The Point

Emerging Markets: Take care with Asian tech leaders such as Korea and Taiwan

Emerging markets investors will be aware that media and analysts have recently been talking up the prospects of a return to growth for key Asian tech hardware export markets.

But Pendal’s James Syme warns investors to take care before jumping into Korea and Taiwan on the back of bullish semi-conductor export expectations.

Both countries continue to face historically weak conditions in their key computer chip and electronics export industries, says James, who co-manages Pendal Emerging Markets Opportunities fund.

“We’ve seen a lot of investors go back to the playbook of what worked for the last couple of years – Chinese Internet stocks and Korean and Taiwanese tech hardware names.

“But when we look at the data, we see no evidence of that at all.”

Instead, James believes investors should stick to the EMs best suited to current global economic conditions, such as Mexico, Poland, Hungary and Czech Republic.

Crispin Murray: Four government intervention areas investors must watch

Investors should keep a close eye on a growing trend toward government policy intervention in business, says Pendal’s head of equities, Crispin Murray.

“As investors our focus is on the practical reality of the market environment,” Crispin says in his biannual Beyond The Numbers webinar.

“One key shift we have seen is the number of companies referencing the growing influence of government policy on their outlook.”

Investors should be aware of government influence from four perspectives, he says:
1 Determining award wages
2 Power and gas policy
3 The carbon reduction pathway
4 Potential new regulations for the big banks

Tim Hext: The end of interest rate hikes may finally be near

Almost exactly a year after the Fed started raising rates, it has finally signalled a pause may be near.

Today’s 25-point hike brings us to a total of 4.75% of hikes in nine meetings.

Future hikes no longer “will” be needed but now “may be appropriate”, the Fed says.

Bond markets rallied modestly on the statement but were given a decent boost by Powell’s comments that the Fed considered a pause this time after recent bank wobbles.

“We are now all on ‘break watch’,” says Pendal’s head of government bond strategies Tim Hext.

“Where will we see the next signs of stress after almost 5% of hikes in a year?”

Tim points to commercial property, private equity and the non-bank financial sector as areas that thrived in the zero-rate environment.

“Equities have largely taken it all in their stride. Stresses may be offset by lower rates, meaning it may be a case of picking the sector winners and losers more than the overall market direction.”

Why the Silicon Valley Bank collapse happened and what it means for investors

Cockroach theory refers to the belief that problems affecting one company may indicate similar problems with other similar companies.

After the collapse of California’s Silicon Valley Bank (SVB), the market and the media are on the lookout for more cockroaches.

The good news is that SVB was an unusual cockroach. There could be other lending institutions with similar red flags, but the bank’s problems were largely self-made.

The SVB episode highlights a number of broader risks, which our head of income strategies Amy Xie Patrick outlines here.

But the failure also reinforces the investment views of our income and fixed interest team

“The SVB collapse highlights the need to hold a true-to-label fixed income allocation in your portfolios – if only for insurance,” Amy says.

“Since the third quarter of 2021, we have held a defensive stance in our credit and income portfolios, favouring quality and liquidity over stretching for that extra bit of yield or spread.”

Crispin Murray: Four issues driving the economic outlook for Aussie equities

Australian stocks have proven remarkably defensive over the past year, compared to global shares and other asset classes, delivering a 6.5 per cent return in the year to February, says Pendal’s Crispin Murray.

A material decline in shares is unlikely in 2023, says Crispin in his new biannual Beyond The Numbers webinar.

Earnings are on track for 2% growth in 2023 and 1% in 2024, he believes.

“However, if we do get the RBA forced to hike rates far higher than the economy can absorb, and we do get a downturn, then we’re going to see much more material downgrades. But it’s not the scenario we expect.”

Four issues will drive the underlying economic picture for Australian companies, he says: