growth, moderating inflation, wages under control and global easing cycles – so why the hesitation from the RBA?

The central bank remains focused on the idea that the labour market remains too tight, as it believes that 4.5% – not the current 4.1% – to be full employment.

The data is now suggesting otherwise.

Outlook

It will be an interesting few upcoming meetings for the RBA board.

February will likely be the last monetary policy board decision for three of the six independent directors. And March or April will see a split into governance and monetary policy boards.

Whether this influences thinking remains to be seen, but the current spirit of caution may yet stop a rate cut in February.

However, I think the RBA may do a short sharp pivot in the next few months, and view two cuts (in February and May) as still on the cards.

The Q4 inflation data at the end of February will be another low number, with even underlying inflation likely to print 0.6%, or annualised at the RBA midpoint.

While bond investors will be cheering for a cut, the Labour government will be desperate for one ahead of the “cost-of-living” election.

Time will tell if the RBA delivers for them.

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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.

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

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About Pendal

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

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

Contact a Pendal key account manager

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

• Find out about Pendal Focus Australian Share fund
• Tune in: register to watch Crispin’s Beyond the Numbers webinar

THE market finished November on a high, helped by falling bond yields and a lower US Dollar.

The S&P 500 returned 1.1% for the week and 5.9% for the month, while the S&P/ASX 300 was up 0.6% and 3.7%, respectively.

President-elect Trump’s threat of 25% tariffs on Canada and Mexico as well as 10% on China did not illicit a durable negative reaction in either bonds or equities – probably due to the attached conditionality and a timeframe that is still almost two months away.

The pre-conditions for a continued rally into year-end remain in place, with positive macro data, flows good, confidence high, and the supportive technicals.

There was strong divergence within Australian equities last week; tech and healthcare outperformed while energy and banks lagged.

The market’s favourite high-momentum growth names are melting up, with Life360 (360) up 20.5%, Pro Medicus (PME) up 13.6%, Sigma Healthcare (SIG) up 13.3%, Guzman y Gomez (GYG) up 12.7% and Telix Pharmaceuticals (TLX) up 9.6% week on week, with flows the main driver.

Our broad-cap portfolio positioning is generally skewed to growth, with Technology One (TNE) and Xero (XRO) underpinning performance in November. This was combined with quality industrials such as SGH (SGH) – formerly Seven Group – and James Hardie (JHX), as well as insurers which benefitted from higher bond yields over the month and the rotation to financials.

US tariffs: hard to know where they land, so not factored in by the market for now

Trump posted that he intends to impose 25% tariffs on Mexico and Canada on day one of his administration.

While these are higher than the market expected, he conditioned them on action relating to immigration and drugs.

We have subsequently seen Mexican President Sheinbaum have a call with Trump, while Canadian Prime Minister Trudeau popped in for dinner at Mar-a-Lago.

Trump also spoke to imposing an additional 10% tariff on China.

The impact, if applied, is material.

The percentage of import value collected as tariffs would rise from low single-digits to roughly 10%, before factoring in anything additional for Europe.

So far, the market is sanguine on this on the belief that they will be watered down in both size and scope.

The other issues to consider with tariffs are:

• suppliers absorb part of the impact in their margins
• that the inflationary effect is diluted as trade flows adapt to avoid them

• currencies may adjust to dampen down effects (e.g. USD strength reduces the inflationary effect)

US economic outlook: looks fine, persistent inflation is one area to watch

This week’s monthly payroll data is an important signal for the US Federal Reserve.

The signals are constructive, with claims data coming off post the hurricane-induced spike. While continuing claims are picking up, it is gradual and still low in historical context.

Consumer confidence – reflected in the Conference Board Expectations Index – has seen a post-election increase tied to the election outcome.

History indicates that this may not result in higher spending, but it doesn’t hurt and reduces risks to the downside.

An encouraging component of the Conference Board measure is the confidence in jobs, which has improved and is a positive read on the outlook for employment.

Overall, the growth outlook remains encouraging according to the Atlanta Fed GDPNow indicator, which still has Q4 2024 GDP at above 2.5% growth.

There is a concern among some that inflation is not coming down sufficiently for the Fed to cut rates much below 4%.

