Most equity markets are in a drawn-out, bottoming process and patience will be required as we wait for the dips, says Pendal’s CHRIS LEES

• Investors are looking beyond a potential recession
• Quality growth stocks favoured
• Find out about Pendal Global Select Fund

MOST equity markets are in a drawn-out, bottoming process – but patience is still required in the wake of last month’s rally and potential recession risks.

That’s the message from Chris Lees, co-manager of Pendal Global Select Fund.

“China’s re-opening and signs that disinflation is prompting a slower pace of interest rate rises buoyed markets in January.

“So far this year, these two positives have offset negative earnings revisions as equity markets try to look through the much-anticipated recession,” Lees says.

The bottoming process will take time, he says.

Investors will take on more risk on some occasions, and then reduce risk, as they manage their portfolios for the period beyond any short-term downturn.

Lees says there are improving relative fundamentals and share prices, and attractive valuations in several segments of the global equity market.

• Quality growth stocks, many of which are already down up to 50 per cent
• UK and European global champions, plus Japanese exporters
• Emerging markets domestic consumption stocks
• Stocks exposed to China’s reopening and recovering economy

“But given the recent rally and 2023 recession risks we will wait to buy the dips throughout the year,” he says.

The bear and bull scenarios

Lees and co-manager Nudgem Richyal’s current scenario analysis is 50 per cent bullish and 50 per cent bearish on equity markets.

“Short-term reasons to be bearish include a recession potentially becoming a financial crisis or a larger event such as a contagion,” Lees says.

“Medium-term reasons to be bullish include the Fed regaining credibility with inflation and interest rates stabilising this year.”

Beneath the 50 per cent bullish, 50 per cent bearish forecast are three scenarios. The first, which Lees and Richyal assign a 40 per cent probability to, is a rally led by quality growth stocks.

“It is probably nearer the end of the bear market for economically resilient, quality growth stocks that are already down 30 to 50 per cent after their 2022 interest rate shock,” Lees says.

The second scenario, which the fund managers assign a 10 per cent probability to, is a rally led by cyclical value stocks.

“In the case of these stocks, it is probably nearer the beginning of the bear market given their recessionary earnings risk. The question is whether investors will look through this?” Lees says.

The final scenario, which Lees and Richyal assign a 50 per cent probability to, is that equity markets keep falling. In that case defensive stocks are more attractive options.

“Healthcare is our biggest position relative to benchmark given the sectors positive fundamentals, valuation and trend,” Lees says.

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About Chris Lees and Nudgem Richyal

Chris Lees co-manages Pendal Global Select Fund with Nudgem Richyal. The pair have been working together in global equities investing for more than 20 years.

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

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About Pendal Global Select Fund

Pendal Global Select Fund is a global equities portfolio with a distinctive, yet proven approach. Fund managers Chris Lees and Nudgem Richyal have worked closely together for more than 20 years.

They manage a portfolio of 30-60 stocks using quantitative analysis and fundamental research based on decades of experience.

The team draws on the experience of 40-plus investment professionals at JOHCM and Regnan.

An economic recession is highly likely in 2023 says Pendal’s head of income strategies AMY XIE PATRICK in our latest fast podcast. Here’s how investors should prepare

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:

We think an economic recession is highly, highly likely in 2023.

How should investors be positioning their portfolios?

An easy decision is to consider long-duration government bonds, says Amy.

When we talk about government bonds, we’re talking about high-quality, developed-market government bonds.

Regardless of whether your view is of a mild or a deep recession, bonds should rally when recessions hit.

This is why being in duration or government bonds should be the crux of your portfolio decision this year.

Compared to the beginning of 2022, government bonds are far more attractive now in terms of the income stream that they can provide, compared to other risky assets like equities.

But it shouldn’t be a set-and-forget strategy.

We fear that 2023 will be just as volatile a market environment as 2022.

There will be new fears about whether inflation’s really behind us, whether monetary policy tightening is closer to an end or not, and that will drive volatility in both equity and bonds this year.

So putting a larger weight to fixed income and putting it with an actively managed strategy that has proven to be tactical and agile through market volatility will be key.

INTERNET search has been upended by ChatGPT – a “generative AI” technology that can scan existing knowledge and create new and original data such as images, text and music.

Will programs such as ChatGPT bring sweeping change to everything we know? Or is it just the next dot com bubble?

Our head of global equities ASHLEY PITTARD explains in this new Pendal Fast Podcast.

