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When is the right time to buy global equities and how best to value stocks during volatile times? Pendal global equities fund manager NUDGEM RICHYAL has some answers in this quick podcast

You can also listen to this podcast on Apple or Spotify or read an edited transcript below

An excerpt from this podcast:

What signpost should global equities investors be looking for right now?

Nudgem Richyal, co-manager of Pendal Global Select Fund: It goes back to the need to see a shift in Fed policy. Once we see a clear change in language, that the Fed is no longer worried about the politics and inflation, at that point, it will be safe to go back in.

The challenge is, markets are discounting mechanisms.

The market may anticipate any such shift in the Fed before it's actually articulated. That's always the $64 million question.

So that's what we're looking for. What we're expecting is the market will discount a change in Fed policy, and so we've got to anticipate that.

One of the ways to do that would be to see if the inflation data itself peaks. That hasn't happened. It was expected to happen last week, but it didn't.

Chair Jerome Powell isn't talking down interest rate rises at the moment.

But at some point the market will anticipate he will shift.

---

About Nudgem Richyal

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

Nudgem has 22 years of industry experience, joining J O Hambro Capital Management (a wholly owned subsidiary of Pendal Group) with Chris in 2008. He was previously an investment director with the Global Equity Group of Baring Asset Management, where he worked closely with Chris since 2001.

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.*

About Pendal

Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management. Pendal Group includes Pendal Australia, J O Hambro Capital Management, Regnan and Thompson, Siegel and Walmsley (TSW).

Contact a Pendal key account manager here

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After the evolution of Coalition fiscal spending habits during the pandemic, Australia’s new Labor government won't be a big change, says Pendal’s Anna Hong

ON THE economic front, Australians will be largely unaffected by the change of federal government -- at least in the near term, says Pendal's Anna Hong.

That's because key economic policies between Australia's two major parties are mostly aligned, says Hong, an assistant portfolio manager from Pendal’s Income and Fixed Interest team.

However, there will be an increase in fiscal spending by the Albanese government.

Labor will increase fiscal spending by a net $7.4 billion in areas such as home equity schemes and electric car discounts, as you can see in this table:

Labor's Fiscal Plan

Net Budget Impact		-$7.4bn
Revenue + Savings		$11.5bn
Spending		$18.9bn
Key Spends	Childcare subsidies	$5.4bn
	Aged care	$2.5bn
	Medicare	$0.75bn
	Electric car discount	$0.47bn
	Home equity scheme	$0.31bn

“This will prop up demand without fixing the supply issues, nudging inflation higher," says Hong. "It will make the RBA work harder to counter the loose fiscal policy.”

The federal budget will remain in deficit for the rest of the decade -- under either party.

"The stumbling block to Labor’s policies may be in generating planned revenue and savings.

"Many items on their list -- such as multinational tax revenue -- are easy to promise but notoriously difficult to achieve.

"Overall, the change of government is more of the same for the economy and the budget.

"The difference will be in the changes many Australian voters are focused on – climate policy, federal integrity, and gender equity — as Pendal’s Rajinder Singh outlines here.

"Australians want action and will watch this space closely."

---

About Anna Hong and Pendal’s Income and Fixed Interest team

Anna Hong is an assistant portfolio manager with Pendal’s Income and Fixed Interest team.

Pendal’s Income and Fixed Interest 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.

With the goal of building the most defensive line of funds in Australia, the team oversees A$22 billion invested across income, composite, pure alpha, global and Australian government strategies.

Find out more about Pendal’s fixed interest strategies here

---

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

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A bewildering array of net zero frameworks can seem daunting for investors, but the underlying principles are straightforward, says Regnan’s Alison Ewings. Here’s what to know

• Every increasing array of net zero frameworks and guidance
• Underlying aim needs to be practical action and meaningful change
• Find out about Regnan Global Equity Impact Solutions Fund
• Find out about Regnan Credit Impact Fund

ASSESSING climate risk in a portfolio can be a daunting proposition.

