October, 2023
Higher long-term bond yields in both the US and Australia weighed on equity markets in October.
Inflation continued to trend in the right direction in the US. However resilience in the economy, underpinned by several stronger-than-expected economic data points, saw the market shift to a “higher for longer” narrative in its outlook for interest rates. Instability in the Middle East added to the mix, and saw sharp rallies in both gold and oil, although Brent crude finished off -8.3% for the month.
In Australia, the RBA held rates steady at 4.10%, However the headline monthly consumer price index (CPI) rose 5.6% for September, which was stronger than August’s 5.2% gain and is still well ahead of the RBA’s target. This underpinned the view that the RBA has to shift rates higher to bring inflation under control.
The S&P/ASX 51-150 fell -6.68%, underperforming the -3.8% return from the S&P/ASX 300.
Weakness was broad=based across the Australian market with only Utilities (+0.19%) recording a gain as AGL Energy’s defensive qualities were rewarded in a falling market.
Energy (-4.39%) fell but outperformed, held up by Whitehaven Coal (WHC, +4.08%) on confirmation that it would buy the Daunia and Blackwater coal mines from BHP for what looks to be a good price.
It was the long-duration growth stocks and sectors which bore the brunt of higher bond yields.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Pendal-MidCap-Fund-Factsheet-2.pdfSeptember, 2023
Continued resilience in the US economy has pushed out the timeline for expected rate cuts and saw expectations around the ultimate terminal rate creep up.
In combination with larger US bond supply, this pushed US tenyear bond yields up materially, weighing on equity markets in the US and around the world.
The dominant narrative of resilient global economic momentum and higher-for-longer rates continues.
The S&P/ASX 51-150 fell -4.17% for the month.
The Energy sector (+8.52%) was the only one to shine. Higher coal prices pushed up Whitehaven Coal (WHC, +16.75%) and New Hope Corporation (NHC, +12.79%) while uranium miner Paladin Energy (PDN) was up 30.18%.
Health Care (+0.07%) rose largely on the back of strength in Pro Medicus (PME) which was up 14.00% on a new contract win.
Real Estate (-8.54%) underperformed on broad-based weakness driven in part by higher bond yields. The recent reporting season demonstrated the effect that higher rates was having on interest expense and earnings. Vicinity Centres (VCX) fell -9.36% and Lendlease (LLC, -8.07%)
Consumer Discretionary (-7.16%) was also weak pretty much across the board, with larger names IDP Education (IEL, -12.51%), JB Hi-Fi (JBH, -0.55%) and Domino’s Pizza (DMP, -1.61%) all losing ground.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Pendal-MidCap-Fund-Factsheet-1.pdfAugust, 2023
The equity market gave up much of its July rally over the first half of August.
However a softer-than-expected CPI inflation print in Australia, coupled with several US indicators that eased some concerns about excessive economic growth, saw some of the concern around further rate hikes recede.
Equities rebounded into the month’s end as a result. The S&P/ASX 51-150 ended down -1.36% for August.
A recent softer-than-expected US employment report is seen as supporting the view that the Fed does not need to hike rates again.
The market is now pricing in a 94% chance that Fed holds rates steady in September and 65% chance of a hold in November too.
The consensus view is firmly that of a soft landing, goldilocks scenario playing out in the US.
Australian earnings season was largely in-line with expectations with earnings revisions no larger than normal. It painted a picture of an economy that remains in good shape with very little evidence of slowdown.
Broadly speaking, cyclicals generally performed better than defensives. In some instances, the former’s earnings declined but held up better than the market feared.
There tended to be larger dispersion within sectors than across them. This indicates a market where stock specifics are exerting a great influence on performance than was the case twelve months ago.
Communication Services (+6.77%) was the best performing sector with good performance from online classified stocks CarSales.Com (CAR, +15.61%) and REA Group (REA, +5.32%)
Energy (+2.47%) also did relatively well, driven mainly by fuel refiner and distributor Ampol (ALD, +7.46%), coal miner New Hope (NHC, +6.03%) and uranium miner Paladin Energy (PDN, +14.97%)
Utilties (-7.13%) fell as AGL Energy (AGL, -7.13%) returned some of the recent strong gains it has made on the back of higher elecrticty prices.
Information Technology (-6.27%) fell as Wisetech (WTC, -18.99%), the largest stock in the sector, flagged that FY24 margins would be below consensus estimates due to the need to invest in in a new product portfolio.
