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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
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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.
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Inflation back below 5pc – but getting to 2-3pc remains a challenge
Annual inflation fell below 5 per cent in July and looks on track to hit 4 per cent or lower by the end of the year as 2022’s higher numbers drop out.
That reduces any urgency around further rate hikes – particularly since the fixed-rate cliff is now peaking, which effectively increases rates independent of the RBA.
However, the battle to get inflation back into the 2-3% band will still be a challenge next year and rate cuts seem a distance away, says our head of government bond strategies Tim Hext.
When Dr Michele Bullock takes over as RBA governor on September 18 she will be keen to establish her inflation credentials – so any move to a dovish outlook is unlikely, says Tim.
“For now, rates remain range-bound – as do risk markets,” he says.
Aug 24
How China is impacting equities | A warning on global bond index funds | Why Brazil is well positioned for EM investors | Where to look for AI winners
Emerging markets: Brazil is set up for a classic virtuous cycle
Brazil’s bigger-than-expected rate cuts are raising the chances of sustained economic outperformance.
And markets are underplaying the likelihood of further rate cuts in Brazil, argues James Syme, who manages Pendal Global Emerging Markets Opportunities Fund
South America’s biggest country is showing signs of entering a classic emerging markets virtuous cycle of capital inflows, strengthening growth and rising markets, says James.
Brazil’s central bank cut its key interest rate 50 points to 13.25 per cent in August, ending eight months of keeping borrowing costs on hold.
Market expectations are for further cuts to 12 per cent by the end of the year and 9.25 per cent by the end of next year. But Syme says those expectations are likely short of the mark.
“Emerging markets tend to overshoot to the downside and then to upside. We think Brazil is setting up to be in a cycle of much more positive news, and that should be reflected in equity prices.”
Crispin Murray: What’s driving Aussie equities this week
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Crispin Murray: What’s driving Aussie equities this week
Confidence in China continues to weaken.
High youth unemployment is deterring consumer spending. Fears about the solvency of private developers are discouraging new home purchases.
Investment trust defaults such as Zhongrong risk triggering redemption requests, leading to a potential liquidity squeeze.
A number of incremental policy initiatives have been unable to reverse deteriorating sentiment.
Despite the bearish portrait, our head of equities Crispin Murray notes that some China-related stocks and ASX sectors have held up – notably the miners.
The bulls are taking the view that things are so bad, they’re good – which increases the chance of a more convincing policy response such as the one we saw in 2015, says Crispin.
“They are drawing a comparison with the period prior to the reversal of the Zero-covid policy, where there were incremental signals before a major policy change,” says Crispin.
If a major policy response doesn’t materialise, Crispin sees some risk around bulk commodity producers at these levels.
Aug 17
The big questions for equities | Two stocks taking off | Why you can look past ESG volatility | How investors are making the world better
Tim Hext: Wage growth remains under control – for now
Wage growth – a key indicator that the RBA watches when weighing up rates decisions – was surprisingly benign in the June quarter.
The latest Wage Price Index, which measures salary changes across 18 industries, shows overall wages grew by only 0.8% in the period.
That’s three quarters in a row at 0.8%, suggesting an annual run-rate of only 3.2%, points out our head of bond strategies Tim Hext. (The official number is 3.6% due to a 1.1% result in September).
“Wages across the economy are likely to settle on 4% rises for several years yet,” predicts Tim.
That continues to buy time for the RBA – the market expects one more hike towards year-end or early 2024.
The outlook for bond investors?
“Short-end bonds should remain rangebound for now. Longer bonds remain vulnerable to higher long-end rates globally.”
Another Chinese property developer is in trouble. Here’s what it means
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Another Chinese property developer is in trouble. Here’s what it means
China’s property sector woes continued this week as another big property developer found itself in trouble.
Country Garden – China’s biggest property developer based on last year’s contracted sales – missed US$22.5 million in payments on two bonds.
The company is described as facing “periodic liquidity stress“.
Country Garden will probably find enough money to pay the coupon within the 30-day grace period, says our head of income strategies Amy Xie Patrick.
But it needs another $US2 billion for other payments, plus cash to complete pre-sold projects.
As the confidence crisis in the property sector deepens in China, levered property developers need strong new pre-sales to complete older pre-sales.
But monthly sales are well down on 2021 down and still falling.
“This is what is causing the ‘periodic liquidity stress’ – though I would describe it as existential rather than periodic,” says Amy.
Here Amy explains the detail and what it means for the global outlook
Aug 10
Change on US recession outlook | Watch-out on Asia tech stocks | Green bonds primer
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