There’s a bewildering array of frameworks available to help companies and investors set net zero targets, says Alison Ewings, who heads up engagement at sustainable investing leader Regnan.

Asset managers and owners can use a wide range of initiatives and protocols to help assess climate risk and establish plans to achieve net-zero.

Here’s just a few:

• Net Zero Asset Managers initiative
• Paris Aligned Investment Initiative's Net Zero Investment Framework
• Science Based Target initiative for Financial Institutions
• UN Net Zero Asset Owner Alliance Target Setting Protocol, and
• Partnership for Carbon Accounting Financials

The list goes on — and for good reason.

The sheer scale of action needed to tackle climate change — and the important differences between sectors, asset classes and countries — means the finance industry must take a nuanced and targeted approach.

But how can investors get their heads around the complexity of the net zero problem?

Net zero for investors

Superficially, getting to a net-zero portfolio is simple — “you simply divest things”, says Ewings.

But that simplistic approach misses the point: not only can it come with important implications for returns, it also fails to manage the risk to a portfolio if climate change continues unabated, she says.

“It is not just about managing for net zero in portfolios. What we want to bring about is a net zero world,” says Ewings.

“Increasingly the frameworks are focused on driving meaningful change in the economy, not just in the individual portfolios of investors.”

Ewings says understanding the ever-increasing array of net zero frameworks is not as complicated as it looks. For all the apparent complexity in the frameworks, “most of them work together”.

“What looks like nine different things is actually much simpler — there are two key frameworks you can sign up to if you're an asset owner, and another if you’re an asset manager. And then there’s a series of methodologies and tools to use to help you implement it.”

Three areas of focus

There are fundamentally three distinct activities at the heart of all these types of protocols, says Ewings.

• “The first is around the decarbonisation of portfolios and moving away from emissions intensive activities, including where they may have stranded asset risk attached to them.
• “The second is about directly investing in climate solutions that will reduce emissions.
• “The third is stewardship, which includes engaging with companies and influencing them to become Paris-aligned, factoring climate considerations into voting and supporting public policy outcomes that address climate risk.

Stewardship also includes engaging throughout the investment value chain — engaging with data providers on the types of information that you need or with rating houses on the types of assessments that you are interested in.

These frameworks emphasise the need  for asset owners and managers to work together to support net zero outcomes, Ewings says.

“It’s also around public policy discussions. There are many aspects of climate change that are not well handled by engaging with individual companies.

“This is partly because it's not the most efficient way of doing it, but also because there has been a tendency in stewardship to focus primarily on listed equities, and that's not the whole economy.

“In fact, what you might be doing is creating an uneven playing field. The good news is that as the frameworks evolve we're seeing greater focus on a range of different asset classes and greater prominence of policy advocacy.”

The ultimate lesson for investors?

Regardless of the framework, the systemic nature of climate risk means that “unless the way you’re approaching net zero is aimed at bringing about meaningful change in the real economy, you’re not actually reducing your long term risk at all”.

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Has inflation peaked and if so, what's next for fixed interest investors? Here’s a view from our head of government bond strategies TIM HEXT

AMONG the many adages I’ve heard in my career “sell in May and go away” always sticks in my mind.  

The quote apparently originated in London and said in full: “sell in May and go away and come back on St Leger Day” (in September). The “go away” referred to very long summer holidays enjoyed by rich stockbrokers.

In the US equity market November-to-April outperforms May-to-November over time. 

Going back more than a century the Dow’s average return is apparently 5.2% for November-to-April, compared to 2.1% for May-to-October.

In Australia the numbers are 5.1% and 2.4%.  The term could be recoined as “buy in November and sit back”, but that wouldn’t rhyme.

The calm in the storm

This May has been the calm in the storm. But no one can agree if it’s the eye of the storm or if we’re actually through it.

Markets are clutching at any sign inflation has peaked.

In the US it likely has on both on a monthly and year-on-year basis — but will be slow to come down.  