The portfolio outperformed the index in August.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Pendal-MidCap-Fund-Factsheet.pdfJuly, 2023
July 2023 was a strong month for emerging market equities. The MSCI EM index returned 4.9% in AUD terms, with strong gains from some major groups of stocks. Chinese internet names performed well, including some key portfolio holdings; some emerging market banks rose strongly, including portfolio holdings in Mexico and South Africa. Turkish (not held) stocks rose strongly on hopes for more orthodox economic policies.
By far, the most substantial gains, though, were in parts of the broader technology sector, particularly stocks with exposure to electric vehicles/batteries and stocks that are possible artificial intelligence beneficiaries. We see multiple signs that there may be excessive optimism in some of these groups of stocks. We are neither taking a view on particular companies/business models nor saying that these upward moves are finished, but we are highlighting some of the market dynamics we see:
1. Huge volumes and parabolic price moves driven by retail investors: this has particularly been the case with the Korean EV/battery sector. EV/battery stocks represented nearly half of the total Korean stock market turnover on some days in July, driven by retail investor leverage rising to a record KRW (South Korean won) 10trn. The key to stock selection has been the Korean YouTube presenter Park Soon-hyeok, better known as ‘Mr. Battery’. Six of his eight recommended names rose over 40% in the month, with the strongest of them, Ecopro (not held), up 1,059% year-to-date. There has also been a raft of new issuance of Korean EV/battery ETFs in recent weeks.
2. Strongest moves in names that might have quality challenges: Strongest moves in names that might have quality challenges: New Oriental Education (China, online education, not held) has previously been the subject of both short-seller allegations of dishonesty and also of the crackdown on online education by the Chinese government. The stock returned 49.8% in July. NIO (China, EV, not held) is forecast by consensus estimates to have a net loss of USD 2bn on USD 8.9bn of sales this year but rose 58% in July, underperforming XPeng (China, EV, not held), expected to lose USD 1.2bn on USD 4.5bn of sales, and up 74% in July. In May of this year, Lee Dong-chae, the chairman and largest shareholder of Ecopro, was sentenced to two years in prison for violating South Korean capital market laws.
3. Parabolic moves in stocks that aren’t pure play tech names: Posco Holdings (Korea, steel, not held) is one of Asia’s largest steel producers, with thirty thousand employees producing 32 million tons of steel every year. The company has made some smart investments in green steel technology and has ongoing investments in EV battery components, which it provided an update on in July. That update was material in driving the market cap of Posco Holdings from USD 24.9bn to USD 42.5bn in the month. Similarly, strong monthly gains (+50%) were seen in some Taiwanese PC and laptop producers that have been reporting declining PC, laptop and server volumes this year, on the hope that AI server orders (volumes and margins at this point unclear) are about to follow.
4. Crucially, the high-quality large-cap companies with proven track records and technologies were laggards in the month. TSMC (Taiwan, tech hardware, held) is widely recognised as the world’s dominant producer of high-performance semiconductors that are key to AI; the stock fell 2.8% in July. Samsung Electronics (Korea, tech hardware, held) is TSMC’s nearest challenger in highend semiconductors and a major producer of computer memory, including the HBM type used in AI servers; the stock fell -0.4% in July. The technological revolutions in AI and EV are changing the world, but equity markets will not price that opportunity with perfect efficiency. We are concerned that some parts of the EM equity space look particularly inefficient right now.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Pendal-Global-Emerging-Markets-Opportunities-Fund-WS-Factsheet-1.pdfJune, 2023
One of the strongest arguments for employing a top-down, country-level approach to EM equity investing (as we do) is the role of currencies in returns and the variance of returns. Emerging market currencies are typically more volatile than developed market currencies, but in addition, currency moves in emerging markets are typically correlated with equity market moves and with economic conditions.
This approach has worked well in the first half of 2023, with some major emerging markets (from the higher beta, more US dollarsensitive end of the spectrum) seeing strong returns in both currencies and equities. For example, MSCI Mexico returned 11.6% in MXN terms, while the Mexican peso appreciated by 13.9% against the US dollar, lifting USD returns for the index to 27.1%. Brazil and Indonesia enjoyed similar return patterns in the first half of the year.
There have been a number of drivers of this currency support for equity returns, and we believe that these are likely to persist in the second half of 2023, lifting our confidence in the markets our portfolio is overweight.
Firstly, conditions for the US dollar. Exchange rates are just ratios, and the fundamentals of the US dollar have not been supportive this year. 2021 and 2022 saw dramatic strength in the US dollar relative to key trade-partner currencies, lifting the real effective exchange rate to a thirty-year high. This represented an overshoot relative to the commodity terms of trade, which turned into negative momentum in late 2022 and the first half of 2023. With a more uncertain outlook, the Federal Reserve may be hiking or cutting interest rates in the second half of 2023 in H2, but the interest rate outlook seems less hawkish than other global central banks.
