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What’s driving ASX stocks this week?
Transcript
Simon Anderson (00:03.138)
Welcome to another Pendle podcast. Mid caps are a bit of a sweet spot in the Australian share market. Over almost two decades, the hundred biggest companies outside the ASX 50 have outperformed both the broader market and the small ordinaries. The Pendle Mid Cap Fund has outperformed its benchmark by 2.4 percentage points a year since inception. So what makes mid caps different? How is the mid cap universe changing? And where are the best opportunities for investors? Today I’m joined by Brenton Saunders.
Portfolio Manager, Pendle Mid Cap Fund. Good morning, Brenton.
Brenton Saunders (00:37.286)
morning, Simon.
Simon Anderson (00:38.69)
So mid caps sit between large caps and small caps. What makes that part of the market different? And why do you think it deserves investors’ attention?
Brenton Saunders (00:48.931)
Thanks, Simon. A couple of different reasons. I mean, the first and most obvious thing is it’s just blindingly different to some of the other benchmarks that Australian managers manage against. And compositionally, that means that, you know, if you look at most of the large cap benchmarks or the broader market more generally, you’ll find that the top twenty stocks make up about sixty percent of that that index.
And then if you look more generally, you know, your biggest stock is BHP at twelve percent and CBA at nine comes a quick second. Five of the top ten stocks are bank stocks. diversified mining makes up 17% of that total index. And whilst there is a fair bit of copper in it now, there’s a there’s a heavy iron ore component to that as well. And so if you compare that to the mid cap benchmark.
You’ll find that the top 20 stocks only make up 40% of the benchmark. the biggest stock is the biggest stock is 2.4% of the benchmark, which is mineral resources currently. And the second biggest one is 2.2% of of the benchmark. the biggest sector, which I’d have to say is an anomaly by historic standards, is currently gold. And that makes up 16%. It’s at an all-time high
contribution to the total benchmark currently. But outside of that, you know, the the contributions that ever any given sector make up are are quite moderate. And again, very different to the large cap benchmark. So for example, banks only make up sort of effectively about 3%, iron ore is less than 3% of that, of that total benchmark. so so very materially different.
Simon Anderson (02:44.471)
So you mentioned gold, but the composition of the universe has changed quite a bit in recent years. So what are some of those other shifts you’ve seen and what do they tell us about where opportunities are emerging?
Brenton Saunders (02:54.698)
Yeah, so it you know, but it’s hard to go past gold. It’s it’s by far and away the biggest change in the universe for the longest time and it’s quite close to its all-time highs in terms of the contribution to the index. So so that’s that’s really important. you know, and go with with gold comes a bunch of quite desirable sort of portfolio characteristics, notionally the fact that it is generally seen as
the opposite of some of the geopolitical risks and and market risks that that we face. it’s not always the case, but generally that’s quite enduring over time. and then the other things is like the the decline of the contribution of software, not so much growth more collectively, but software specifically has fallen from six, seven percent to about two percent currently and then
also the other one that’s been very cyclical in the space over time has been lithium. You know, lithium has been 7, 8, 9% at times down to 1 or 2%, and it’s currently about 4% of the space. So those are some of the ones that have been quite cyclical over time. the other components that collectively are quite big and quite ripe with opportunity as well currently are just.
You know, I guess basic materials more generally. And by that I include oil and gas and refineries in that as well. And that’s up to about 17% of the total benchmark. So in that, given that the the content for iron ore is quite low, you know, the biggest cons con constituents outside of gold are things like copper, which has been very strong and very topical within the context of the build-out of
infrastructure more generally globally, but you know, also the AI and and and data center thematic. lithium, which is bigger again now and has a number of touch points in the in the benchmark now as well, which is again very topical with the transition from a lot of carbon based energy generation to renewables and and storage.