In this vein, the latest Personal Consumption Expenditures (PCE) data – the Fed’s favoured inflation indicator – saw Core PCE up 0.27% month-on-month, in line with expectations.

However, the three-month annualised rate increased to 2.8% year-on-year.

Some of the services components are proving sticky; the concern is that the PCE won’t be able to break below 2.5% next year before we begin to get the effects of tariff increases and the potential impacts of lower immigration and tax cuts supporting the economy.

This could leave the Fed in a difficult position in terms of predicting the outlook, which may make them more cautious of further rate cuts.

The market is currently pricing 3.3 cuts by the end of CY25.

Australia: inflation data provides no help for case to cut rates

October’s Consumer Price Index (CPI) was lower than expected at 2.1% year-on-year, but this was all down to government subsidies.

Underlying inflation measures remain stubbornly high and the trimmed mean was 3.5% for the 12 months to October, up from 3.2% in September.

This provides no cover for the RBA to cut rates.

Inflation in areas such as rents and new dwelling purchase costs remain high, driven by structural issues in the economy.

We continue to see limited risk of a material slowdown in Australian GDP, but confidence is muted and growth seems likely to remain below trend for the next few quarters.

Markets: short-term signals remain positive

November was a good for equity markets, triggered by the decisive US election outcome.

The S&P 500 returned +5.9% for the month and the S&P/ASX 300 3.7%, with the bulk of the move from valuation re-rating.

Short-term market signals are positive:

1. The US dollar has not broken above its range and retraced in the last week.
2. Bonds yields have also rolled over and didn’t get back to the April highs.
3. Market technicals like breadth and seasonality are positive. For example, 77% of the S&P 500 is trading above its 200-day moving average.
4. Earnings revisions have been positive. This has been driven by mega-cap tech, where FY25 earnings have been revised up 11% over CY 2024. The rest of the tech sector has been revised down 1.6% and the rest of the S&P 500 down -3.8%. However, this is well within the normal range of zero to -5% earnings downgrades over the course of a year.
5. Flows into US equities remain strong, with a large spike following the election result.

The challenge is US equity valuations are full. There appears little catalyst to change this currently, but if there was a shift in liquidity or in the economy, then valuations could reset.

The S&P 500 is on the top decile in terms historical market valuation going back to 1999.

There is an argument being made that the market structure is now dominated by mega-cap tech companies which have low capital intensity, high rates of return on investment and incremental return, as well as strong revenue growth rates which may suggest that valuations aren’t as extended as simple historical analysis suggests.

We do note that credit spreads are low by historical standards, which suggests that the liquidity environment remains supportive.

Australia

Information technology (+10.2%), banks (+7.1%), consumer discretionary (+6.6%) and industrials (+5.6%) led the S&P/ASX 300 higher in November. Energy (-0.7%) and resources (-3.4%) lost ground.

Growth momentum performed best; results from TNE, XRO and Block (SQ2) were good, while PME won a key contract.

With limited revisions, the banks’ earnings season was neutral, with CBA performing the best.

Insurers outpaced the banks, helped by bond yields.

Resources continue to fall and have given back more than 50% of their China stimulus rally.

Battery materials remain the worst of the sector, despite lithium prices stabilising. BHP continues to be burdened by the fear of it re-bidding for Anglo American now that the six-month lock period is up. Finally, copper and gold have retreated post the US election.

Portfolio positioning

Generally, across our broad-cap portfolios, we have kept our sector skews relatively limited:

• We have been underweight defensives/bond sensitives, though this has been reduced somewhat with the addition of Scentre Group (SCG) in recent months.
• We also have a small underweight to resources.
• The bank underweight has increased in recent weeks. We see reduced risk of valuations breaking higher for the bank sector given the strong run and current rating. This exposure is also partly offset by the overweight in insurers. 
• We are underweight consumer defensive – notably supermarkets – which we see as expensive, low-growth stocks.
• Against this we are overweight growth, mainly through technology companies where we see earnings growth underpinning the higher valuations.
• We have also benefited from an overweight in cyclicals industrials, with stocks in good industries and/or strong market positions such as Aristocrat Leisure (ALL), SGH (SGH), James Hardie (JHX) and Qantas (QAN) all performing well in November.