Secondly, and following on from that, many emerging market central banks, including in Mexico and Brazil, had hiked much earlier and far more aggressively than developed market central banks. Policymakers in these countries have remained cautious despite clear disinflation in their economies – ex-ante real interest rates in Brazil are approaching 9%. Other central banks, for example, in India and Indonesia, have chosen to deploy excess foreign exchange reserves to support their currencies but have avoided the accommodation of inflation that we have seen in many developed markets.
Combining these, we have seen strong conditions for carry trade investors funding in US dollars and investing in emerging market rates and bond markets. As those flows have stabilised currency volatility, risk-adjusted carry returns have steadily improved. A JP Morgan index of one month volatility in emerging market currencies peaked at 20% during the Covid sell-off, averaged 11.3% in 2022, but declined to 8% in June 2023. Volatility adjusted carry still looks attractive relative to history.
Lastly, the trade fundamentals, both in terms of prices (terms of trade) and goods flows (trade balances), look extremely supportive. Trade balances and current account balances look strong relative to history in Brazil, India and Indonesia, while the Mexican trade deficit is offset by inbound remittances from overseas Mexican workers. In all four countries, strong economic and domestic demand growth will inevitably lead to rising imports, but the starting position remains attractive after weak domestic demand growth in the 2010s and the powerful sell-off in real effective exchange rates in 2020.
For these emerging economies, we see attractive economic conditions and strong commitments to monetary orthodoxy attracting increasing capital flows from global carry-trade investors. Those flows further drive liquidity and growth while stabilising and strengthening currencies, all of which are highly supportive for equity investors. We remain highly positive on the outlook for these markets in the second half of the year.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Pendal-Global-Emerging-Markets-Opportunities-Fund-WS-Factsheet.pdfMay, 2021
This Fund is designed for investors who want the potential for long term capital growth and tax effective income from a portfolio of primarily 40-60 Australian mid cap shares and are prepared to accept higher variability of returns.
Pendal defines the mid cap universe to include companies ranked between 51 and 150 of the S&P/ASX 200 Index. The Fund may also invest in equivalent companies listed on the New Zealand Stock Exchange, hold cash and may use derivatives. Pendal’s investment process for Australian shares is based on our core investment style and aims to add value through active stock selection and fundamental company research. Pendal’s core investment style is to select stocks based on our assessment of their long term worth and ability to outperform the market, without being restricted by a growth or value bias. Our fundamental company research focuses on valuation, franchise, management quality and risk factors (both financial and non-financial risk).
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/173179439.pdfApril, 2021
This Fund is designed for investors who want the potential for long term capital growth and tax effective income from a portfolio of primarily 40-60 Australian mid cap shares and are prepared to accept higher variability of returns. Pendal defines the mid cap universe to include companies ranked between 51 and 150 of the S&P/ASX 200 Index. The Fund may also invest in equivalent companies listed on the New Zealand Stock Exchange, hold cash and may use derivatives. Pendal’s investment process for Australian shares is based on our core investment style and aims to add value through active stock selection and fundamental company research. Pendal’s core investment style is to select stocks based on our assessment of their long term worth and ability to outperform the market, without being restricted by a growth or value bias. Our fundamental company research focuses on valuation, franchise, management quality and risk factors (both financial and non-financial risk).
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/171818989.pdfMarch, 2021
This Fund is designed for investors who want the potential for long term capital growth and tax effective income from a portfolio of primarily 40-60 Australian mid cap shares and are prepared to accept higher variability of returns. Pendal defines the mid cap universe to include companies ranked between 51 and 150 of the S&P/ASX 200 Index. The Fund may also invest in equivalent companies listed on the New Zealand Stock Exchange, hold cash and may use derivatives. Pendal’s investment process for Australian shares is based on our core investment style and aims to add value through active stock selection and fundamental company research. Pendal’s core investment style is to select stocks based on our assessment of their long term worth and ability to outperform the market, without being restricted by a growth or value bias. Our fundamental company research focuses on valuation, franchise, management quality and risk factors (both financial and non-financial risk)
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/170128969.pdfFebruary, 2021
This Fund is designed for investors who want the potential for long term capital growth and tax effective income from a portfolio of primarily 40-60 Australian mid cap shares and are prepared to accept higher variability of returns.
