Market Insights and Education & Resources

object(WP_Query)#4360 (51) { ["query"]=> array(4) { ["post_type"]=> array(1) { [0]=> string(5) "blogs" } ["posts_per_page"]=> int(6) ["post_status"]=> string(7) "publish" ["meta_query"]=> array(1) { [0]=> array(3) { ["key"]=> string(11) "media_types" ["value"]=> string(3) ""2"" ["compare"]=> string(4) "LIKE" } } } ["query_vars"]=> array(65) { ["post_type"]=> array(1) { [0]=> string(5) "blogs" } ["posts_per_page"]=> int(6) ["post_status"]=> string(7) "publish" ["meta_query"]=> array(1) { [0]=> array(3) { ["key"]=> string(11) "media_types" ["value"]=> string(3) ""2"" ["compare"]=> string(4) "LIKE" } } ["error"]=> string(0) "" ["m"]=> string(0) "" ["p"]=> int(0) ["post_parent"]=> string(0) "" ["subpost"]=> string(0) "" ["subpost_id"]=> string(0) "" ["attachment"]=> string(0) "" ["attachment_id"]=> int(0) ["name"]=> string(0) "" ["pagename"]=> string(0) "" ["page_id"]=> int(0) ["second"]=> string(0) "" ["minute"]=> string(0) "" ["hour"]=> string(0) "" ["day"]=> int(0) ["monthnum"]=> int(0) ["year"]=> int(0) ["w"]=> int(0) ["category_name"]=> string(0) "" ["tag"]=> string(0) "" ["cat"]=> string(0) "" ["tag_id"]=> string(0) "" ["author"]=> string(0) "" ["author_name"]=> string(0) "" ["feed"]=> string(0) "" ["tb"]=> string(0) "" ["paged"]=> int(0) ["meta_key"]=> string(0) "" ["meta_value"]=> string(0) "" ["preview"]=> string(0) "" ["s"]=> string(0) "" ["sentence"]=> string(0) "" ["title"]=> string(0) "" ["fields"]=> string(0) "" ["menu_order"]=> string(0) "" ["embed"]=> string(0) "" ["category__in"]=> array(0) { } ["category__not_in"]=> array(0) { } ["category__and"]=> array(0) { } ["post__in"]=> array(0) { } ["post__not_in"]=> array(0) { } ["post_name__in"]=> array(0) { } ["tag__in"]=> array(0) { } ["tag__not_in"]=> array(0) { } ["tag__and"]=> array(0) { } ["tag_slug__in"]=> array(0) { } ["tag_slug__and"]=> array(0) { } ["post_parent__in"]=> array(0) { } ["post_parent__not_in"]=> array(0) { } ["author__in"]=> array(0) { } ["author__not_in"]=> array(0) { } ["ignore_sticky_posts"]=> bool(false) ["suppress_filters"]=> bool(false) ["cache_results"]=> bool(true) ["update_post_term_cache"]=> bool(true) ["lazy_load_term_meta"]=> bool(true) ["update_post_meta_cache"]=> bool(true) ["nopaging"]=> bool(false) ["comments_per_page"]=> string(2) "50" ["no_found_rows"]=> bool(false) ["order"]=> string(4) "DESC" } ["tax_query"]=> object(WP_Tax_Query)#4343 (6) { ["queries"]=> array(0) { } ["relation"]=> string(3) "AND" ["table_aliases":protected]=> array(0) { } ["queried_terms"]=> array(0) { } ["primary_table"]=> string(8) "wp_posts" ["primary_id_column"]=> string(2) "ID" } ["meta_query"]=> object(WP_Meta_Query)#4342 (9) { ["queries"]=> array(2) { [0]=> array(3) { ["key"]=> string(11) "media_types" ["value"]=> string(3) ""2"" ["compare"]=> string(4) "LIKE" } ["relation"]=> string(2) "OR" } ["relation"]=> string(3) "AND" ["meta_table"]=> string(11) "wp_postmeta" ["meta_id_column"]=> string(7) "post_id" ["primary_table"]=> string(8) "wp_posts" ["primary_id_column"]=> string(2) "ID" ["table_aliases":protected]=> array(1) { [0]=> string(11) "wp_postmeta" } ["clauses":protected]=> array(1) { ["wp_postmeta"]=> array(6) { ["key"]=> string(11) "media_types" ["value"]=> string(3) ""2"" ["compare"]=> string(4) "LIKE" ["compare_key"]=> string(1) "=" ["alias"]=> string(11) "wp_postmeta" ["cast"]=> string(4) "CHAR" } } ["has_or_relation":protected]=> bool(false) } ["date_query"]=> bool(false) ["request"]=> string(905) " SELECT SQL_CALC_FOUND_ROWS wp_posts.ID FROM wp_posts INNER JOIN wp_postmeta ON ( wp_posts.ID = wp_postmeta.post_id ) LEFT JOIN wp_postmeta c ON wp_posts.ID = c.post_id and c.meta_key like '_wplp_%' and (( wp_posts.post_type in ('post','acme_product') and (c.meta_key in ( '_wplp_post_front') )) OR ( wp_posts.post_type='page' and (c.meta_key in ( '_wplp_post_front','_wplp_hide_frontpage','_wplp_hide_always','_wplp_nohide_search') ))) WHERE 1=1 AND ( ( wp_postmeta.meta_key = 'media_types' AND wp_postmeta.meta_value LIKE '{b1f98da99898a01df7cb13e194dce4031ff21c56127fa08e9a077581b3b4a3da}\"2\"{b1f98da99898a01df7cb13e194dce4031ff21c56127fa08e9a077581b3b4a3da}' ) ) AND wp_posts.post_type = 'blogs' AND ((wp_posts.post_status = 'publish')) AND post_password = '' AND c.post_id IS NULL GROUP BY wp_posts.ID ORDER BY wp_posts.post_date DESC LIMIT 0, 6 " ["posts"]=> array(6) { [0]=> object(WP_Post)#4200 (24) { ["ID"]=> int(20741) ["post_author"]=> string(2) "36" ["post_date"]=> string(19) "2022-08-15 18:23:26" ["post_date_gmt"]=> string(19) "2022-08-15 08:23:26" ["post_content"]=> string(13171) "