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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  

Contact a Pendal key account manager

At the end of a year in which almost half the world’s population were eligible to vote, investors can finally look forward to more certainty, says Pendal’s ADA CHAN

• End of a huge election year improves certainty for investors
• Potential opportunity emerges in China
• Find out more about Pendal Global Emerging Markets Opportunities Fund
• Watch a Pendal webinar covering the outlook for global equities and emerging markets

IF IT feels like a hectic year for emerging markets investors, you’d be right.

So far 66 national elections have taken place around the world in 2024, according to the International Institute for Democracy and Electoral Assistance, an intergovernmental organisation that supports democracy worldwide.

And another eight or so are still scheduled before the new year.

Just after the US election, Pendal Global Emerging Markets Opportunities fund manager Ada Chan joined Pendal Global Select fund manager Chris Lees in a live webinar to discuss major trends emerging from these polls, along with other issues.

You can watch the full webinar here. 

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

A big year for elections

Investors in emerging markets (EM) can expect more certainty after a huge year in national elections, says Pendal emerging markets fund manager Ada Chan.

“We will have to wait and see the details on many Trump Administration policies … and implementation is key from the US.”

But there are already actionable lessons to be drawn from elections in Indonesia, Mexico and India — which all had “very different elections this year”, Chan says.

“In Indonesia, there is continuity and stability and that is viewed positively. It is a market where reforms are [working] and driving the economy. That’s a differentiator among ASEAN markets.”

James Syme, Paul Wimborne and Ada Chan (right) are co-managers of Pendal Global Emerging Market Opportunities Fund

“In Mexico investors expected Claudia Sheinbaum to win, but the surprise was her super majority. There was also an overlap with her predecessor … and that created uncertainty and investors don’t like uncertainty.

“Mexico is a difficult market – which part of a valuation is driven by a carry trade unwinding, which part is driven by local politics and which part is driven by anticipation of what Donald Trump is going to do. We think a lot of the bad news is already in valuations,” she says.

“In India, people expected Narendra Modi to win, and he did. But markets in India are pricing in perfection. In India it isn’t so much about the election as high valuations.”

China

Investors in China should focus on domestic industries, rather than manufacturing exporters, Chan says, ahead of any Trump Administration decision on tariffs.

“The Chinese government wants to stimulate its economy. But I think there is a little bit of wait and see, to make sure they know what Trump is proposing,” Chan says.

“It is a timing issue for China. They want a bit more clarity [on the Trump Administration] before they come up with their stimulus. We do expect there will be more stimulus, but it is a step-by-step process.”

Chinese consumers are changing as well. Previously foreign brands sold better than local products but that is no longer the case.

“Chinese consumers are embracing domestic brands. They can buy better products, with higher average prices, that are a lot cheaper than foreign brands,” Chan says.

Country-first analysis

Chan’s investment process starts with identifying a promising country, based on an outlook and valuation perspective.

“There are opportunities emerging  in China. We think people had become too pessimistic and gone too extreme when looking at China.

“We saw Chinese companies report better numbers, raise forward earnings [guidance] and then get sold off.

“There is the opportunity to [invest] in companies that are becoming stronger because management are focusing on what makes the business more efficient, in an environment which is very difficult.”

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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.

Contact a Pendal key account manager here

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

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

EQUITIES continue to grind higher, with the S&P 500 up 1.7% last week and the S&P/ASX 300 up 1.3%.

Safe havens like gold, oil and the Swiss franc caught a bid on the back of rising geopolitical tensions, with outgoing US president Joe Biden giving a final push to resolve the Russia-Ukraine conflict before Donald Trump takes office.

Treasury yields were relatively stable as markets attempt to discern the likely policy mix under a Trump administration, made even more difficult by some interesting cabinet nominees. 

US Fed-speak was mixed but on balance more dovish.

Nvidia, the world’s largest company, reported Q3 results with guidance for Q4 sales only beating by $400 million versus the normal $1 billion. Management highlighted some delays and cost pressures around the next-generation AI chip. 

In Australia, Reserve Bank minutes noted that easing in the labour market might have begun to stall or modestly reverse. The RBA wants to see two quarters of declining inflation before cutting the cash rate.

US macro and policy

Howard Lutnick, CEO of bond broker Cantor Fitzgerald, was appointed US commerce secretary and hedge fund manager Scott Bessent was announced as Treasury secretary.