In Australia we are unlikely to see a repeat of the Q1 2.1% quarterly CPI number. But base effects mean annual inflation will peak closer to 6% (currently 5.1%) in Q3 (released in late October).

We have just finished a deep dive into inflation which we will release shortly as part of our Australian Investor Quarterly newsletter.

As the inflation narrative settles down, all eyes will turn to the impact of inflation and interest rates on growth.

Share markets remain vulnerable to earnings downgrades and weakening growth numbers.

This becomes reflexive, though, as equity weakness in turn causes confidence to fall which may eventually take some pressure off rising interest rates thereby supporting equities.   

We may well spend the northern summer rolling around in this cycle of volatility, heading eventually nowhere as the dynamics try to work themselves out.

What it means for investors

As a fixed interest portfolio manager it means we must look to harvest more tactical trades than big-picture moves for the next few months.

We continue to think short-dated inflation bonds are cheap in outright real yields but also in break-evens (inflation expectations).

The picture for duration and credit is less clear though we do have some positions based on cash rates “only” getting to 2% this year as opposed to markets pricing closer to 2.75%.

With both bond markets and equity markets trashed in the last four months I will ignore the “sell in May and go away” advice as coming way too late — wishing someone had instead advised me this year to “Sell on New Years Day and go away.”

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Latin America offers a rare bright spot in a world worried about inflation, interest rates and war, says Pendal emerging markets manager James Syme

• Latin America offers a bright spot for EM investors
• Strong growth underpinned by commodities
• Find out more about Pendal Global Emerging Markets Opportunities fund

THE mood in global markets may have left investors feeling uncertain, but there are opportunities in even the most negative of times, says Pendal emerging markets manager James Syme.

Right now, the sometimes overlooked markets of Latin America are a bright spot in a world worried about inflation, interest rates and war, says Syme.

“In the first four months of the year, when global emerging markets were down 12 per cent, Latin American stock markets rose 11 per cent.

“And it’s more than just a market move — the underlying fundamentals are looking pretty good.”

Under the radar

Latin America often flies under the radar of investors, partly because its commodity-exposed economies are subject to boom-and-bust cycles that can leave investors vulnerable to swift capital outflows.

But in the face of global uncertainty, big Latin American economies like Brazil and Mexico are doing well.

“We’ve seen GDP growth expectations revised upwards as economic data comes in relatively strongly,” says London-based Syme, who co-manages Pendal Global Emerging Markets Opportunities fund with Paul Wimborne.

“For some investors, that’s been a surprise. People have thought that a stronger US dollar and higher bond yields will start to really drag on Brazil.

“But it has its own internal cycle, which has been reasonably strong.”

Strength in Brazil

Syme says Brazil is seeing strength across the board in services, retail sales, consumer confidence and credit growth.

“It's probably the strongest credit environment in any emerging market,” he says.

The underlying support for the strength is commodity exports.

Brazil is a significant oil producer and produces commodities like pulp and paper as well as metals.

“Brazil is also a huge food exporter. One element that's been overlooked is that with Russia and Ukraine going offline in terms of edible oil exports — and Indonesia putting a palm oil export ban in place — that’s about 50 per cent of global edible oil exports taken offline.

“One of the big alternatives to palm oil is soy — and Brazil is a major soy exporter.”

“The whole commodity export side from Brazil is really robust. And that's happening at the same time as the domestic cycle is picking up,” says Syme.

Brazil’s policy response to the booming economy has been significant interest rate hikes, leaving it well placed to weather increases in global bond yields and a higher US dollar.

Mexico overlooked

Syme also points to Mexico as an example of boom times in a sometimes overlooked market.

“Mexico is a very high quality, stable market. I've seen it characterised as boring, but sometimes boring is good,” says Syme. “In a difficult world, it’s got a relatively high return on equity and good corporate governance.”

Mexico is a large domestic crude oil producer, which reduces the economic risk of higher oil price.

And it’s a beneficiary of strength in the neighbouring US economy.

“These inflationary pressures we're seeing in the US are a reflection of a strong economy — that’s just a huge benefit for Mexico.

