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Michael Blayney: Take care with stretched US valuations

The strength of global equities continues to surprise as we near the halfway mark of 2023 — but some markets make more sense than others, argues Pendal’s MICHAEL BLAYNEY

THE rally in big US tech stocks, Japan’s bourse and the performance of government bonds have been among the year’s main investing trends as we near the halfway mark.

Global equity markets have surprised many investors, notes Pendal’s multi-asset chief Michael Blayney — none more so than US tech stocks and the Japanese bourse.

But the two markets tell different stories, he says.

“The rally in US equities has been driven by a narrow number of large cap tech names with the artificial intelligence theme particularly important,” Blayney says, highlighting the run of high-end micro-processing chip maker Nvidia.

Its share price is up 175 per cent so far in 2023. With a market capitalisation closing in on $US1 trillion, it is now Wall Street’s fifth biggest company.

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But Blayney has a word of warning about Wall Street.

“The US remains one of our less preferred markets given stretched valuations and the heightened risk of recession.”

“While AI is clearly an important thematic for the world for the next decade, markets do have a habit of getting overly exuberant in the short term when a new theme emerges – and this would appear to be one of those occasions,” he says.

Japan a strong performer

The Japanese share market has also been a strong performer in 2023, rising more than 20 per cent this year, compared to 1 per cent for the S&P/ASX200.

“We’ve liked and been overweight Japan for some time,” says Blayney.

“Earnings estimates have been relatively flat in the last year whereas they’ve been downgraded in the US and Europe. It has been a case of pricing catching up with the fundamentals.”

Japanese companies have been more profitable in recent quarters than they have been for many years, with the exception of a run-up in earnings immediately before the Covid pandemic.

Japanese companies are also relatively under-leveraged compared to the rest of the world, putting them in a better position as interest rates rise.

“Finally, Japan has been ‘under-owned’ for a long time,” Blayeny says.

“The fundamentals are better than they’ve been for a long time, and so once the Japanese market’s performance improved, it quickly caught the attention of global investors.

“Even after the most recent increase, it’s still cheap.”

Bonds near 2022 highs

Pendal’s multi-asset team is also generally positive on bonds.

“Bond yields have headed back to almost their 2022 highs,” says Blayney.

“We like bonds. The higher yields available now mean they are able to fulfil their defensive function in a portfolio in a ‘risk-off’ environment, and also provide a ‘return cushion’ from further volatility.”

While inflation has come off its highs, it remains elevated, and employment remains resilient. That poses some risk to bonds, he says.

Blayney is more cautious about corporate debt.

“We’re still pretty bearish on credit, particularly high yield spreads. They don’t provide an adequate cushion from defaults in the case of recession.”

“Overall we are marginally underweight equities and close to neutral on bonds, while holding a little more cash and liquid alternatives, which also gives some exposure to inflation hedging assets.”


About Michael Blayney and Pendal’s Multi-Asset capabilities

Michael Blayney leads Pendal’s multi-asset team. Michael has more than 20 years of investment management and consulting experience. He was previously Head of Investment Strategy at First State Super and head of Diversified Strategies at Perpetual.

Pendal’s diversified funds provide investors with a variety of traditional and alternative asset classes and strategies.

The team — which also includes Allan Polley — manages our multi-asset portfolios with a focus on strategic asset allocation, active management and tactical asset allocation.

Find out more about Pendal’s multi asset funds:

Contact a Pendal 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 June 14, 2023. PFSL is the responsible entity and issuer of units in the Pendal Multi-Asset Target Return Fund (Fund) ARSN: 623 987 968. 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.

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