Lutnick advocated for higher tariffs at a recent rally in New York, citing the prosperity of the early 1900s when there was no income tax and all the government had was tariffs. Though he did acknowledge they would raise prices, at least temporarily.

In an interview with the Financial Times, Richmond Fed president Tom Barkin noted the US was more vulnerable to inflationary shocks than in the past, with businesses more readily passing on costs to consumers.

The inflationary effects of potential tariffs and immigration plans under president-elect Donald Trump were a “concern” for businesses, but the Fed shouldn’t adjust monetary policy before possible changes in economic policy, he said.

Elsewhere, US home builder sentiment rose to a seven-month high. The results suggest optimism that high-income households will move forward with home-buying plans, given US personal tax cuts will persist.

While sentiment has been strong actual starts have been softer, with starts and permits declining 4% and 7.7% year-on-year. Mortgage rates have risen 80bp to 6.86% over the past two months.

Walmart reported sales +5.3% with the retailer benefiting from trading down.

Recent surveys suggest US consumers are set to spend 4% more on holiday shopping this year. While consumers may feel fearful of inflation, their balance sheets look good.

Initial jobless claims came in at 213k, better than consensus expectations (220k) with the data showing that the labour market is trending sideways at a healthy level.

The narrative that the US labour market is cooling appears inconsistent with the continued strength in data for above-trend GDP growth, strong retail sales, low jobless claims, and rising average hourly earnings.

In addition, credit spreads continue to be tight, corporate profits and forward profit margins are at all-time highs and US household balance sheets are in very good shape.

In short, the US economy remains very strong.

The market continues to pare back expectations of large Fed Fund rate cuts. Expectations for a December rate cut from the U.S. Federal Reserve have diminished, with the likelihood now at 53%, a sharp drop from 82.5% just a week earlier. 

Unsurprisingly the US dollar continues to be very strong.

US inflation and bond rates

The US 10-year bond yield has increased from 3.6% to 4.4% despite the Fed signalling significant rate cuts.

This has not been the case in previous rate cutting cycles where yields have either fallen or gone sideways.

The soft employment print in September prompted a 50 bp cut but was then met by a couple of sticky inflation prints.

Fed funds futures have shifted over the past two months, with the expectation for the end 2025 moving from 2.8% up to 3.8%.

While inflation has been trending down with the core measure at 3.3% year-on-year, it will remain a key concern for financial markets, as well as in the political sphere.

This was the 42nd consecutive month with Core CPI above 3%, the longest period of elevated inflation in the US since the early 1990s.

Voter perceptions of inflation were important in the recent US elections. The economy was the top concern for Republican voters, and three quarters of US voters felt inflation created hardship for them this year.

Tariffs generally apply to lower frequency consumer durables, with consumers less aware of price changes unlike the hyper awareness of changes in prices at supermarket or petrol stations.

As such tariffs may end up raising inflation with less impact on the politically important perception of inflation.

Europe macro and policy

The European Central Bank’s index for negotiated wages rose to 5.4% year-on-year in Q3, up from 3.5% in Q2, a record lift since the euro area was formed.

A jump had been anticipated after large, negotiated wage rises in Germany for auto and engineering workers.

The ECB expects wage inflation to fall next year to a rate more consistent with the 2% inflation target.

The market’s reaction was limited, with the data playing to the view that the ECB is likely to cut by only 25bps next month.

China macro and policy

China announced some tax reductions for home buyers. This might indirectly support consumer spending, with new home buyers having more spare cash to spend on furniture, for example.

However it is not the degree of consumer support markets really wish to see.

A wide gap has opened between mortgage interest rates and mortgage borrowing, implying that potential homebuyers are unwilling to buy apartments at any level of mortgage rate.

With an estimated 90 million empty apartments and a population expected to fall by roughly 100 million in the next 20-to-30 years, the cyclical and structural headwinds make stimulating this important part of the economy extremely difficult.

Australia macro and policy

Minutes from the RBA’s November meeting noted that easing in the labour market might have begun to stall or modestly reverse.

A breakdown of Australian unemployment by duration shows that short-term unemployment appears to have stabilised below pre-pandemic levels. 