You can also listen to this podcast on Apple or Spotify

An excerpt from this podcast with Pendal’s head of global equities Ashley Pittard:

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How will generative AI technologies such as ChatGPT impact investors?

There are two parts to that question.

First of all, stock price movements near term. There’s been a lot of volatility in stock prices that have this technology.

When Baidu announced that they had a bot, their stock price was up 15% on the announcement.

When Microsoft said that they were integrating ChatGPT into their search engine, Bing, and also into their Edge browser, their stock price was up 4%.

Google, on the other hand, was down 8% and was actually the worst non-earnings day that Google has ever had versus the S&P 500 in the last 10 years.

So near-term, there’s going to be significantly more volatility.

But longer term, the AI technology – which is the real gem of ChatGPT – will create significant earnings opportunities or revenue opportunities for companies in big tech.

That AI technology is going to be the backbone of the internet going forward and it’s going to drive many, many outcomes – not just in search.

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About Ashley Pittard and Pendal Concentrated Global Share Fund

Ashley Pittard leads Pendal’s Global Equities investment boutique. He is responsible for setting the strategy, processes and risk management for the boutique and its funds including Pendal Concentrated Global Share (COGS) Fund.

Ashley has more than 24 years of finance experience, including roles in petroleum economics, global energy investment analysis and 20 years as a global equities fund manager.

Pendal COGS Fund is an actively managed, concentrated portfolio of global shares diversified across a broad range of global sharemarkets.

Find out more about Pendal Concentrated Global Share Fund

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.

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About Pendal Group

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 account manager

The US Inflation Reduction Act is the most ambitious environmental energy policy in a decade, says Regnan’s MAXIME LE FLOCH. Here’s how it should benefit investors

• US Inflation Reduction Act changes incentives
• Investment opportunities across the economy
• Find out Regnan Global Equity Impact Solutions Fund

THE title of President Biden’s Inflation Reduction Act is all about prices.

But the long-term impact is about the environment — and boosting manufacturing and infrastructure in the world’s biggest economy.

“That opens up opportunities for investors,” says Maxime Le Floch, a senior analyst with Regnan Global Equity Impact Solutions fund.

“The implications of the IRA are unfolding as we speak. It’s clearly going to have a transformational boost for some industries like wind and solar.

“The onshore wind market in the US had a flat trajectory, but now it’s more attractive.

“For other industries which were less competitive, the Act transforms their economics. That’s the case in technologies like hydrogen and carbon capture.

“It’s the most ambitious environmental energy policy we’ve seen in the last decade and it’s transformational.”

How it works

The policy, which focuses on tax credits, is well designed and easy to implement, says Le Floch.

“It’s a supply push policy. It makes greener alternatives cheaper, rather than other approaches which focus on making high-carbon products more expensive.

“The one thing we know is we need a lot of solar, wind, batteries, electric vehicles, heat pumps, carbon capture and so on.

“This policy is focused on massively ramping up investment in manufacturing in those areas.”

One significant difference between developing new sources of renewal energy and carbon-intensive energy is the capital expenditure time frame.

Generally, renewable energy sources require very large upfront capital expenditure, but low ongoing spending.

Capital expenditure on fossil fuel developments tend to be large upfront, and then constant over the life of a project.

The Inflation Reduction Act – which is in place until the US reduces emissions by 20 per cent or at least 2032 – gives renewable energy projects an immediate tax credit, offsetting that large upfront cost.

While it is estimated to cost $US400 billion, investment bank Credit Suisse forecasts the impact to be $US1.7 trillion over the next decade.

Value chains are changing

“The Act is already changing value chains globally,” says Le Floch.

“Companies are adapting their investment plans,” he says, citing Tesla’s recent decision to cancel the expansion of a German battery plant, and replace it with one in the US.

Alongside the Act is the Covid-inspired trend to re-shore (or “near-shore”) supply facilities, which is leading to greater industrial activity.

“That trend is accelerating … across industries from renewable energy through to semi-conductors,” Le Floch says.

“The bottom line is that many supply chain companies that feed into renewables, such as solar panel manufacturing, will relocate to the US.

“When you get value chains moving like that, you get a multiplier effect across the economy,” he says.

Regnan has invested in Canadian industrial automation company ATS, for example, which has picked up business from companies wanting to improve manufacturing lines in recent months.

“We are going to keep talking about this for many years – the reconfiguring of value chains and the ramifications across many different areas is enormous.”