Pendal defines the mid cap universe to include companies ranked between 51 and 150 of the S&P/ASX 200 Index. The Fund may also invest in equivalent companies listed on the New Zealand Stock Exchange, hold cash and may use derivatives. Pendal’s investment process for Australian shares is based on our core investment style and aims to add value through active stock selection and fundamental company research. Pendal’s core investment style is to select stocks based on our assessment of their long term worth and ability to outperform the market, without being restricted by a growth or value bias. Our fundamental company research focuses on valuation, franchise, management quality and risk factors (both financial and non-financial risk).
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/168917728.pdfJanuary, 2021
The Fund underperformed the benchmark over the month of January.
Contributors Do not hold Magellan (MFG) Magellan (MFG, -10.7%) provided its FUM/Flow update of the December quarter in January. Whilst flows have been resilient, FUM was down by 1.6% from A$103bn to A$101.4bn, driven by negative investment returns which also weighed on the performance fees earned. This saw MFG pull back over the month. Overweight Nine (NEC) Nine Entertainment (NEC, +3.9%) benefitted from growing confidence that there would be a media deal in Australia leading to higher revenue for their news content. Advertising also remains strong, as companies look to leverage their brands to the optimism surrounding a roll back in restrictions and re-opening economy. This saw the stock outperform during January.
Detractors Overweight Xero Xero (XRO, -11.5%) was caught in the crosshairs of some hedge fund deleveraging during the month, after a year of strong outperformance. It is one of our preferred growth names, which we believe will be a beneficiary of digitisation of the economy and low interest rates. Despite some near-term headwinds on expected SME churn and failure rates, we believe that the structural shift to the cloud will be further accelerated as a result of COVID and that the relationship between accountants, SMEs and software has never been more important.
Do not hold Zip (Z1P) Zip (Z1P, +37.4%) provided a solid 2Q trading update during the month, which saw its US business Quadpay continue to grow strongly. Quadpay’s key metrics accelerated in December, with a +215% year-on-year growth in Total-Transaction-Volumes (TTVs), a further step up from the 205% recorded in November. The business also added another 394k customer in December, compared to the 296k added in November.
Outlook
The S&P/ASX 51-150 index ended the month down, with the Fund behind the index.
There were some good gains from Nine Entertainment, which continues to benefit from a recovery in advertising demand, and from JB Hi-Fi, which continues to see strong sales growth. However some of the more defensive names in the portfolio also made good contributions, including Metcash and Healius.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/166783828.pdfDecember, 2020
The S&P/ASX 51-150 Accumulation index made some further gains (+3.0%) in December, capping the year’s return at +14.9%. This saw the small cap index outperform its broader cap counterpart, the ASX 300 index by +1.7% over the month; and +13.2% over the year. Resources (+5.7%) led the gains in December; whereas Industrials (+2.3%) were the laggard. Covid cases in the US continue to rise and Europe has started to deteriorate again. In the UK concern centres on the rise of cases in London, and the focus has been on a potentially new strain/variant of Covid-19. While it has proven more infectious, there is no evidence to suggest this new strain will make people sicker or is more resistant to vaccines. The latter is critical to market sentiment.
Despite worsening health news and greater restrictions, the economy is holding up better than expected. This is despite softer consumer confidence and shoppers holding back from physical retailers and restaurants. November retail sales, released in December were softer, but real times measures suggest this may have picked up again. Surveys for holiday sales continue to look ok, with a substantial shift to online.
Turning to sector performance, some performance divergence was evident. Information Technology (+7.4%), Materials (+5.7%), Consumer Staples (+5.5%) and Real Estate (+4.2%) outperformed the headline index; whereas Healthcare (-6.5%), Energy (-0.5%) and Financials (-0.3%) recorded some losses. Afterpay (APT, +24.2%) was the largest return contributor within IT, followed by Xero (XRO, +10.8%) and Nextdc (NXT, +8.7%). The former two have both made into the S&P/ASX 50 index recently (and the S&P/ASX 20 index in APT’s case).
APT provided a trading update for November at the beginning of the month, which saw its global underlying sales grow by +112% from last year to A$ 2.1b. The US region recorded sales of 1.0b, exceeding ANZ’s 0.9bn for the first time. Referrals to global retailers also continued to grow strongly with over 35m leads generated during the month of November, which was 147% up on November 2019. Offsetting some of these gains, Appen (APX, -21.7%) was sold off after management downgraded CY20 guidance to A$108-111m, from A$125-130m (EBITDA). Whilst it was expected somewhat due to the Covid-19 impact, it dampened investor sentiment.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/164222489.pdfNovember, 2021
The Midcap sector made solid gains in November. While improved sentiment toward US politics and vaccines drove markets, the move was supercharged by two surprises. First, contrary to consensus expectations, there was no “Blue Wave” of change in US politics. The Presidential race was very close and the Senate looks set to remain in Republican hands, leaving the US with a far more moderate – and market friendly – government than many expected.