Again, like Brazil, the central bank has been hiking rates.

“But they've remained highly orthodox through the inflation spike. There probably will be some more hikes ahead but again, we've probably seen bulk of what needs to be done,” he says.

Underpinning the Mexican stockmarket is a big domestic pension fund industry with assets equal to 25 per cent of GDP.

“They've been increasing their allocation to domestic equities.”

And remittances — largely from the US as Mexicans abroad send money home — are supporting the economy, up 13 per cent year on year in March.

Keep an eye on politics

There are risks, says Syme.

The traditional threat to Latin American markets is politics. Brazil is due for an election in October and a win by the left-wing candidate may be a challenge to some parts of the Brazilian equity market. But Mexico is already under a left-leaning government and performing well.

“We are comfortable in both cases,” says Syme.

“Emerging markets go right or wrong at a country level and a lot of what happens is around economic cycles and how they interact with global economic cycles.

“Booms in emerging markets can be quite sustained.

“And while valuation alone is not an investment case, most of MSCI LatAm looks pretty reasonably valued in a world where a lot of assets don't.”

---

About James Syme and Pendal Global Emerging Markets Opportunities Fund

James Syme is a senior portfolio manager of Pendal’s Global Emerging Markets Opportunities Fund with Paul Wimborne.

The fund aims to add value through a combination of country allocation and individual stock selection.

The country allocation process is based on analysis of a country’s economic growth, monetary policy, market liquidity, currency, governance/politics and equity market valuation.

The stock selection process focuses on buying quality growth stocks at attractive valuations.

Find out more about Pendal Global Emerging Markets Opportunities 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

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Here are the main factors driving the ASX this week according to our head of equities Crispin Murray. Reported by portfolio specialist Chris Adams.

Find out about Crispin's Pendal Focus Australian Share Fund
Find out about Crispin's sustainable Pendal Horizon Fund

THE MARKET is at an interesting near-term juncture.

The S&P 500 has lost ground seven weeks in a row and is now off about 20% from its peak. It has re-tested and held recent lows.

Expiring options may reduce volatility and we may see some month-end rebalancing towards equities in a low-liquidity environment due to next Monday’s US Memorial Day holiday.

A near-term bounce may be possible and counter-trend moves can be material.

However we don’t think we’ve seen the low point for this cycle. The market is yet to work through the effect of a slowing economy on corporate earnings. 

The S&P 500 fell 3% last week as the market continued to worry about the potential for recession.

This was compounded by some poor earnings results out of US retailers. The issue here was not weaker consumption, but the mix shift from goods to services and a rising cost impost. 

This emphasises the market’s vulnerability should a slowdown occur and begin to affect earnings.

US 10-year government bond yields fell 14bp. The positive correlation between bonds and equities appears to have broken down as the focus moves to risk aversion and a flight to safety.

We also saw a fall in the US dollar. This was probably a consolidation after a big run. It helped commodities and resource stocks, as did more signs of Chinese easing. 

Australia again remains the market for these times.

The S&P/ASX 300 was up 1.2% for the week. It’s down only 2.5% for the calendar year to date, versus -17.7% for the S&P 500 and -27.2% for the NASDAQ.

Two key issues driving the market

We see two primary issues driving the outlook for markets.

The first issue is whether the US economy slows down or slips into recession.

Looking at recent bear markets, a recession has tended to lead to bigger drawdowns – such as in 2000-2002 and 2007-2009.

Current investor surveys indicate a 50-55% probability of recession.

This comes down to views on what the Fed sees as acceptable inflation and what they will need to do to achieve it. There are two scenarios here:

1. The positive scenario: Financial conditions have tightened enough, the economy is already slowing, inflation pressures are beginning to ease and therefore bonds have peaked and aggressive monetary tightening (and therefore recession) will not occur. A variant of this view is that the Fed will live with inflation in the mid to high 2s — rather than go for 2% — to avoid pushing the economy into recession
2. The negative scenario: The economy will prove more resilient to rising rates, with consumers bolstered by excess savings and the labour market remaining tight. This will force the Fed to do more tightening and ultimately “break” the economy to control inflation. Proponents point to unemployment of 3.5% needing to rise to around 4.25% to create sufficient slack to ensure wages don’t reinforce inflationary pressures. The US has never been able to engineer such a rise in unemployment without it being associated with a recession.