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 reluctant rally continues with the S&P 500 up 3.3% last week and the S&P/ASX 300 gaining 1.4%. They are now down 9.3% and 3.7% respectively for 2022.

The US market is now up more than 15% from its low and the rally has lasted 32 days.

Key drivers include:

  • Positioning: Systematic and institutional investors have been sitting on their biggest equity underweights in years.
  • Lower volatility: This leads to increased participation by systematic investors
  • Better sentiment: Job data has helped quell the view that the economy is facing imminent recession.
  • Strong US earnings season: Hasn’t validated the pre-season market de-rating
  • Lower commodity prices: Particularly in US gas which is helping dampened inflation expectations
  • Early signs of goods inflation slowing as supply chains free up

A small shift in fundamental view — that things are not as bad as feared — has prompted a material shift into equities by various systematic approaches. This caught institutional investors off-guard.

This is the nature of bear market rallies — sharp and often short. We now find ourselves at a key point.

In the short term we’re likely to have a quiet couple of weeks ahead of the Jackson Hole central banking conference on August 25-27.

We suspect the market will be range-bound given it is high summer in the north, there are limited new data releases, we are near a large technical resistance level for the S&P 500 and it appears the sharp move in systematic investors has played out. 

Beyond that there remains a wide distribution of outcomes:

  1. Inflation rolls over, the economy has a mild recession at worse, earnings declines are limited and the easing cycle starts at the back-end of 2023. In this scenario the market may consolidate, but ultimately moves higher.
  2. Inflation proves more persistent, driven by tight labour market and higher energy prices as the economy runs too hot and China re-opens. Central banks need to continue to tighten into the downturn and earnings decline more significantly, taking equities lower.

There is probably enough evidence to indicate the latter scenario does not take us to new lows.

The key to the call remains the main drivers of inflation: the job market (particularly job ads and wage pressures), corporate pricing power and commodity markets.

Economics and policy

US year-on-year CPI (8.5%) and PPI (9.8%) were lower than expected.

But one month does not create a trend — and there was enough in the data for both inflation bulls and bears to validate their outlooks.

Core CPI (5.9%) was 0.3% month-on-month, a lot lower than recent months. But it is at 0.5% excluding the more idiosyncratic categories such as used cars and airline tickets.

Core goods inflation is falling away reasonably quickly. Energy represents 34% of current inflation and is heading down as petrol prices drop.

Forward indicators of inflation — including the Crude Non-farm Materials ex Energy PPI which is a directional indicator for the Finished Goods (ex-energy and food) PPI — are moving in the right direction.

Freight rates also continue to decline.

All this underpinned more positive sentiment in market last week.

But in the medium term, categories such as direct rent and owner’s equivalent rent become more important. While these have begun to decelerate, it is marginal at this point and is still running above 8%.

Unit labour costs also remain too high, while there is no sign of a turn in the Atlanta wage tracker.

This means the Fed has had to re-iterate its vigilance on inflation.

China

There is some hope that cumulative stimulus measures will begin to drive economic recovery, particularly as we head into Autumn when construction activity should pick up.

We are cautious on calling this too soon. Some key lead indicators remain negative, notably property stock performance.

Credit data continues to be weaker than expected, reflecting low demand given the zero-Covid policy.

Australia

The market continues to grind higher, helped last week by BHP’s (BHP) bid for OzMinerals (OZL) which fired up the resource sector.

Small caps also continue their recovery, outperforming the S&P/ASX 300 by 8% QTD. This is helped by a combination of short covering and a position squeeze.

There is an emerging view that the government and RBA are looking to deliver a soft landing by allowing inflation to run a bit hotter than normal — on the premise that commodity prices should stop rising, and immigration can ultimately resolve labour shortages.

In this context banks don’t face downside risk on bad debts and some of the consumer-exposed stocks may now be pricing in too much downside.

As in the US, this is contingent on commodity prices staying subdued and labour markets loosening.

Markets

It was interesting that US bond yields couldn’t break the 2.51% low of August 8 in response to the lower CPI number.

June’s hot CPI number coincided with the peak in bond yields (3.5% on June 14). Since then we’ve seen a 100bp move down, before a 33bp rise, closing the week at 2.83%.

Bonds could trade back towards 3% for several reasons:

  • Economic data is surprising on the upside. The Fed is likely to be uncomfortable without further slowing, given inflation remains too high.
  • The Total Financial Conditions index has begun to loosen, reflecting more confidence in the economy. This works against the Fed’s goals, which may lead them to signal rates stay higher for longer.
  • Quantitative tightening beginning to kick in, which will potentially act as a headwind to lower yields.
  • Yield curve inversion is implying too quick a reversal in US rates, particularly given economy and FCI trends

Given this, we do not expect to see bond yield moves lower — and they may move higher within a trading band.