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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.

In our latest fast podcast, Pendal’s head of multi-asset MICHAEL BLAYNEY talks about the lessons of 2022, how he’s valuing major asset classes right now and suitable portfolio settings

You can also listen to this podcast on Apple or Spotify

An excerpt from this podcast with Michael Blayney, Pendal’s head of multi-asset

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What are the big lessons investors should take from 2022?

“The first one is that volatility in financial markets is a normal thing,” says Penal’s Michael Blayney in this fast podcast.

“It can obviously cause short-term pain, but it also creates opportunities for investors who are willing to take a long-term view when value arises.”

The second lesson relates to the correlation between bonds and equities.

“People had assumed bonds and equities would always move in opposite directions with that negative correlation we’ve seen over the last decade or two.

“But the reality is that correlations and diversification benefits of various asset classes do vary over time.

“So it’s important to have more than just bonds and equities in a mix.

“We believe in having meaningful allocations to alternative assets. Some of the exposures there —  particularly those that have given us a bit more energy price exposure or some commodity-linked exposures — have performed quite well in the last year and helped cushion the downside for investors.”

In this podcast Michael also discusses the current value of major asset classes and suitable portfolio settings.

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About Pendal’s multi-asset capabilities

Pendal’s diversified funds provide investors with a variety of traditional and alternative asset classes and strategies.

These include Australian and international shares, property securities, fixed interest, cash investments and alternatives.

In March 2024, Perpetual Group brought together the Pendal and Perpetual multi-asset teams under the leadership of Michael O’Dea.

The newly expanded nine-strong team will manage more than $6 billion in AUM and create a platform with the scale and resources to deliver leading multi-asset solutions for clients.  

Michael is a highly experienced investor with more than 23 years industry experience, including almost a decade leading the team at Perpetual.

Find out more about Pendal’s multi asset funds

Contact a Pendal account manager here

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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

What will prompt central banks to stop hiking interest rates altogether? Look to wages for the answer, says Pendal’s head of income strategies AMY XIE PATRICK

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:

What do we need to see to have the central banks stop hiking altogether?

“The US Fed is looking for inflation not only peaking but coming down very convincingly to its 2% target,” says our head of income strategies, Amy Xi Patrick in a new fast podcast

“Wage growth in Australia is only at around about 2.5% to 3%.

“The RBA is comfortable for it to go up to 3.5%, maybe even temporarily to 4%.”

“Wage growth in the US however, is hovering at about 5.5% to 6% percent, which is clearly not consistent with the 2% inflation rate. “

This means inflation will be stickier than the market expects.

Central banks may slow down hikes, but they will be hiking for longer next year than the market currently expects, says Amy.

Higher-quality fixed income assets will help offer some buffer for future volatility, says Amy. Listen to Amy’s fast podcast to find out how.

There are signs that inflation has peaked and is due to come off in the next few quarters – which means owning bonds could be compelling around Q2 2023, says Pendal’s OLIVER GE

You can also listen to this podcast on Apple or Spotify

An excerpt from this podcast with Oliver Ge, an assistant portfolio manager with Pendal’s Income and Fixed Interest team

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“There are signs that inflation has peaked and is due to come off in the next few quarters.

“That would invariably take us to a position, maybe in Q2 2023, where it looks quite compelling for us to own bonds.

“At that point you’d already see inflation pressures come off and growth indicators start to materially deteriorate.

“Then central banks will in all likelihood tilt their reaction function to be more benign, more dovish. They’re not accelerating, there likely won’t be more hikes.

“That environment is conducive to owning bonds.

“You’re looking at returns of five to 6% per annum at that point.”

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About Oliver Ge and Pendal’s Income and Fixed Interest boutique

Oliver Ge is an Assistant Portfolio Manager with Pendal’s Income and Fixed Interest (IFI) team.

Oliver works on developing and running key quantitative investment models, and acting as trading support for the Income & Fixed Interest team. Oliver received his Bachelor of Commerce (Finance) from the University of Sydney and is also a CFA Charterholder.

Pendal’s IFI boutique is one of the most experienced and well-regarded fixed income teams in Australia. In 2020 the team won the Australian Fixed Interest category in the Zenith awards.

The invests across income, composite, pure alpha, global and Australian government strategies.