The second major issue is whether the Chinese economy deteriorates or sees a policy-driven rebound.

Again, there are two scenarios:

1. The positive view: China is close to peak Covid lockdown and the combination of re-opening and additional infrastructure stimulus will trigger a recovery, generate good commodity demand, and underpin resource stocks.
2. The negative scenario: The economy is in far worse shape than the market realises. Lower rates reflect the financial vulnerability of property developers, stimulus will be ineffective due to low confidence, high input costs and inability to execute due to Covid restrictions.

Economics and policy

There is a lot of debate about whether we have seen peak inflation and peak bond yields.

Official data such as retail sales is signalling that the consumer remains strong, though there are signs the economy is slowing. For example, the Economic Surprise index – which shows the degree to which economic data is beating or missing estimates – is deteriorating in most countries. Consumer confidence is also weak and is at 40-year lows in the UK.

The combined effects of higher mortgage rates and fuel prices have reached levels consistent with previous consumer slowdowns. This indicator tends to lead by around 12 months.

Total financial conditions – which includes rates, equities and credit spreads – have tightened to a reasonable degree and should lead to a headwind of 1.3% of US GDP growth by Q3 2022.

We are also seeing signs that corporate pricing power – while still at high levels – may be easing.

There are signs that consumers are under some stress – particularly at the lower income end – with credit outstanding rising rapidly. This may support current consumption but is unsustainable.

Freight shipping rates are beginning to drop and there are early signs of a fall in US trucking rates.

That said, the freight rate may be a misleading signal due to a drop-off in Chinese exports. It’s unclear how much of this is a genuine de-bottlenecking of supply chains.  

All this indicates the economy is responding to tighter financial conditions. It is slowing down and this is beginning to reduce inflation pressures.

This belief can be seen in forward pricing of inflation, where both break even yields and the 5-year inflation swap have rolled over since late April.

This could be positive for the equity market since it’s in line with the first scenario outlined above.

However there are still two key unknowns:

1. This slowing could be the prequel to a recession. A slow-down and a recession will look the same initially. It will also probably result in negative earnings revisions, which the market will not like as we saw last week in the US. 
2. The second unknown is whether this will equate to inflation falling enough to allow the Fed to declare victory.

Fed Chair Powell has stressed that the labour market is resilient enough to weather tightening policy.

While this sounds reassuring, the question is whether a resilient labour market is consistent with inflation falling to target levels. If it is not, policy needs to tighten even more.

The labour force is very tight and this is driving wage growth. Some measures suggest we need to see employment decline by at least 1% to reduce wage pressure.

China

Economic surveys indicate the Chinese economy is weak. Q2 GDP is expected to decline 1.5% to 2%, with growth for the year coming in between 3% and 4%. 

Beijing has responded with a larger-than-expected cut in its 5-year loan prime rate.

China bears see this as a move to prop up private developers who are facing a funding squeeze, thereby preventing deterioration rather than providing stimulus.

The more bullish view is that while this may not be a sizeable move, it is a very strong signal that the government will support property, similar to November 2014. Then it was the precursor to a big bounce in Chinese growth sentiment in 2015.

We remain cautious on a China recovery.

The property market appears to be deflating, but prices remain very high and developers are still too leveraged. At best the market stays flat, but the risk is to the downside, so any infrastructure related stimulus will only be offsetting this.

The other challenge is the lack of transparency over the extent of Covid and the real level of restrictions.

Europe

The ECB struck a more hawkish tone in response to poor inflation data. The market is now being primed for a first rate rise in July, with a possible 50bp move straight up. This is unlikely, but helped the Euro bounce off its lows against the US dollar.

