The Point

FAST PODCAST: How to choose the right mid-cap Aussie stocks

The development of a decarbonised economy will take a long time.

But that doesn’t mean it’s not a critical factor right now, says Pendal portfolio manager Brenton Saunders.

The ESG transition can be divided into three periods, says Brenton:

1. The existing status quo
2. A transition period with an overlap between old and new technologies
3. A transition to the new

“Once you understand that, it’s really about characterising companies in terms of where they sit in these transitions,” says Brenton, who manages Pendal MidCap Fund.

“Are they making their way across those phases to an environment where they can contend with the decarbonised, ESG world? Or are their business models fairly constrained to one of those thematics?

“We are very careful about how and if we invest in those latter sectors because this transition will take place over the course of the next 10 years. That’s definitely within the context of an investible timeframe.” 

Aussie equities: Small business changes bring opportunity for Xero

Small businesses are under pressure to shift their accounting systems online as a global regulatory push to e-invoicing and real-time tax gathers speed, says Pendal Aussie equities analyst Elise McKay.

E-invoicing — pushed by the ATO and other regulatory bodies globally — aims to reduce security issues and fraud and speed up payments.

Elise has just returned from digital accounting platform Xero’s annual conference in the UK, where the big topic was the push to digital tax.

From 2024 British businesses and landlords with £10,000 turnover will have to report digitally, impacting some 4.2 million taxpayers.

“Regulatory tailwinds are very supportive for cloud accounting adoption,” says Elise.

“I spoke to one UK accounting firm with more than 3000 clients who are going to have to adopt cloud accounting solutions.”

That’s good news for ASX-listed Xero, which is part of Pendal’s Focus and Horizon Aussie equities portfolios.

Fixed interest: why bonds look promising and how to take advantage

A re-assessment of fixed income securities and yields — and their defensive qualities — have recently made bonds attractive again, says Dale Pereira, who heads up client solutions at Pendal.

“Bond returns don’t predict the future — they reflect what’s happened,” says Dale.

“That’s where the opportunity lies: they may be showing negative returns now, but the future looks a lot brighter.”

Bonds typically lead equities in terms of market reaction, says Dale.

“From the end of 2021 and into the first half of 2022, bond yields moved in line with expectations of future rate rises — which in turn reflected inflation expectations.

“But markets often over-react when extrapolating good and bad news. And that’s probably the case now.

“The market has likely priced in too many rate rises. It’s priced in a good chance that central banks won’t be able to control inflation. (Though recently that pricing has started to dissipate, making yields less volatile.)

“This means the bond market is at a much better entry point for investors.”

Emerging Markets: Commodity cycle could be well timed for Brazil investors

Brazil’s powerful agriculture, energy and mining sectors have been among the world’s big economic winners from the supply squeeze in 2022.

But with an election due in October markets are starting to get nervous about a change of government.

Left-wing Luiz Inácio Lula da Silva is leading in the polls. When he was last elected in 2002, markets sold off sharply, fearing a big-spending, left-wing agenda.

“But he moved centre-left when actually took office,” says Paul, who co-manages Pendal Global Emerging Markets Opportunities fund.

That was largely because his presidency coincided with a commodity super-cycle that boosted export conditions for Brazil and allowed increased spending.

Ironically, a similar story may play out again in 2022. High prices for energy, agricultural commodities and iron ore are boosting Brazil’s export earnings and lifting tax revenue.

“It’s too early to say, but it may well be that if Lula is elected he could once again be very fortunate in the timing of the commodity cycle.”