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The Point
Quick, actionable insights for investors
Sep 4
Five major ASX reporting season themes | Aussie spending and rate cuts | The countries benefitting from a weaker US dollar
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Aussies are spending again. But what does it mean for rate cuts?
AUSSIE consumers are spending again – that’s the main message from the June-quarter GDP data out this week.
Overall, growth was slightly higher than expected at 0.6% versus a 0.5% forecast. Annually we are 1.8% stronger than a year ago.
But increased consumer spending comes through as a clear trend, notes Pendal’s head of government bonds Tim Hext.
Despite last year’s tax cuts and February’s rate cuts, for a while it seemed consumers were more interested in saving than spending.
However, household spending rose 0.9% in the last quarter, led by a 1.4% rise in discretionary spending.
Now rate-cut expectations have dropped from 100% chance of one cut by November to 90%.
“It does all feed into the idea that the RBA has time and optionality on its side,” says Tim.
“If the consumer gets more confident from here, some may ask if any more rate cuts are needed.”
How to identify emerging markets benefitting from a weaker US dollar
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How to identify emerging markets benefitting from a weaker US dollar
A weaker US dollar is creating support for emerging-market equities – but not all countries will benefit equally.
The US Dollar Index – which measures the USD against other major currencies – is down about 10 per cent this year.
EM returns have historically been strongest when the US dollar is weak, because servicing US-dollar debt becomes cheaper; domestic purchasing power in EMs improves; and cheaper imports help keep inflation under control, creating room for rate cuts.
Still, while EM performance lifts as the US dollar weakens, the effect is uneven and investors should be discriminating in country selection, cautions Pendal’s EM team.
Economies with a current account deficit – common in Latin America and South-East Asia – benefit most from cheaper borrowing, lower imported inflation and stronger consumer demand.
But big exporters that run a surplus such as Taiwan and Korea can face headwinds as their products become more expensive in US-dollar terms.
Crispin Murray: What’s driving the ASX this week?
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Crispin Murray: What’s driving the ASX this week?
Pendal identified five major themes this ASX reporting season.
1. Overall earnings were okay, with similar trends to February in terms of misses and beats. A third of companies beat by 5% or more and 22% missed.
2. Stock volatililty reached new highs on result days, driven by the tone of messaging and revisions. Almost a third of companies experienced stock moves more than three standard deviations away from their average on reporting day.
3. Rating changes were the most material driver of returns. The biggest re-ratings were generally stocks beginning to stabilise or those that affirmed their status as safe havens.
4. Disappointing large caps were hit harder than smalls. The average two-day relative return for industrial large caps that missed consensus EPS by more than 5% was -7.2% for the ASX 100, versus -3.8% for small caps.
5. Domestic stocks generally performed better than internationally-exposed companies.
Amy Xie Patrick: What the Fed’s shift from inflation to employment means for investors
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Amy Xie Patrick: What the Fed’s shift from inflation to employment means for investors
A shift in focus from inflation to employment hints at a likely rate cut in September observes Pendal’s head of income strategies AMY XIE PATRICK
In her latest article, Amy explains how she is positioning Pendal’s income funds in response to these and other global factors.
Pendal profile: Meet Australian equities analyst and portfolio manager Elise McKay
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Pendal profile: Meet Australian equities analyst and portfolio manager Elise McKay
AUSTRALIAN equities have the potential to offer investors a compelling trio of benefits, argues analyst and portfolio manager Elise McKay.
In this video, Elise explains how the Pendal investment process helps her team identify and take advantage of opportunities in Australian shares.
Latest updates from our fund managers
Income and Fixed Interest
Aussies are spending again. But what does it mean for rate cuts?
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Emerging Markets
Emerging markets: Look past commodity exports to countries with strong domestic demand
July 26, 2023
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These podcasts are for general information purposes only, should not be considered as a comprehensive statement on any matter and should not be relied upon as such. They have been prepared without taking into account any recipient’s personal objectives, financial situation or needs. Because of this, recipients should, before acting on the information, consider its appropriateness having regard to their or their clients’ individual objectives, financial situation and needs. The information is not to be regarded as a securities recommendation.
The information in these podcasts may contain material provided by third parties, is given in good faith and has been derived from sources believed to be accurate as at its issue date. While such material is published with necessary permission, and while all reasonable care has been taken to ensure that the information in this presentation is complete and correct, to the maximum extent permitted by law neither Pendal nor any company in the Pendal group accepts any responsibility or liability for the accuracy or completeness of this information.
Any projections contained in these podcasts are predictive and should not be relied upon when making an investment decision or recommendation. Whilst we have used every effort to ensure that the assumptions on which the projections are based are reasonable, the projections may be based on incorrect assumptions or may not take into account known or unknown risks and uncertainties. The actual results may differ materially from these projections.