The board also highlighted that due to govt subsidy ’noise’ from government subsidies in the December 24 quarter, it wants to see two quarters of declining inflation before cutting the cash rate’.

This means that the first rate cut (if any) is likely to occur from May 2025.

Australian housing prices have also hit a historical peak of unaffordability – with the average home now costing eight times the median household income.

The percentage of national median income needed to fund a mortgage on the national median dwelling value has hit 50.6%, according to CoreLogic, versus a 20 year average of 36.6%.

Rental costs are 33%, versus a 20 year average of 29%, by the same measurement.

The Australian Bureau of Statistics considers a household to be in housing stress if it pays more than 30% of income on housing costs.

While first home buyers have benefited from assistance from the Bank of Mum and Dad in recent years. There are warning signs of pressure here.

By one measure, the percentage of households in the 55-64 year age cohort owning a home with no mortgage has fallen from over 70% in 1995 to under 40% today.

Markets

There are some warning signals in US equities, such as historically high valuation levels, insider selling (although there are some seasonal effects here) and Berkshire Hathaway loading up on cash.

However, sentiment remains strong, and earnings growth continues to be supportive.

Market breadth is also improving and favouring small caps which are likely to benefit from US pro-growth policies.

The stock market is the second most expensive for any incoming President (after George W Bush in 2000). 

Given Trump’s pro-market tendencies, it is reasonable to expect that he is likely to double down on market friendly policies in the event of a big sell off.

Locally, the ASX unwound some of the recent weak performance in energy and resources with both sectors up strongly at the expense of IT, consumer discretionary stocks and AREITs.

 

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Shorting bonds may no longer be the best trade, argues Pendal’s head of income strategies AMY XIE PATRICK

• Bonds carry plenty of risk premium for the uncertainty that lies ahead
• Hedge funds piling on short US bond bets “like no other time in recorded history”
• Find out more about the Pendal Monthly Income Plus Fund

IN the final weeks leading up to the US election, political pollsters said it would be a close call.

Bond markets, on the other hand, traded like a Trump victory was in the bag.

While the market continues to show little love for bonds in the aftermath of the “Red Sweep”, this article looks at whether the bond short remains the correct “Trump trade”.

What’s priced in?

Bonds have had a busy time. For most of the year, US bond yields have danced between large and small rate cut expectations, fuelled by recession fears and resilient data, respectively.

Despite the US Federal Reserve (the Fed) kicking off this easing cycle with a 50 basis point (bp) cut to the Fed Funds Rate in September, bond yields have failed to fall any lower.

The fear of a Trump victory and the anticipation of his economic policies have played a large part in the most recent bond sell-off.

This move has been similar to the post-election bond market reaction in 2016.

After some immediate confusion as to whether a Trump presidency would herald the end of civilisation as the world had known it, bond yields started to take off. This made sense, as tax cuts and corporate repatriation tax breaks were lifting US growth expectations across the board.

The Fed was also engaged in a hiking cycle.

Between the 2016 US election and the middle of 2018, most tax cuts and repatriation flows had already happened. In that same window, US 10-year Treasury yields climbed by nearly 1.00%.

This time around, bond yields started to move ahead of the US election.

Since the September Fed rate cut (and there has been another cut since then), US 10-year bond yields have climbed by close to 0.9%.

Source: Bloomberg

This latest rise in US bond yields has effectively erased all the market’s anticipation of how the Fed easing cycle would play out on longer-dated bond yields.

It could even be argued that this similar rise in bond yields compares as more extreme than the 2016 experience, which took place against the backdrop of a Fed tightening cycle.

While it’s impossible to say whether the full impact of Trump’s presidency is already in the price, it is certain that bonds already carry plenty of risk premium for the uncertainty that lies ahead.

The real rise in yields

The rise in US bond yields since September is not just about a fear of Trump’s policies being inflationary. Figure 3 shows that both US 10-year breakeven and real yields have marched higher.

Breakeven yields indicate the market’s view on long-term inflation expectations. Since the September FOMC meeting, 10-year breakeven yields have risen by 0.24% to 2.35%.

In other words, the market is having doubts about the Fed being able to maintain inflation at its 2% target in the long run.

Real yields, however, have risen by twice as much in the same period – from below 1.6% in September to nearly 2.1% today.