This does not necessarily mean bad news for equities, but it makes further moves higher harder.

Given the moves seen so far we expect a period of consolidation coming soon.


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

" ["post_title"]=> string(48) "Crispin Murray: What's driving the ASX this week" ["post_excerpt"]=> string(0) "" ["post_status"]=> string(7) "publish" ["comment_status"]=> string(6) "closed" ["ping_status"]=> string(6) "closed" ["post_password"]=> string(0) "" ["post_name"]=> string(48) "crispin-murray-whats-driving-the-asx-this-week-2" ["to_ping"]=> string(0) "" ["pinged"]=> string(0) "" ["post_modified"]=> string(19) "2022-08-15 18:24:12" ["post_modified_gmt"]=> string(19) "2022-08-15 08:24:12" ["post_content_filtered"]=> string(0) "" ["post_parent"]=> int(0) ["guid"]=> string(57) "https://www.pendalgroup.com/?post_type=blogs&p=20741" ["menu_order"]=> int(0) ["post_type"]=> string(5) "blogs" ["post_mime_type"]=> string(0) "" ["comment_count"]=> string(1) "0" ["filter"]=> string(3) "raw" } [1]=> object(WP_Post)#4201 (24) { ["ID"]=> int(20655) ["post_author"]=> string(2) "52" ["post_date"]=> string(19) "2022-08-10 17:00:16" ["post_date_gmt"]=> string(19) "2022-08-10 07:00:16" ["post_content"]=> string(8028) "

YOU'VE driven a car designed on a computer -- but have you driven one designed by a computer?

The rising sophistication of simulation software means your next car -- or at least parts of it -- will have had it performance simulated and tested by computer software, says Regnan analyst Maxime Le Floch.

Engineering simulation integrated into computer-aided design software is providing important innovations across many different industries, dramatically cutting the time to create and test new designs, improving manufacturing efficiency and slashing costs and resource usage.

“We need to speed up innovation across the global economy -- it is specifically something called out by UN Sustainable Development Goals nine and 12 which highlight resource efficiency and enhancing scientific research,” says Le Floch, an investment analyst with Regnan’s Global Equity Impact Solutions team.

“Simulation software helps improve efficiency in the way we use environmental resources and it’s also greatly improving innovation.”

Cloud-based simulation software has made staggering strides in recent years. Systems that once simulated a single feature of a vehicle like its reaction to wind flow can now run 1000s of tests across a wider range of physics, testing a vehicle design for safety, engine performance, fuel efficiency and more.

“Physical prototyping is expensive and it uses resources,” says Le Floch.

“In the car industry, simulation means that instead of having to build physical prototypes of cars and smash them into walls at all kinds of speeds and angles, you can instead run more simulations.

“This means you can run thousands of different simulations, changing lots of different small parts, which you wouldn't be able to do otherwise.

“It means you also get much better products that are more optimised and more efficient, with a reduced risk of defects.”

It is not just the car industry that has latched on to simulation software — the techniques are equally well used across industries as diverse as healthcare, energy, construction and consumer products.

And it’s not only used for new product design but also to monitor and optimise existing systems.

“A ‘digital twin’ is a 3D software model of a machine or piece of equipment or even a full factory,” says Le Floch.

“The model gets fed real time data from sensors on its real-world counterpart and can simulate and predict what might happen.

“It can be used for predictive maintenance that issues a warning ahead of a part failing and allows you to intervene.

“And you can test what might happen if you want to make a change like running a production line faster.”

Simulation supports sustainable innovation

The software is also being used extensively in the renewable energy industry, for example to simulate different wind conditions and understand how that affects the performance of the turbines, says Le Floch.

Le Floch says simulation software is providing three benefits for investors and for the planet:

  • It's improving the performance of products in use by maximising their efficiency and reducing their downtime and energy usage.
  • It's saving money and resources that used be consumed in the R&D process.
  • And it's speeding up R&D and spurring innovation, which is critical to the world solving its sustainability problems.

Regnan’s Global Equity Impact Solutions Fund has a position in US-listed simulation software leader Ansys, which has a stated aim of “helping innovative companies deliver radically better products”.

“The world has a broad need to innovate to meet the SDG goals — not least in decarbonisation where we have a lot of existing technologies but there’s a need to greatly enhance innovation,” says Le Floch.


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.

" ["post_title"]=> string(69) "Impact investing: Computer simulations are helping solve big problems" ["post_excerpt"]=> string(0) "" ["post_status"]=> string(7) "publish" ["comment_status"]=> string(6) "closed" ["ping_status"]=> string(6) "closed" ["post_password"]=> string(0) "" ["post_name"]=> string(68) "impact-investing-computer-simulations-are-helping-solve-big-problems" ["to_ping"]=> string(0) "" ["pinged"]=> string(0) "" ["post_modified"]=> string(19) "2022-08-11 10:31:33" ["post_modified_gmt"]=> string(19) "2022-08-11 00:31:33" ["post_content_filtered"]=> string(0) "" ["post_parent"]=> int(0) ["guid"]=> string(57) "https://www.pendalgroup.com/?post_type=blogs&p=20655" ["menu_order"]=> int(29) ["post_type"]=> string(5) "blogs" ["post_mime_type"]=> string(0) "" ["comment_count"]=> string(1) "0" ["filter"]=> string(3) "raw" } [2]=> object(WP_Post)#4202 (24) { ["ID"]=> int(20676) ["post_author"]=> string(2) "52" ["post_date"]=> string(19) "2022-08-10 16:19:20" ["post_date_gmt"]=> string(19) "2022-08-10 06:19:20" ["post_content"]=> string(7306) "

It’s time to be fully invested in financial markets, not sitting on the sidelines, believes Pendal’s head of global equities ASHLEY PITTARD

EARNINGS seasons in the US and Europe have been strong, and there are signs inflation is peaking, which would allow the US Fed to slow its interest rate cycle, says Pendal’s head of global equities Ashley Pittard.