Performance figures are calculated in accordance with the Financial Services Council (FSC) standards. Performance data (post-fee) assumes reinvestment of distributions and is calculated using exit prices, net of management costs. Performance data (pre-fee) is calculated by adding back management costs to the post-fee performance. Past performance is not a reliable indicator of future performance.
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Crispin Murray: What’s driving the ASX this week?
The gravest fears for a material market sell-off look to be over, says Pendal’s head of equities Crispin Murray in his latest weekly newsletter.
“With negative seasonal effects and limited new positive news, we expect the market can now consolidate. It’s shown impressive resilience and that should help underpin returns into the year end.”
A soft-landing narrative resumed in the US last week on the back of a series of data points that suggest the economy is holding up, he says.
The data points included supportive company survey data; solid US retail sales growth; strong sales at Walmart (a proxy for US retail sales); and an easing of initial jobless claims.
Crispin also notes a positive start to the first major week for ASX reporting season.
“Banks, telecom and discretionary stocks are seeing upgrades and the broader read on the economy suggests things are holding up well.”
Investors are now focused on whether US Federal Reserve chair Jay Powell will signal a rate cut at the Fed’s annual Jackson Hole Monetary Policy Symposium this Friday (early Saturday morning AEST time).
Prevailing view or misconception? Pendal’s Amy Xie Patrick busts a few modern investing myths
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Prevailing view or misconception? Pendal’s Amy Xie Patrick busts a few modern investing myths
The past few years have played havoc with conventional market assumptions.
Inverted yield curves don’t mean recessions are imminent. Expensive valuations can get more expensive. An aggressive hiking cycle need not bring about recession. Bonds don’t have to go up when equities go down.
These things can cause head-scratching among modern-day investors.
“But viewed through a longer-term lens – think multiple cycles and regimes – these events become clearer,” says Pendal’s head of income strategies Amy Xie Patrick.
In this article, Amy explains what’s really going on with these “broken relationships”.
For example, an inverted yield curve – when short-term interest rates are higher than long-term ones – is often viewed as a sign of a looming recession.
But history shows the lag between the curve inversion and recession is highly variable – three months to two years.
“It simply indicates the market expects interest rate cuts at some point down the line, and that current policy settings are restrictive and will be normalised – for whatever reason – in the future.”
Global market volatility should be positive for stocks in some emerging markets
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Global market volatility should be positive for stocks in some emerging markets
In the EM space, market segments with the highest exposure to international investors saw the greatest weakness during the recent bout of market volatility.
Pendal’s Global Emerging Markets Opportunities team spotted opportunities amid the volatility – but not necessarily in the obvious places.
“In EM equities, the pain was concentrated in the IT sector, especially in Korea and Taiwan,” the team said in a recent report.
“We find hard to be overly positive about the IT sector, despite a reset in valuations.
“The entire sector has re-rated substantially in recent years, despite essentially soft demand in important end-demand segments such as PCs and mobile phones.
“This optimism has been attributed to a potential demand shift from widespread adoption of generative artificial intelligence.
“But beyond some key semiconductor names held in our portfolio, we have not seen sufficient evidence of this opportunity.”
Instead, look to companies in Mexico and Brazil, which appear to be well placed in the medium term, the team said.
Aug 8
How to manage current volatility in Aussie equities and fixed income markets
Amy Xie Patrick: A fixed-income perspective on current market volatility
Big market moves have rocked sentiment since the beginning of August.
What’s the outlook for a US recession and potential rate cuts?
US markets expect a 50-basis-point cut in September, followed by consecutive 25-point cuts, says Pendal’s head of income strategies, Amy Xie Patrick.
“Some big-bank economists are calling for back-to-back 50-point cuts – even an inter-meeting emergency cut.” Are things really that dire?
“We argue the data isn’t there yet,” says Amy.
Either way, we’re in “the ripe part of the cycle” for owning at least some bonds in portfolios, she says.
“Without a recession, bond yields should continue to fall steadily as central banks normalise their policy settings from restrictive levels. With a recession, bonds will pay for themselves.”
Bonds provide great insurance for the unpredictable. Add to that the 4% types of annual income returns you can get on US or Australian 10-year bonds and it basically amounts to being paid to take out insurance.
Crispin Murray: What’s driving the market this week?
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Crispin Murray: What’s driving the market this week?
Signs the US economy is slowing faster than expected has prompted a significant shift in market sentiment.
Even if this proves a “head-fake”, there’s room for an S&P500 correction to the 5000-5100 level – reinforced by weaker seasonals and election uncertainty, says Pendal’s head of equities Crispin Murray.
“There is also likely to be material rotation as part of this. We’ve been bracing for such a correction, with cash levels higher and positions reduced in some of the more economically leveraged stocks.”
Is this a “normal” bull market correction or will we see a more meaningful drawdown?
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