The prevailing market explanation is that the incoming Trump administration is very likely to see a worsening of the US deficit situation, leading to an increase in US government bond supply.

However, real yields can move due to both the demand for and supply of capital.

An increase in US government bond issuance represents an increase in demand for capital. But existing academic studies have found that the most significant drivers of real yields in the US are demographics and growth.

Source: Bloomberg

Ageing populations lead to higher savings rates, which increase the supply of capital – pushing down real yields.

This long-term trend is unlikely to be suddenly reversed by Trump’s policies and may, in fact, be exacerbated if the working-age population can no longer grow so easily due to more hawkish immigration policies.

GDP growth is positively linked to real yields, because when an economy grows, its need for capital tends to increase. This is why productivity growth is also tied to real yields. Higher productivity is usually a result of investment in technology and innovation – both of which require capital.

The likely effect of tax cuts and tariffs

An expansion and extension of tax cuts under the Tax Cuts and Jobs Act may indeed lift the growth rate of the US economy. But with a real yield rise of over 0.5% since September, a lot of those higher growth expectations have already been baked in.

Furthermore, tax cuts are unlikely to have the same distributional impact as the post-pandemic fiscal handouts implemented under the Biden Administration.

As illustrated in Figure 4, the poorest half of Americans still have more cash in their pockets than prior to the pandemic. The poorest one-fifth of US households have still experienced significant growth in their ex-real estate wealth since the pandemic.

In addition, trade tariffs tend to have a contractionary effect on demand and global growth.

The US economic slowdown in 2018 was evidence of this during Trump’s tariff wars with China. The deflationary effects were so strong at the time that it forced the Fed into the famous “Powell Pivot”, whereby the hiking cycle was abruptly halted (Figure 5).

Source: Bloomberg

The extent to which Trump’s policies can lift the US economic growth trajectory is uncertain. That the poorest Americans stand to benefit the most is unlikely.

Place your bets

While the US economy has remained resilient, we remind ourselves that only weeks ago recession was the main concern on the supposed breach of the “Sahm rule”. Whether the US labour market will manage to avoid further deterioration remains the main concern.

As Figure 6 highlights, once the unemployment rate starts to turn higher, recession usually follows.

Source: Bloomberg

In the meantime, global hedge funds have piled on short US bond bets like no other time in recorded history (Figure 7).

 

Source: Bloomberg

Asset managers’ natural positioning on Treasury futures tends to be long, as often futures will be used to ensure their portfolios’ duration do not fall short of their benchmarks. This creates room to put cash to work on higher-yielding assets like credit.

The most recent rise in the net Treasury futures position among global asset managers may be linked to their chase for credit, rather than an outright desire to extend their US government bond exposures.

Hedge fund positioning, on the other hand, tends to be driven by a direct view of how US Treasuries will fare.

In the low-rates era, hedge funds built up short positions on views that lower rates could not possibly last forever. The pandemic brought in a brief period of even lower rates and forced those hedge fund short positions to be unwound.

Since 2022, however, hedge funds have re-engaged with the short-bond trade because of concerns over inflation, the US deficit situation, and likely a multitude of other factors such as momentum.

The most recent driver of short positioning among global hedge funds seems to be the “Trump trade”. With hedge funds’ short bets on US Treasuries at an all-time high and yields having already risen significantly, the risk is that even hawkish Trump policies fail to push this trade on further.

Market positioning is never the primary driver behind our portfolio positioning decisions. However, it does inform our assessment of the risk-reward dynamic affecting any active decision we make.

If the details of Trump’s economic policies surprise to be more benign or if hawkish policies lead to disappointing market reactions, one expects profit-taking or capitulation to occur among the hedge fund community.

In other words, market positioning points to risk-reward that favours bonds. At the very least, shorting bonds may no longer be the best Trump trade.

 

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

• Find out about Pendal Focus Australian Share fund
• Tune in: register to watch Crispin’s Beyond the Numbers webinar

THE post-election rally in equities hit the wall last week, driven by a combination of being overbought, a rise in bond yields, hawkish comments from the Fed, and concerns over some of Trump’s cabinet appointments.

The Fed’s Chairman, Jerome Powell, signalled that a December rate cut was not a certainty. We have now had four cuts taken out of forward expectations in the past two months.