“The Fed was behind the curve in March and there was earnings risk because of high valuations.

“Fast-forward to today, the market is down 20 per cent and the price-to-earnings multiple has come back from 22 times to about 15 times earnings.”

The June quarter earnings season on Wall Street and in Europe has been solid.

On a sales basis, about half the companies beat consensus forecasts. On an earnings basis that rises to nearly two-thirds.

Not surprisingly, the response from investors has been positive.

There have been exceptions to the good news story. Consumer discretionary stocks in the US, such as Walmart and Target, disappointed.

“But when you look at this market, it’s one that you want to be fully invested in,” Pittard says.

“The US Federal Reserve has lifted interest rates sharply and is now ahead of the curve. In March this year they were behind the curve.”

Pittard doesn’t expect the Fed to continue doing 75 basis point hikes, though rates will still rise.

“We are at the point where the Fed might pause for a bit, or only has a couple of rate rises to go and earnings are growing around 5 per cent.

“That’s a good position for equities. That’s because the price-to-earnings multiple on Wall Street has come back to more normal levels on a historical basis.”

Pittard doesn’t expect Wall Street to fall much further.

“What you’ve seen in this quarterly earnings season is lower margins. Earnings expectations have also come down and forward guidance from companies have come down.  

“You only get massive cuts in earnings growth if you go into a sharp recession.

“That might have happened if the Fed was behind the curve. But the Fed is now ahead of the curve,” he says.

Pittard isn’t definitively calling peak inflation, but he believes it’s close, highlighting a recent drop in oil prices as evidence.

“It doesn’t mean interest rates are going back to zero again, but it does mean rates won’t keep rising,” he says.

In the Fed’s favour is time, Pittard says. The Open Market Committee isn’t meeting again until mid- September — plenty of time for new economic data.

“The Fed has six weeks leeway. It will be data-dependent going forward, and that’s important,” Pittard says.

“Something else could happen such as the war in Ukraine pushes prices back up.

“But right now inflation is peaking, there’s negative real interest rates so policy is still accommodative, there’s wages growth of 3-to-4 per cent, there’s capital spending, there’s savings built up, and there’s a bunch of initiatives from the US government which mandate spending for renewables.

“You could argue very strongly that you just want to be invested and cash levels are close to their lows.”


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 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.

" ["post_title"]=> string(49) "Global equities: Is it time to be fully invested?" ["post_excerpt"]=> string(0) "" ["post_status"]=> string(7) "publish" ["comment_status"]=> string(6) "closed" ["ping_status"]=> string(6) "closed" ["post_password"]=> string(0) "" ["post_name"]=> string(47) "global-equities-is-it-time-to-be-fully-invested" ["to_ping"]=> string(0) "" ["pinged"]=> string(0) "" ["post_modified"]=> string(19) "2022-08-11 10:20:28" ["post_modified_gmt"]=> string(19) "2022-08-11 00:20:28" ["post_content_filtered"]=> string(0) "" ["post_parent"]=> int(0) ["guid"]=> string(57) "https://www.pendalgroup.com/?post_type=blogs&p=20676" ["menu_order"]=> int(41) ["post_type"]=> string(5) "blogs" ["post_mime_type"]=> string(0) "" ["comment_count"]=> string(1) "0" ["filter"]=> string(3) "raw" } [3]=> object(WP_Post)#4203 (24) { ["ID"]=> int(20692) ["post_author"]=> string(2) "52" ["post_date"]=> string(19) "2022-08-10 16:10:45" ["post_date_gmt"]=> string(19) "2022-08-10 06:10:45" ["post_content"]=> string(3640) "

Consumers and business can only be out of step for so long — and 2023 will see a reckoning, writes Pendal’s head of government bond strategies TIM HEXT

WE ALL exist in the same economy -- but you’d be forgiven for thinking otherwise. 

This week we had new consumer and business sentiment data.

Early last year consumer confidence boomed as escaped from lockdowns with money in our pockets. 

Sentiment hit an all-time high of 118 in the April 2021 Westpac-Melbourne Institute Consumer Confidence survey.

Now we have resumed our gloomy outlook. Weighed down by rising prices and rate hikes we’ve plunged to 81 -- not far off the March 2020 low.

For business, however, it’s hardly looked better. 

The NAB Business Survey sees business conditions at 20, not far off the April 2021 high of 30 (it averages around 5).

Business outlook, as measured by confidence, is a more modest 7, nearer the long-term averages.

What’s going on?  

Clearly while we’re worrying about the future we’re still spending our pent-up savings. 

Rate hikes of 1.75% to date have been manageable. But the next 1% this year will start to bite — heavily for some. 

Tight supply of goods and services means businesses are able to pass on higher costs, maintaining margins and seeing conditions as strong.

