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Aussie equities: Three mid-cap themes that look promising

Pendal portfolio manager BRENTON SAUNDERS outlines three mid-cap themes that look good right now

IN the ASX midcap space three themes – energy, data centres and battery materials – look like opportunities at the moment, argues Pendal portfolio manager Brenton Saunders.

Saunders manages Pendal’s MidCap Fund, which invests in the 100 biggest companies outside the ASX50, where market caps typically range from around $1 billion to $10 billion.

Theme one: energy

“A number of factors provide a constructive backdrop to the energy picture in the short, medium and longer terms,” Saunders says.

Short-term considerations revolve around oil prices and the geopolitical backdrop.

“It’s not just a function of the conflicts in Israel and Ukraine but also how the United States economy performs especially ahead of the election next year.

“Ultimately the people that control the oil market – OPEC and its aligned bodies – view an oil price in the $US90 to $US100 a barrel range as a more acceptable outcome than one in the 60s or 70s.

“I think they will reverse-engineer that market to achieve that outcome,” he says, adding that the dynamics in oil markets will play into coal markets as well.

“The medium-term considerations are more around opportunities available to companies that have strong positions in transition fuels, like natural gas.”

Saunders highlights some stocks held in Pendal MidCap Fund:

“An example in that space is Beach Energy (ASX: BPT),” Saunders says.

“The more tangential opportunities, in the medium term, are the oil refiners which are using the decarbonisation period to reinvent their strategies.

“We’ve seen Viva Energy (ASX: VEA) delve much more into convenience retail, for example.

“We also think energy generators could possibly benefit as economies struggle to replace baseload power with renewables. That helps companies like Beach Energy, Viva and Whitehaven Coal,” he says.

In the longer term, Saunders believes there are opportunities in uranium.

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Midcap Fund

“The narrative around uranium is not as just a transition fuel, but possibly a renewable baseload fuel.

“Countries have progressively comes to terms with the fact that they will need to add uranium to their mix of fuels over time.”

Theme two: date centres

Another opportunity in the midcap space is data and data centres, as business demand for bandwidth and data storage grows.

Saunders believes this bodes well for NEXTDC (ASX: NXT) — another holding in Pendal Midcaps Fund. 

NXT is well placed with respect to existing and planned data centres.

Its premium land bank in Australia and growing ambitious in ASEAN provide a strong and long growth pipeline, he believes.

“The advent of generative AI and the broadscale the adoption of it in some industries is accelerating the need for the transmission of data and the storage of data.

“With think this has a relatively long timeframe to play out.”

Theme three: battery materials

The third thematic among mid-caps is the battery materials markets.

“It is on the nose at the moment, but the demand for demand for batteries and battery materials continues to ramp up aggressively,” Saunders says.

“With both supply of — and demand for — lithium compounding at 20 to 30 per cent a year, there is a fairly big dislocation as lumpy new supply comes into the system.

“At the moment we are dealing with an oversupply of some raw materials for batteries, and of batteries themselves. This should clear as electric vehicle penetration continue to progress.

“Pricing for materials and for stocks in the space is relatively depressed and has sold off significantly in the last four or five months.

“But we think this is a trend that has longevity.

“The sector will have some cyclicality in growth and we are experiencing that now, and that provides investable opportunities.

“We retain good exposure to that through our lithium names and our rare earths names.”

About Brenton Saunders and Pendal MidCap Fund

Brenton is a portfolio manager with Pendal’s Australian equities team. He co-manages Pendal MidCap Fund and our natural resources portfolio, drawing on more than 25 years of expertise in resources, derivatives, investment banking and private equity. He is a member of the CFA Institute.

Pendal MidCap Fund features 40-60 Australian midcap shares. The fund leverages insights and experience gained from Pendal’s access to senior executives and directors at ASX-listed companies. Pendal operates one of Australia’s biggest Aussie equities teams under the experienced leadership of Crispin Murray.

Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management. 

Find out more about Pendal MidCap Fund here

Contact a Pendal key account manager here

This information has been prepared by Pendal Fund Services Limited (PFSL) ABN 13 161 249 332, AFSL No 431426 and is current at November 8, 2023.

PFSL is the responsible entity and issuer of units in the Pendal Midcap Fund (Fund) ARSN: 130 466 581. A product disclosure statement (PDS) is available for the Fund and can be obtained by calling 1300 346 821 or visiting www.pendalgroup.com.

The Target Market Determination (TMD) for the Fund is available at www.pendalgroup.com/ddo. You should obtain and consider the PDS and the TMD before deciding whether to acquire, continue to hold or dispose of units in the Fund.

An investment in the Fund or any of the funds referred to in this web page is subject to investment risk, including possible delays in repayment of withdrawal proceeds and loss of income and principal invested. This information is for general purposes only, should not be considered as a comprehensive statement on any matter and should not be relied upon as such. It has been prepared without taking into account any recipient’s personal objectives, financial situation or needs. Because of this, recipients should, before acting on this information, consider its appropriateness having regard to their individual objectives, financial situation and needs.

This information is not to be regarded as a securities recommendation. The information 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 is complete and correct, to the maximum extent permitted by law neither PFSL nor any company in the Pendal group accepts any responsibility or liability for the accuracy or completeness of this information.

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