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Crispin Murray: Four government intervention areas investors must watch

This year Australian investors should be aware of government influence in four areas, says Pendal’s head of equities, Crispin Murray.

A GROWING trend toward government policy intervention in business is becoming an issue for investors, says Pendal’s head of equities, Crispin Murray.

Murray was speaking at his biannual Beyond The Numbers webinar.

“As investors our focus is on the practical reality of market environment we are operating in,” he says.

“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 over the companies in their portfolios from four perspectives:

  1. Determining award wages
  2. Industrial policy, including regulating the big banks
  3. Power and gas policy
  4. The carbon reduction pathway

Below, Crispin goes into detail:

Award wages

Higher wages will impact the profitability of companies with a high share of domestic labour costs like the supermarkets and there are signs the government will push for a real wage increase.

A decision on the minimum wage and award wages is due mid-year, in a process that is normally tied to inflation in the March quarter.

“Will the government push for real wages to be protected? Which could lead to wage increases of 6 or 7-plus plus percent?” says Murray.

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“The challenge is that maybe inflation is set to fall over the course of this year and may head back towards 4 or 5 per cent — and so perhaps a 5 to 6 per cent wage increases is more appropriate.

“This is a battle that will need to be determined.”

Industrial policy

Industrial policy is also an emerging risk for investors.

“Our recent meetings with the banks had a very different tone,” says Murray.

“The banks have moved from being reasonably relaxed about the fact that rising interest rates were going to help support their margins.

“Now, they’re much more concerned about the backlash that this is creating in the community and from government.

“What we’re seeing, I believe, is anticipation of potential intervention by the government.”

Early intervention in the banks’ interest rate settings is already occurring, he says.

The Australian Competition and Consumer Commission is investigating how banks set interest rates for savers and some banks have already lifted savings rates to head off the inquiry.

“We also may see potentially an increase in the bank levy”, which is a quarterly tax on the largest banks calculated as 0.015 per cent of liabilities.

“The signal that sends to other companies is [to be] very mindful about using their pricing power.

“The government is saying ‘inflation is an issue — real wages have gone down — the corporate sector should absorb some of these inflationary pressures themselves.

“‘And if you’re not prepared to do it, we might find a way of intervening to make you do it’.”

Power and gas policy

Electricity and gas policy is also an area of intervention for the federal government.

“Clearly there’s been issues with policy in Australia for many, many years.

“But right now, we’ve got a real challenge — like it or not, we’re going to need gas for the next 10 years to help firm renewables.

“That is the lesson that the rest of the world has learned as a result of the Ukraine invasion.”

Australia is beginning to wake up to the fact that if there is no reliable domestic gas supply at a reasonable price, power prices have to go up, he says.

But the government’s attempt to cap gas prices is just leading to a breakdown in the marketplace: “There are no contracts being signed. And as a result of that, no one’s going to look to develop gas.

“This is again a key issue for companies in that sector.

“We’re hopeful that perhaps a little shifting of positions can occur that will solve this problem.

“If it doesn’t, then power costs will be going up, and it will hit households and it will hit corporate profits.”

Carbon reduction

The carbon reduction pathway and the safeguard mechanism is another area of government influence on business.

The safeguard mechanism requires companies that emit more than a certain amount of greenhouse gases to reduce their emissions each year or face financial penalties.

Export exposed companies get favourable treatment to ensure they are not put at a competitive disadvantage.

(Pendal’s ESG credit analyst Murray Ackman explains more here.)

“It is still in consultation phase. The government is seeking feedback.

“But as it stands today, what we’re hearing is certain companies are saying ‘we’re not going to qualify for being export-exposed’.

“For example, steel — because of the way it’s been measured — is not being considered export sensitive.

“Which means for those companies, they’re going to have to be reducing the carbon emissions between 4% and 5% a year through to 2030.

“Their current plans are maybe around 1%.”

The challenge is that the technology to solve for that kind of accelerated reduction pathway does not exist anywhere in the world, says Murray.

“That may mean that they start having to think about not investing in their businesses,” he says.

“We need to be very clear on that and make sure that we’re not caught out by that in our investments.”

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 a 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

This information has been prepared by Pendal Fund Services Limited (PFSL) ABN 13 161 249 332, AFSL No 431426 and is current at March 29, 2023. PFSL is the responsible entity and issuer of units in the Pendal Focus Australian Share Fund (Fund) ARSN: 113 232 812. 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. Performance figures are calculated in accordance with the Financial Services Council (FSC) standards. Performance data (post-fee) assumes reinvestment of distributions and is calculated using exit prices, net of management costs. Performance data (pre-fee) is calculated by adding back management costs to the post-fee performance. Past performance is not a reliable indicator of future performance. Any projections are predictive only and should not be relied upon when making an investment decision or recommendation. Whilst we have used every effort to ensure that the assumptions on which the projections are based are reasonable, the projections may be based on incorrect assumptions or may not take into account known or unknown risks and uncertainties. The actual results may differ materially from these projections. For more information, please call Customer Relations on 1300 346 821 8am to 6pm (Sydney time) or visit our website www.pendalgroup.com

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