Of course, consumers and business can only be out of step for so long — and 2023 will see a reckoning. 

For now pessimists are winning the day as markets price in rates topping out early next year. 

Growth will slow, but whether the landing is soft or hard is a guessing game that will be heavily debated. 

Challenging times for everyone but particularly for central banks trying to bring down inflation without a recession.

However it does mean bonds are back — and their role as insurance in these highly uncertain times should not be underestimated.

" ["post_title"]=> string(51) "Consumers and business head in different directions" ["post_excerpt"]=> string(0) "" ["post_status"]=> string(7) "publish" ["comment_status"]=> string(6) "closed" ["ping_status"]=> string(6) "closed" ["post_password"]=> string(0) "" ["post_name"]=> string(51) "consumers-and-business-head-in-different-directions" ["to_ping"]=> string(0) "" ["pinged"]=> string(0) "" ["post_modified"]=> string(19) "2022-08-11 10:14:44" ["post_modified_gmt"]=> string(19) "2022-08-11 00:14:44" ["post_content_filtered"]=> string(0) "" ["post_parent"]=> int(0) ["guid"]=> string(57) "https://www.pendalgroup.com/?post_type=blogs&p=20692" ["menu_order"]=> int(0) ["post_type"]=> string(5) "blogs" ["post_mime_type"]=> string(0) "" ["comment_count"]=> string(1) "0" ["filter"]=> string(3) "raw" } [4]=> object(WP_Post)#4204 (24) { ["ID"]=> int(20669) ["post_author"]=> string(2) "52" ["post_date"]=> string(19) "2022-08-10 13:30:43" ["post_date_gmt"]=> string(19) "2022-08-10 03:30:43" ["post_content"]=> string(8868) "

Want to understand the outlook for China? Look to Japan’s 1990s stagnation experience, says Pendal Asian equities manager SAMIR MEHTA

INVESTORS looking for clues as to how China’s economic future will pan out should examine Japan’s performance after the 1980s boom, says Pendal’s Samir Mehta.

China faces enormous uncertainty about its economic outlook after decades of faster-than-normal growth culminated in a slowdown on the back of Covid-lockdowns, a real estate crunch and regulatory tightening in tech and education.

As the rest of the world wrestles with supply constraints, runaway inflation and rising interest rates in 2022, China instead faces lacklustre growth, rising unemployment and the real prospect of deflation.

“It’s almost diametrically opposite to what the rest of the world is facing,” says Mehta, who manages Pendal’s Asian Share Fund.

“What we are seeing at the moment in China is reminiscent of what happened in the Japanese economy when their bubble burst in the 1990s -- for the next three decades Japan’s economy was mostly hobbled.”

Samir Mehta on the China-Taiwan stand-off
"All of us are spell-bound watching a potential Thucydides Trap play out in action between China and the US,” says Pendal’s Samir Mehta on the recent geopolitical developments in the Taiwan Straits.
"Speaker Pelosi’s visit further heightened the risks as rising power China threatens the hegemony of the US.
“My opinion on whether events escalate or not does not matter. But we should not lose sight of what the underlying problems are in China.
"Even without geopolitics, investors looking for clues as to how China’s economic future will pan out should examine Japan’s performance after the 1980s boom," says Mehta.

Mehta says the key to Japan’s long-term troubles lay in the fact that its banks refused to recognise non-performing loans (NPLs), take write-offs, recapitalise and move on to lubricate economic growth via taking on risks on new projects.

“There are parallels with what we are seeing in Chinese banks. They are unlikely to recognise or write off their NPLs and they are not changing old business models.

“If you do not recognise the problem, then you risk a massive balance sheet recession and deflation.”

Another parallel to Japan is policy mistakes prolonging the downturn.

In the 1990s the Bank of Japan went too far with interest rate rises while increases in indirect taxes were poorly executed.

Similarly, Beijing seems to be making policy mistakes such as its strict zero COVID policy. Just last month authorities locked down a million people in Wuhan.

Mehta says an extended period of low growth should change the way investors approach China.

“Remember that in Japan’s case there were always some very good companies that were globally competitive -- Toyota, Sony, Nintendo, some of their speciality chemical and semi-conductor companies.

“It’s not as if there weren’t good businesses but those businesses typically relied on export orientation because the domestic economy was going through a very challenging period of disinflation and deflation.

“I want to keep that precedent in mind for China and look for similar opportunities.”

Mehta cautions that the geopolitical environment is different. While Japan did cause resentment in the US in the 1980s because of its economic power, it was never a military threat.

“So be careful – the same export markets that were open to the Japanese might not be open to the Chinese.”

But the broad characteristics of companies that will thrive in a slow growth, deflationary domestic environment should be similar.

“The companies that stood out had shared characteristics.

"They were companies with high pricing power, they had an industry structure with few irrational competitors, and they were able to generate very strong cash flows.

“When you have a disinflationary or deflationary environment, cash is a fantastic asset to own.

“Inflation is the enemy of holding cash as value, whereas in a deflationary environment, cash is king.

“In my portfolio in China, I am gravitating towards these kinds of businesses – export-oriented champions or domestic champions with pricing power and cash flow.”


About Samir Mehta and Pendal Asian Share Fund

Samir manages Penda’s Asian Share Fund, an actively managed portfolio of Asian shares excluding Japan and Australia. Samir is a senior fund manager at UK-based J O Hambro, which is part of Pendal Group.