The US economy continues to travel well and is increasingly divergent from the rest of the world.

This is leading to a strong US Dollar, which is also acting as a check on equities. The S&P 500 shed 2.05% for the week.

There were several results for ASX-listed companies which were, on balance, positive. The S&P/ASX 300 finished up 0.07%.

Commonwealth Bank’s quarterly update reinforced the benign credit environment, leading to small upgrades that fuelled further outperformance from the banks.

US interest rates and economy

The outlook for interest rates continued to shift higher on a slightly more cautious tone from the Fed as Chairman Powell signalled that a December rate cut was not locked in.

“The economy is not sending any signals that we need to be in a hurry to lower rates,” he said.

He further noted that current economic strength was giving the Fed “the ability to approach our decisions carefully”.

In a break with recent messaging, there was also no mention of rates being “a long way from neutral”.

The US government two-year bond yield has risen from roughly 3.6% in September to 4.3% now, as a signal of where the market thinks rates are likely to go.

The market is still pricing a 62% probability of a rate cut in December, before a pause in January.

While expectations for the end of 2025 are broad, the market is assigning the highest probability for rates to be 3.75-4.0% – that is, three more cuts from current levels.

All up, four cuts have been removed from expectations in the past two months. This reflects three factors:

1. The economy is holding up well. The latest Atlanta Fed GDPNow indicator for Q4 is 2.5% growth. The latest consensus data has US GDP growing 2% over the next twelve months, with Goldman Sachs – which has called GDP well this year – estimating 2.4%.  Jobless claims data remains benign, falling back down to 217k last week. October’s personal consumption data was solid and indicates consumer growth is around the trend rate of 2.5% to 3.0%.
2. Inflation is holding up above target levels. October’s CPI data was okay and certainly better than September. Headline CPI was up 0.2% month-on-month to 2.6% year-on-year, while core CPI rose 0.28% month-on-month (versus 0.31% in September) to 3.3% year-on-year. As always, CPI data can be cut to support multiple arguments. Core CPI looks to be trending the wrong way, but the super core measures – excluding idiosyncratic categories – are more consistent with the Fed getting towards its target. Ultimately, there is enough uncertainty here to indicate the Fed will be careful with rates.
3. Trump policies. Tariffs are seen as a one-off reset of prices rather than an ongoing issue. However, immigration policy may have more of an impact on rates. If immigration slows from the estimated annual run rate of three million people to 750,000, then labour supply is tighter which can affect wages. The employment growth needed to hold the unemployment rate steady is estimated at 170k per month, and this could be down to 60k-70k in H2 2025.

Elsewhere, the Senior Loan Officer Opinion Survey (SLOOS) still indicates relatively tight credit standards, but these continue to normalise and suggest that credit demand will pick up in the US over the next 12 months.

The Fed watches this carefully as a gauge for how tight monetary policy actually is.

Markets

US equities corrected last week, and a period of consolidation is understandable given the recent move.

Australia, like the US, has seen a significant sector rotation.

Resources have been weak on disappointment over China stimulus. Consumer Staples and Utilities are underperforming due to defensive attributes and rising capital intensity.

Technology and Banks lead the market. 

Currency markets

One issue to watch is currency markets.

The US rate outlook is moving higher at the same time as the market is becoming more pessimistic about European growth. Expectations of sub-1% growth in Europe in the next 12 months would require the European Central Bank to cut more aggressively.

The implied interest rate differential between Europe and the US has widened to 200 basis points (bps) by the end of 2025. There has been a similar issue with Japan and this has led to a significant move higher in the US Dollar.

The roughly 5% increase in the US Dollar trade-weighted index is not good for equity markets. A similar move in July to October 2023 coincided with a 9% correction in the S&P 500.

That said, the 2023 sell-off also coincided with a 130bp increase in US 10-year yields – we have only seen an 80bp move here so far.

Oil also rose $20 in that period to $95, whereas it is sitting at its lows currently.

So while there are some early warning signs, this is not as material a headwind as last year.

Liquidity/risk-on signals such as Bitcoin remain positive. Credit spreads are close to 20-year lows, which suggest this is more a consolidation than a market reversal.

US earnings are also supportive, with earnings per share (EPS) growth expected to pick up in the next 12 months.