Second, on the vaccine front, the ~95% efficacy rates reported by Modern and Pfizer were far higher than most expected. This prompted a surge in some of the more cyclical value stocks. The Fund performed in line with the index and remains ahead of it over the preceding twelve months. Companies which are well set to benefit from the relaxation of travel and movement restrictions and recovery in the domestic economy did best. This includes Monadelphous, Seven Group and Nine Entertainment. Some of the more defensive holdings – such as Metcash and Saracen – underperformed.
Looking forward, risks remain. The surge in Covid in the Northern Hemisphere has led to lockdowns – with perhaps more coming – and is having an impact on real-time economic activity. There is a great deal of complexity around the vaccines – how soon and widespread will they be used? How quickly will we return to normal? Geopolitical risk – particularly around the relationship between China and Australia – is higher than usual.
Nevertheless, the world is in a better place than many feared in March. The economic rebound has been strong, helped by a surge in monetary and fiscal policy support. In the US, strong industrial production is helping offset weaker activity in services. Vaccines are on the horizon.
The world is getting better at living with the virus and mitigating its economic damage. The risk of prolonged recession has receded. Policy-makers remains in the mindset of “whatever it takes” – with the policy settings supporting both the economy and markets. The upshot is that we believe our balanced approach remains as valid now as it did earlier in the year.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/162875788.pdfOctober, 2020
The Fund underperformed the benchmark over the month of October.
Contributors
Overweight Nine Entertainment
Domestic cyclicals outperformed, as optimism over easing border restrictions continued to support expectation for earnings recovery. This saw Nine Entertainment (NEC, +19.2%) contribute the most to the fund’s outperformance over the month. In addition, the latest SMI data also pointed to the ongoing improvement in TV markets.
Does not hold Mesoblast
Mesoblast (MSB, -39.8%) pulled back, and was the largest performance detractor. The company’s share price has skyrocketed since April, as market welcomed its remestemcel-L as a potential treatment for hospitalised COVID-19 patients suffering from acute respiratory distress syndrome. In October, the company announced that the US FDA has issued a Complete Response Letter to its Biologics License Application (BLA) for remestemcel-L. This will likely to delay the approval process, and MSB has requested a Type A meeting with the FDA to discuss a potential accelerated approval with a post-approval condition for an additional study.
Detractors
Does not hold Afterpay
The latest Australian Federal budget underpinned several growth stocks over the month, which saw market darling Afterpay (APT) record another double-digit gain of 20.9%; and not owning that weighed on our relative performance. That said, our preferred growth exposure, Xero (XRO, +9.3%) also benefited from the measures to help accelerate investment and stop business going under.
Overweight Monadelphous
Mining service provider Mondadelphous (MND, -9.9%) took a breather in October after recording a double-digit gain during the previous month. There was no new news revealed, and we believe the resilient demand for iron ore as a result of Chinese policy, coupled with supply disruption will continue to support the outlook for increased spending by miners on production expansion and maintenance. This would in turn result in a solid pipeline of contract wins for MND.
ticker: BTA0313AU
commentary_block: Array
factsheet_url:
https://www.pendalgroup.com/products/
Factsheet
release_schedule: Monthly
fund_features:
Pendal MidCap Fund aims to provide a return (before fees, costs and taxes) that exceeds the Pendal Custom Index over the medium to long term. The Fund is designed for investors who want the potential for long term capital growth. Pendal defines the mid cap universe to include companies ranked between 51 and 150 of the S&P/ASX 200 Index. The Fund may also invest in equivalent companies listed on the New Zealand Stock Exchange, hold cash and may use derivatives.
- The Fund typically holds between 40 – 60 stocks.
- May have assets denominated in foreign currencies.
- Derivatives may be used to reduce risk.
- Maximum 20% cash allocation.
- Pendal incorporates an assessment of environmental, social (including labour standards), corporate governance (ESG) and ethical factors in our investment process where those considerations are deemed material to the financial performance of an investment.
manager_contact_details: Array
asset_class: Domestic Equity
asset_category: Australian Small Cap
peer_benchmark: Domestic Equity - Small Cap Index
broad_market_index: ASX Index Small Ordinaries Index
structure: Managed Fund