Pendal Asian Share Fund aims to provide a return (before fees, costs and taxes) that exceeds the MSCI AC Asia ex Japan (Standard) Index (Net Dividends) in AUD over the medium-to-long term.

Find out about Pendal Asian Share Fund

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.

" ["post_title"]=> string(49) "Global equities: How to invest in a slowing China" ["post_excerpt"]=> string(0) "" ["post_status"]=> string(7) "publish" ["comment_status"]=> string(6) "closed" ["ping_status"]=> string(6) "closed" ["post_password"]=> string(0) "" ["post_name"]=> string(48) "global-equities-how-to-invest-in-a-slowing-china" ["to_ping"]=> string(0) "" ["pinged"]=> string(0) "" ["post_modified"]=> string(19) "2022-08-11 10:47:25" ["post_modified_gmt"]=> string(19) "2022-08-11 00:47:25" ["post_content_filtered"]=> string(0) "" ["post_parent"]=> int(0) ["guid"]=> string(57) "https://www.pendalgroup.com/?post_type=blogs&p=20669" ["menu_order"]=> int(17) ["post_type"]=> string(5) "blogs" ["post_mime_type"]=> string(0) "" ["comment_count"]=> string(1) "0" ["filter"]=> string(3) "raw" } [5]=> object(WP_Post)#4467 (24) { ["ID"]=> int(20678) ["post_author"]=> string(2) "36" ["post_date"]=> string(19) "2022-08-09 12:57:48" ["post_date_gmt"]=> string(19) "2022-08-09 02:57:48" ["post_content"]=> string(9236) "

What does the RBA's latest monetary policy statement mean for rates and inflation? Here’s a snapshot from Pendal’s head of cash strategies STEVE CAMPBELL

INVESTOR response to the RBA’s monetary policy statement on Friday was pretty much non-existent.

That’s not surprising since the key updated forecasts were included in Tuesday’s rates announcement, when the cash rate was lifted by another 0.5 percentage points.

Not surprisingly Friday’s statement included sizable upward revisions to inflation forecasts, which had already been flagged when the RBA raised the cash rate by 0.5% in June.

The main downward revisions were to economic growth, dwelling investment and household consumption – not surprising given the increase in interest rates and the economy operating at close to capacity.

The unemployment rate troughs at 3.4% later this year, a downward revision of 0.3% for this year before edging higher.

Regardless, the labour market will remain extremely tight for the next couple of years and wage inflation will follow.

The wage price index was revised marginally higher with annual increases of 3%, 3.6% and 3.9% now forecast for 2022, 2023 and 2024.

Some key points from Friday’s monetary statement:

Inflation
  • Short-term inflation expectations have increased, but longer-term inflation expectations remain anchored
  • Inflation is broad based with about 75% of the basket growing by an annualised rate of 3% or more in the June quarter
  • Fair Work Commission and state government increases will see the wage price index pick up
  • Building materials inflation is now closer to 20%; dwelling construction is about 10% of the inflation basket
  • Passthrough of higher costs continues, though there signs pressure may be easing. (I doubt the passthrough will be quick on the way down)

Labour market
  • Average employment growth of 51k per month over the past quarter versus an average of 21k jobs in the 12 months prior to the pandemic
  • Employment-to-population ratio hit a record high level of 64.4% in June
  • There are now almost as many vacant jobs as there are unemployed people
  • In response to the tight labour market businesses are offering non-wage incentives; hiring lower-skilled people and offering higher wages
  • Numbers for overseas students and working holiday makers remain low, particularly affecting accommodation and food service sectors
Investment
  • Non-residential construction investment remains constrained by supply issues, weather events and capacity constraints
  • Despite higher prices the mining sector is spending only to maintain existing output rather than investing to expand capacity
Housing
  • Existing investment pipeline remains strong, offering near-term support; but approvals and commencements are responding to higher input prices and interest rates
  • Sentiment is deteriorating with biggest declines in Sydney and Melbourne
  • Advertised rents grew strongly in the first half due to low vacancy rates and household income growth

The RBA’s main forecasts and revisions against the May monetary statement:

Current ForecastsDec-22Jun-23Dec-23Jun-24Dec-24
Trimmed mean inflation653.83.33
Consumer price index7.86.24.33.53
Wage price index33.43.63.83.9
Unemployment rate (quarterly, %)3.43.43.53.74
Employment4.42.21.41.10.9
Gross domestic product3.22.31.81.81.7
Dwelling investment1.72.5-0.1-2.6-4.8
Business investment4.95.96.65.74.6
Household consumption4.92.82.42.32.2
Major trading partner (export-weighted) GDP3.34.83.43.43.5

RevisionsDec-22Jun-23Dec-23Jun-24
Trimmed mean inflation1.41.40.70.4
Consumer price index1.91.91.20.6
Wage price index00.10.10.1
Unemployment rate (quarterly, %)-0.3-0.2-0.10.1
Employment0.50.2-0.1-0.1
Gross domestic product-1-0.8-0.2-0.2
Dwelling investment-2.6-3.2-2.7-4
Business investment-0.1-2.4-1.40.2
Household consumption-0.9-1.6-0.7-0.5
Major trading partner (export-weighted) GDP-0.70.50-0.1
Where to from here

The RBA’s line last week that it is “not on a pre-set path for normalising policy” has been interpreted as the central bank becoming potentially less aggressive.