Find out more about Pendal’s fixed interest strategies here

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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

What do this week’s Budget and inflation numbers — and next week’s likely 25-point rate rise — mean for investors? TIM HEXT explains in this 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 key takeaway I have from the last couple of days is this inflation issue is not going to solve itself quickly enough to call an end to rate hikes anytime soon,” says Pendal’s head of government bond strategies Tim Hext in a new fast podcast.

“We are getting the ingredients — particularly globally more so than Australia — where in the second half of next year you could be getting a lot of weakness globally feeding through to the need for lower rates.

“My message — and this has been a consistent message for a number of months now — is start to think about getting some bonds in your portfolio as a defensive instrument.

“I don’t think they’re necessarily going to rally hard in the near term.

“But if you can own those 10-year bonds in Australia at 4% on a two or three-year outlook, I think you’re going to do well out of them.

“And they’re going to give you that buffer should the slow-down prove to be stronger.”

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

An equity markets rally is more likely to be led by quality growth stocks than cyclical value stocks, argues Pendal’s CHRIS LEES

• Pendal’s Chris Lees is 50% bullish and 50% bearish
• Quality growth stocks more likely to lead a rally than cyclical value stocks
• Find out about Pendal Global Select Fund

THE December quarter may see a rally, but equities will be range bound for the next few years, with rotations between value and growth stocks, argues Pendal global equities fund manager Chris Lees.

“Our base-case scenario is that this interest rate shock-crisis ‘valuation’ bear market is morphing into a recessionary ‘profits’ bear market, with the S&P 500 already down 25% year-to-date.

“But we don’t expect widespread financial contagion, where markets would fall by more than 50% like in 2008.

“Our current scenario analysis is 50% bullish and 50% bearish,” says Lees, who co-manages Pendal Global Select Fund with long-time colleague Nudgem Richyal.

“Short-term reasons to be bearish include a recession potentially becoming a financial crisis or contagion.

“Medium-term reasons to be bullish include the US Federal Reserve regaining credibility with inflation and interest rates stabilising next year,” Lees says.

Lees breaks down the probability of three scenarios as follows:

• Bullish scenario #1 (15 per cent): Equity markets rally, led by cyclical value stocks. In this case it is probably nearer the beginning of the bear market for those stocks, because any future downturn, or recession, is likely to hit their earnings the hardest.
  
  
• Bullish scenario #2 (35 per cent probability): Equity markets rally, led by quality growth stocks. That means economically resilient, quality growth stocks are nearer the end, than the beginning, of their bear market.
  
  
• Bearish scenario (50 per cent): Equity markets keep falling if recession becomes a financial crisis or contagion and policy makers do not react.

What does it mean for investing?

In recent months the fund has sold economically cyclical stocks with earnings risk due to recession, and purchased more economically resilient companies, including some in the emerging markets of Brazil and Indonesia.

“Not many people know that the Brazilian and Indonesian equity markets have outperformed the USA stock market this year – even in US dollars – which is another example of just how different this bear market is from previous bear markets when they fell much harder,” Lees says.

The fund is also considering, or as Lees puts it “tiptoeing” around, neighbourhoods where they see positive relative fundamentals and valuations, with stabilising relative share prices.

“Some quality growth stocks are already down 50 per cent year to date and are beginning to stabilise,” Lees says. “And some emerging markets, notably Brazil and Indonesia.”

He also says its worth looking for opportunities to arise from the eventual turn in the US dollar, which in his words is “inevitable but not necessarily imminent”.

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About Chris Lees and Nudgem Richyal

Chris Lees co-manages Pendal Global Select Fund with Nudgem Richyal. The pair have been working together in global equities investing for more than 20 years.

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

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About Pendal Global Select Fund

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

Bonds can be an appropriate investment in a hiking cycle – as long as you know what to look for, argues Pendal’s head of income strategies AMY XIE PATRICK

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:

In a lot of hiking cycles, bonds actually do okay on a total return basis – that is, the income you get from the coupon on those bonds, as well as their potential to gain a little bit in terms of the capital price.

That usually is because most hiking cycles are fairly well flagged, especially in modern economic history.

The difference with this hiking cycle is the central banks just simply left it too late and now have to do a lot of catch up.

But even though central banks may need to keep on hiking, now their mantra is very well flagged to the market there is hope that bonds do better in the second half of this hiking cycle.

It does mean you probably want to look at having bonds in your portfolio as a defensive pillar, more towards the longer end of curves.

Because, at the shorter end, that’s directly tied to where policy rates are going. And as we know, nobody has signaled that they’re ready to peak and pivot more dovishly just yet.