Banks

Banks had another big week and have fully recovered from the China stimulus sell-off in late September.

The sector has now outperformed about 25% over the past 12 months, with the market almost uniformly negative and underweight the sector.

The move, relative to Resources, is even more extreme – now about 66% over 12 months.

Given the earnings outlook for banks is flat, the bulk of the move in Banks has been valuation re-rating.

To highlight the relative valuation shift, we need go no further than the example of Commonwealth Bank which, at 25.88x next-12-month price-to-earnings, has just overtaken CSL (25.14x) for the first time.

Bear in mind that CSL is expected to grow EPS by more than 10% per annuum for the next five years, whereas CBA is likely to be low single digit.

There is no doubt there are significant distortions affecting the market. A lot relates to passive investing, with flows – particularly from offshore – into a small number of mega-cap stocks.

It is hard to predict when these distortions reverse.

But we are reminded of the period where bond yields were around 0% and the market began to justify why this made sense – only to eventually see it unwind.

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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  

Contact a Pendal key account manager

Pendal’s Global Emerging Markets Opportunities team remains positive about China’s property sector. Here they explain why

• Signs of optimism in China’s property sector
• Caution should be applied when choosing where to invest
• Find out more about Pendal Global Emerging Markets Opportunities Fund

CHINA remains the most interesting emerging market from a top-down standpoint.

Here we focus on its property sector.

The scale of China’s property problem in recent years should need little introduction.

But to summarise it in a statistic: residential property sales were RMB 6 trillion in the first nine months of 2024, down from RMB 12.2 trillion in the first nine months of 2021.

A crackdown on new lending to most private-sector real-estate developers since 2020 has coincided with a broad slowdown in the rest of the economy.

This created a crisis of confidence in real estate, which quickly became a liquidity crisis for developers and a funding crisis for local governments.

Stimulus measures

In September, Chinese policy makers announced fiscal and monetary stimulus which brought about the prospect of change.

This included broad policies aimed at supporting the property sector.

They also specifically allowed the refinancing of a potential USD 5.3 trillion in residential mortgages from November, and a reduction in the banking system’s required reserve ratio.

Signalling from central government fed through to local governments.

Important commercial hub Guangzhou became the first tier-one city to remove all restrictions on buying residential property.

Other top-tier cities Beijing, Shanghai and Shenzhen eased rules on home-purchasing in suburban areas.

James Syme, Paul Wimborne and Ada Chan are co-managers of Pendal Global Emerging Market Opportunities Fund

Property sales rising

Chinese property sales data is normally released in the middle of the month, but there are some data sources that provide an early look.

Most significantly, listed property companies report monthly sales data early the following month.

Data released in early November covers the first full month since stimulus was announced.

For the 22 biggest listed real estate developers, October sales were up 68% month-on-month and 3% year-on-year.

A 3% rise is hardly a return to boom conditions. But as the first ten months for 2024 were down 34% on the equivalent period in 2023, it looks like a significant turning point has been reached.

More positive data

Other anecdotal evidence also supports this view.

New home visits over the October 1 National Day holiday were up 93% year-on-year in Beijing and 200% in Guangzhou.

Prime land in Shenzhen and Chengdu has been sold in recent weeks at high prices, reflecting optimism and financing availability for developers.

October national real estate data (due in mid-November) should give much more clarity on this suggestion of a turning point.

Caution advised

Despite this positive data – and despite strong share price performance among some real-estate developers – some caution must be exercised.

Inventory of unsold homes held by real estate developers is an estimated 28 months of current sales volumes.

Inventory in suburban areas and in tier-two and tier-three cities may be very difficult to sell.

And the Chinese economic slowdown is not driven solely by real estate: policy makers may fail to follow through on their announcements.

Keep an eye on country-level data

Operating a top-down investment process involves continually updating views as economic and company data is released.

A major policy announcement has been followed by a series of data points indicating a turning point in this critically important sector.

We will continue to assess the strength of the recovery and be alert to new investment opportunities.

Until then we remain overweight China in the Pendal Global Emerging Markets Opportunities Fund, with a selective –  and we believe higher quality – set of holdings.

We remain overweight Chinese real estate, with a holding in the more defensive state-owned segment of the industry.

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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.
 
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