Inflation data is released quarterly in Australia so we may see the RBA moving in increments of 25 basis points at its next two meetings prior to the release of third-quarter inflation data in late October.

That gets us to a cash rate of 2.35% before a decision on whether a bigger response is needed on Melbourne Cup Day in response to the inflation print.

The inflation forecast of 7.75% seems too high to us. We see inflation as being closer to low 7s for 2022.

Either way it still well above the upper end of the RBA’s 2-3% target band.

We also take the RBA’s forecasting with a massive grain of salt.

As Governor Lowe himself conceded recently, it’s been embarrassing how wrong they’ve been.

" ["post_title"]=> string(51) "Fixed Interest: What's next for rates and inflation" ["post_excerpt"]=> string(0) "" ["post_status"]=> string(7) "publish" ["comment_status"]=> string(6) "closed" ["ping_status"]=> string(6) "closed" ["post_password"]=> string(0) "" ["post_name"]=> string(49) "fixed-interest-whats-next-for-rates-and-inflation" ["to_ping"]=> string(0) "" ["pinged"]=> string(0) "" ["post_modified"]=> string(19) "2022-08-09 13:26:30" ["post_modified_gmt"]=> string(19) "2022-08-09 03:26:30" ["post_content_filtered"]=> string(0) "" ["post_parent"]=> int(0) ["guid"]=> string(57) "https://www.pendalgroup.com/?post_type=blogs&p=20678" ["menu_order"]=> int(13) ["post_type"]=> string(5) "blogs" ["post_mime_type"]=> string(0) "" ["comment_count"]=> string(1) "0" ["filter"]=> string(3) "raw" } } ["post_count"]=> int(6) ["current_post"]=> int(-1) ["in_the_loop"]=> bool(false) ["post"]=> object(WP_Post)#4200 (24) { ["ID"]=> int(20741) ["post_author"]=> string(2) "36" ["post_date"]=> string(19) "2022-08-15 18:23:26" ["post_date_gmt"]=> string(19) "2022-08-15 08:23:26" ["post_content"]=> string(13171) "

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 reluctant rally continues with the S&P 500 up 3.3% last week and the S&P/ASX 300 gaining 1.4%. They are now down 9.3% and 3.7% respectively for 2022.

The US market is now up more than 15% from its low and the rally has lasted 32 days.

Key drivers include:

  • Positioning: Systematic and institutional investors have been sitting on their biggest equity underweights in years.
  • Lower volatility: This leads to increased participation by systematic investors
  • Better sentiment: Job data has helped quell the view that the economy is facing imminent recession.
  • Strong US earnings season: Hasn’t validated the pre-season market de-rating
  • Lower commodity prices: Particularly in US gas which is helping dampened inflation expectations
  • Early signs of goods inflation slowing as supply chains free up

A small shift in fundamental view — that things are not as bad as feared — has prompted a material shift into equities by various systematic approaches. This caught institutional investors off-guard.

This is the nature of bear market rallies — sharp and often short. We now find ourselves at a key point.

In the short term we’re likely to have a quiet couple of weeks ahead of the Jackson Hole central banking conference on August 25-27.

We suspect the market will be range-bound given it is high summer in the north, there are limited new data releases, we are near a large technical resistance level for the S&P 500 and it appears the sharp move in systematic investors has played out. 

Beyond that there remains a wide distribution of outcomes:

  1. Inflation rolls over, the economy has a mild recession at worse, earnings declines are limited and the easing cycle starts at the back-end of 2023. In this scenario the market may consolidate, but ultimately moves higher.
  2. Inflation proves more persistent, driven by tight labour market and higher energy prices as the economy runs too hot and China re-opens. Central banks need to continue to tighten into the downturn and earnings decline more significantly, taking equities lower.

There is probably enough evidence to indicate the latter scenario does not take us to new lows.

The key to the call remains the main drivers of inflation: the job market (particularly job ads and wage pressures), corporate pricing power and commodity markets.

Economics and policy

US year-on-year CPI (8.5%) and PPI (9.8%) were lower than expected.

But one month does not create a trend — and there was enough in the data for both inflation bulls and bears to validate their outlooks.

Core CPI (5.9%) was 0.3% month-on-month, a lot lower than recent months. But it is at 0.5% excluding the more idiosyncratic categories such as used cars and airline tickets.

Core goods inflation is falling away reasonably quickly. Energy represents 34% of current inflation and is heading down as petrol prices drop.

Forward indicators of inflation — including the Crude Non-farm Materials ex Energy PPI which is a directional indicator for the Finished Goods (ex-energy and food) PPI — are moving in the right direction.

Freight rates also continue to decline.

All this underpinned more positive sentiment in market last week.

But in the medium term, categories such as direct rent and owner’s equivalent rent become more important. While these have begun to decelerate, it is marginal at this point and is still running above 8%.

Unit labour costs also remain too high, while there is no sign of a turn in the Atlanta wage tracker.

This means the Fed has had to re-iterate its vigilance on inflation.

China

There is some hope that cumulative stimulus measures will begin to drive economic recovery, particularly as we head into Autumn when construction activity should pick up.

We are cautious on calling this too soon. Some key lead indicators remain negative, notably property stock performance.

Credit data continues to be weaker than expected, reflecting low demand given the zero-Covid policy.

Australia

The market continues to grind higher, helped last week by BHP’s (BHP) bid for OzMinerals (OZL) which fired up the resource sector.

Small caps also continue their recovery, outperforming the S&P/ASX 300 by 8% QTD. This is helped by a combination of short covering and a position squeeze.