Australia

There is little to read into the election outcome at this point. A majority government provides more clarity than a minority.

We are also likely to see more emphasis on reducing carbon emissions in coming years, which will have an impact on corporate disclosures and investment.

US earnings

Overall quarterly earnings were good. Full-year earnings lifted from about 5% to 11% growth.

However the outlook looks overly optimistic, with 9% eps growth expected in CY23 despite a slowdown.

Last week demonstrated the impact earnings headwinds can have. Broadline retailers missed earnings expectations as a result of freight costs and the mix shift in consumption.

Walmart and Target have joined Amazon in highlighting material gross margin pressure.

Underlying sales have not been particularly disappointing. But the impact of the unexpected mix shift caused problems as spending moved away from home, consumer electronics and sporting goods to travel, toys and luxury goods.

Inventories are also building in areas such as home furnishings and consumer electronics, while unit demand growth is dropping. This crimps a company’s ability to push through price rises.

The share of “private label” sales are rising. This is partly due to improved product availability as labour issues improve. It may also indicate consumers are “trading down” as real income falls – potentially a signal of softer consumption.

The overall impact were large hits to stocks in the previously defensive consumer staples sector.

This highlights the difficulty in identifying defensive pockets in this environment

Markets

We may be seeing a near-term low in the US equity market.

Historically, bear market bounces average a 15% gain over 30-40 days.

This does not signal the market has hit its lows for the cycle. Most technical signals have not indicated a degree of panic or capitulation. For example put/call ratio data has not yet moved into 99th percentile level – a usual indicator of capitulation. Nor have we seen high volumes in stocks being sold down.

Retail investors are yet to give up on the bull market.

The triple-leveraged NASDAQ ETF is still seeing large net inflows – despite being down over 60% year-to-date. Interestingly energy-related ETFs – among the best performing year to date – are seeing negligible inflows by comparison.

The high proportion of “buy” ratings on the market leaders of the past few years is another sign that we are yet to see capitulation.

We see scope for short, sharp bear-market rallies, but remain defensively positioned overall. We don’t believe it is yet the time to reload on high beta, illiquid names.

The Australian market last week saw a good bounce in the resource sector (+3.8%) on China optimism. The Technology (+5%) sector bounced as Xero’s management clarified a post-result message and emphasised confidence in improved margins and cash flow over time. Consumer staples (-3.3%) lagged, following the US lead.

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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  

Contact a Pendal key account manager

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When is the right time to buy global equities and how best to value stocks during volatile times? Pendal global equities fund manager NUDGEM RICHYAL has some answers in this quick podcast

You can also listen to this podcast on Apple or Spotify or read an edited transcript below

An excerpt from this podcast:

What signpost should global equities investors be looking for right now?

Nudgem Richyal, co-manager of Pendal Global Select Fund: It goes back to the need to see a shift in Fed policy. Once we see a clear change in language, that the Fed is no longer worried about the politics and inflation, at that point, it will be safe to go back in.

The challenge is, markets are discounting mechanisms.

The market may anticipate any such shift in the Fed before it's actually articulated. That's always the $64 million question.

So that's what we're looking for. What we're expecting is the market will discount a change in Fed policy, and so we've got to anticipate that.

One of the ways to do that would be to see if the inflation data itself peaks. That hasn't happened. It was expected to happen last week, but it didn't.

Chair Jerome Powell isn't talking down interest rate rises at the moment.

But at some point the market will anticipate he will shift.

---

About Nudgem Richyal

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

Nudgem has 22 years of industry experience, joining J O Hambro Capital Management (a wholly owned subsidiary of Pendal Group) with Chris in 2008. He was previously an investment director with the Global Equity Group of Baring Asset Management, where he worked closely with Chris since 2001.

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.*

About Pendal

Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management. Pendal Group includes Pendal Australia, J O Hambro Capital Management, Regnan and Thompson, Siegel and Walmsley (TSW).

Contact a Pendal key account manager here

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