Hi there! Welcome to the new look Pendal website... Take a two minute tour to see what we’ve changed.

Mainstream Online Web Portal

Investors can view their accounts online via a secure web portal. After registering, you can access your account balances, periodical statements, tax statements, transaction histories and distribution statements / details.
Advisers will also have access to view their clients’ accounts online via the secure web portal.

Aussie equities: Unloved financials could be rate-rise winners

Near-zero interest rates have depressed returns in financial services for years. But with further rate cuts unlikely, it might be time to revisit the sector, says Pendal’s Graeme Petroni.

  • Outlook for rates poses challenges for investors
  • Financials one of the few sectors that can benefit from higher rates
  • 10 to 40 per cent earnings upside for every 100-basis point rate rise

THE financial services sector is an important driver of overall stock market returns in Australia, making up nearly a third of the entire market’s capitalisation.

While the past few months have seen a return to favour for the big banks and other financials, it comes after five years of lacklustre share market returns.

“The biggest macro driver of returns has been interest rates,” says Petroni, who covers the financial services sector for Pendal’s Australian equities team.

“But we’re at an interesting juncture where interest rates have fallen to zero.

“It probably can’t get any worse. And that brings scope for significant share price recovery across the sector.”

Impact of rates on financials

Financial services react differently than most companies to higher interest rates, which make borrowing more expensive and slow business activity.

Higher rates allow many of the financial companies to earn increased interest income on their cash holdings. Banks can also benefit directly as they rebuild margins compressed by low lending and deposit rates.

“Financials across the board will perform well in a rising interest rate environment,” says Petroni.

Leverage to rising interest rates can be anywhere from 10 to 40 per cent earnings upside for every 100 points of rate rises, he says.

Portfolio strategy

But building a portfolio that can benefit from rising rates is not simply a matter of buying the whole sector. Each company is affected differently and each has its own idiosyncrasies.

Petroni says the three ASX companies most exposed to a rising rate environment are insurer QBE, British bank-holding company Virgin Money UK and stock market registrar Computershare.

Pendal Focus Australian Share Fund

Now rated at the highest level by Lonsec, Morningstar and Zenith

Insurers benefit from rising rates because of the government bond investments they hold to back their commitments to policyholders. Typically, fixed income makes up more than 75 per cent of an insurer’s portfolio, he says.

For QBE, the yield on its portfolio is now below 1 per cent — the lowest on record — meaning a 100 basis point lift in interest rates could flow through to a 15 to 20 per cent lift in QBE’s earnings.

Virgin Money UK — formed when National Australia Bank spun off its British bank businesses — is another positioned to gain from rising rates.

Bank earnings suffer from near zero interest rates because the difference between what they can charge for loans and what they have to pay on deposit accounts gets squeezed.

Computershare — which administers shareholdings for listed companies — benefits from higher rates because it invests money that it holds temporarily while distributing dividends. A 100-basis point rise in rates could lift Computershare earnings by 15 per cent.

Risks to consider

There are risks. Looming inflation is a problem for insurers because they set aside reserves based on projections of future payouts. Inflation can drive these higher.

Computershare’s clients are unlikely to allow higher interest rate earnings to flow to the bottom line without demanding their share.

And strong competition for market share among banks often eats away margin gains from higher rates.

“There are a wide range of companies in the financial services sector and they each have their own individual issues,” says Petroni.

“But they all have had a large exposure to falling interest rates — and that has been the dominant reason why they have underperformed.”

And his number one pick?

“The one that we like the most is QBE,” he says.

“The reason being is it is not just an interest rate story — it’s also benefiting from strong price rises. In the last result, the interim CEO said market conditions were better than they’ve experienced in more than a decade. Pretty strong words.”

About Graeme Petroni and Pendal Focus Australian Share Fund

Graeme is an analyst with Pendal’s Australian equities team. He has more than 18 years of experience covering the banking, insurance and diversified financials sectors. Graeme is a CFA Charterholder and holds bachelor’s degrees in Commerce and Law from the University of Sydney.

Pendal Focus Australian Share Fund is Crispin Murray’s flagship Aussie equities strategy. It is a high-conviction equity fund with a 16-year track record of strong performance in a range of market conditions. The Fund features our highest conviction ideas and drives alpha from stock insight over style or thematic exposures.

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 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 October 13, 2021.

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

Keep updated
Sign up to receive the latest news and views