There is an emerging view that the government and RBA are looking to deliver a soft landing by allowing inflation to run a bit hotter than normal — on the premise that commodity prices should stop rising, and immigration can ultimately resolve labour shortages.

In this context banks don’t face downside risk on bad debts and some of the consumer-exposed stocks may now be pricing in too much downside.

As in the US, this is contingent on commodity prices staying subdued and labour markets loosening.

Markets

It was interesting that US bond yields couldn’t break the 2.51% low of August 8 in response to the lower CPI number.

June’s hot CPI number coincided with the peak in bond yields (3.5% on June 14). Since then we’ve seen a 100bp move down, before a 33bp rise, closing the week at 2.83%.

Bonds could trade back towards 3% for several reasons:

  • Economic data is surprising on the upside. The Fed is likely to be uncomfortable without further slowing, given inflation remains too high.
  • The Total Financial Conditions index has begun to loosen, reflecting more confidence in the economy. This works against the Fed’s goals, which may lead them to signal rates stay higher for longer.
  • Quantitative tightening beginning to kick in, which will potentially act as a headwind to lower yields.
  • Yield curve inversion is implying too quick a reversal in US rates, particularly given economy and FCI trends

Given this, we do not expect to see bond yield moves lower — and they may move higher within a trading band.

This does not necessarily mean bad news for equities, but it makes further moves higher harder.

Given the moves seen so far we expect a period of consolidation coming soon.


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

" ["post_title"]=> string(48) "Crispin Murray: What's driving the ASX this week" ["post_excerpt"]=> string(0) "" ["post_status"]=> string(7) "publish" ["comment_status"]=> string(6) "closed" ["ping_status"]=> string(6) "closed" ["post_password"]=> string(0) "" ["post_name"]=> string(48) "crispin-murray-whats-driving-the-asx-this-week-2" ["to_ping"]=> string(0) "" ["pinged"]=> string(0) "" ["post_modified"]=> string(19) "2022-08-15 18:24:12" ["post_modified_gmt"]=> string(19) "2022-08-15 08:24:12" ["post_content_filtered"]=> string(0) "" ["post_parent"]=> int(0) ["guid"]=> string(57) "https://www.pendalgroup.com/?post_type=blogs&p=20741" ["menu_order"]=> int(0) ["post_type"]=> string(5) "blogs" ["post_mime_type"]=> string(0) "" ["comment_count"]=> string(1) "0" ["filter"]=> string(3) "raw" } ["comment_count"]=> int(0) ["current_comment"]=> int(-1) ["found_posts"]=> int(581) ["max_num_pages"]=> float(97) ["max_num_comment_pages"]=> int(0) ["is_single"]=> bool(false) ["is_preview"]=> bool(false) ["is_page"]=> bool(false) ["is_archive"]=> bool(false) ["is_date"]=> bool(false) ["is_year"]=> bool(false) ["is_month"]=> bool(false) ["is_day"]=> bool(false) ["is_time"]=> bool(false) ["is_author"]=> bool(false) ["is_category"]=> bool(false) ["is_tag"]=> bool(false) ["is_tax"]=> bool(false) ["is_search"]=> bool(false) ["is_feed"]=> bool(false) ["is_comment_feed"]=> bool(false) ["is_trackback"]=> bool(false) ["is_home"]=> bool(true) ["is_privacy_policy"]=> bool(false) ["is_404"]=> bool(false) ["is_embed"]=> bool(false) ["is_paged"]=> bool(false) ["is_admin"]=> bool(false) ["is_attachment"]=> bool(false) ["is_singular"]=> bool(false) ["is_robots"]=> bool(false) ["is_favicon"]=> bool(false) ["is_posts_page"]=> bool(false) ["is_post_type_archive"]=> bool(false) ["query_vars_hash":"WP_Query":private]=> string(32) "2b251970ebe9d8bd8c27e6570f57f65d" ["query_vars_changed":"WP_Query":private]=> bool(false) ["thumbnails_cached"]=> bool(false) ["stopwords":"WP_Query":private]=> NULL ["compat_fields":"WP_Query":private]=> array(2) { [0]=> string(15) "query_vars_hash" [1]=> string(18) "query_vars_changed" } ["compat_methods":"WP_Query":private]=> array(2) { [0]=> string(16) "init_query_flags" [1]=> string(15) "parse_tax_query" } }

Crispin Murray: What’s driving the ASX this week

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 ou...

Impact investing: Computer simulations are helping solve big pro...

Digital simulation drives innovation Software that supports UN Sustainable Development Goals Find out Regnan Global Equity Impact Solutions Fund YOU’VE dr...

Global equities: Is it time to be fully invested?

It’s time to be fully invested in financial markets, not sitting on the sidelines, believes Pendal’s head of global equities ASHLEY PITTARD Strong earnings ...

Consumers and business head in different directions

Consumers and business can only be out of step for so long — and 2023 will see a reckoning, writes Pendal’s head of government bond strategies TIM HEXT WE A...

Global equities: How to invest in a slowing China

Want to understand the outlook for China? Look to Japan’s 1990s stagnation experience, says Pendal Asian equities manager SAMIR MEHTA Even in low-growth perio...

Fixed Interest: What’s next for rates and inflation

What does the RBA’s latest monetary policy statement mean for rates and inflation? Here’s a snapshot from Pendal’s head of cash strategies STEVE CAMPB...