Brenton Saunders (05:17.596)
lithium is is is is is is great because it’s got a lot of companies that are growing. It’s got a lot of companies that are are are well capitalized and are pretty high quality by pri by global standards. And then the reassertion of some of the importance of things like the refineries through the through the time of the the the Gulf War, this has reasserted itself in terms of its strategic importance.
the stocks have done well to the extent that not not only the the energy prices have gone up, but also that refining spreads have gone up materially over the same time. And for the first time in a very long time, we have got now a very strong underpin from a regulatory perspective, in so much as the government has finally realized the strategic importance of these of these assets, and I think will underpin, you know, one, the maintenance of not only
infrastructure, but the maintenance of the health the financial health of these of these facilities and then also fund things like incremental storage for additional oil and and product storage down the line. So, you know, there’s a there’s a bunch of stuff in there that that is has changed quite a bit as a result of the war, not with no not not least of which is is obviously the energy prices themselves, but certainly for the refiners
their lives have have improved quite materially because of a a sort of regulatory tailwind which they’ve been lacking for for quite some time.
Simon Anderson (06:54.733)
So we’re seeing elevated capital expenditure into mining, infrastructure, defense, not to mention AI. what are the best ways for investors to gain exposure to those themes through mid caps?
Brenton Saunders (07:08.246)
Yeah, so there’s a there’s a bunch of first order and then second order kind of ways you can do that. in the first order ways are most obviously the the companies that are being asked to deploy this capital, namely contractors. you know, so we’ve we’ve got we we’re well represented in the contractor space in in midcaps, generally always have been, but you know, if you think about companies like Ventia, Downer, Wally Parsons are in the space, but we’ve had some
Great new additions more more recently, the likes of Monodelphus and and NRW that have come into the space just as a function of them doing really well and and and capturing a lot a lot of business. So, you know, those are some of the first order ways of doing it. Some of the second order ways of doing it is just upstream of that in in some of the basic materials, again, that are being used to populate.
a lot of this infrastructure and I guess I’m referring more specifically to the data centers. You know, copper plays a big, big role in that. Lithium will play a big role in storage for those kind of things. So there’s a there’s a bunch of first and and and second order ways to play that.
Simon Anderson (08:20.461)
So let’s turn to the portfolio. So we’ve got a market that’s being pulled a bit by AI disruption, geopolitical risk, interest rate expectations are changing. How important is balance in the portfolio and what does that look like in in practice?
Brenton Saunders (08:35.564)
Well, balance is always important for us. it’s sort of what we do i is is just make sure that we’re not inviting any sort of untoward or oversized kind of macro thematic into the portfolio. You know, so we’re core managers and and that’s what we do. But it’s super important at times like this. It it it really means that your portfolio isn’t dominated by any one given market political or
geopolitical second order effect that that gets in get it gets introduced. I guess our our DNA is that, but the in the mid cap space it’s it’s particularly helped by the fact that you have much more of an equal weighted construct rather than a sort of market cap weighted construct that you’ll find in a lot of other benchmarks. So it does make balancing portfolios by way of, you know, whatever it is,
gro growth versus value or whether it’s sectoral balance or whether it’s just a a market leverage or or or risk balance, it it does make it that much easier because you don’t have overriding exposures in the benchmark, like you know, BHP at twelve percent, for example, that you always have to worry about, you know, not having a a huge underweight or or overweight to to BHP.
at any one time. So it is it is aided by that, but I’d have to say it’s it’s super important at times like this.
Simon Anderson (10:08.715)
Now you mentioned some companies before and the Pendle Mid Cap Fund historically has generated alpha through stock selection rather than relying on a a style or sector theme. So where are you seeing the strongest company specific opportunities today?
Brenton Saunders (10:24.478)
we’re seeing them across a range of sectors, oddly enough. And you know, I mean, I g I guess it’s our discipline to look for look for stuff across the sectors. the sort of by elimination, the areas being most challenged are are obviously interest relate interest rate related sectors like REITs, at the moment and then some of your longer duration exposures in in growth as well are really battling with the fact that
We’ve got Australian and US bonds on the 10 year at close to or at or all time highs. So or or multi-year highs at least. And you know, where we’re seeing opportunities is is, you know, if I call out a couple of stocks that that we really like is, you know, we we do like the refiners, both Aviva and and AMPOL, we think, despite the fact that they’ve done quite well, are probably going to be the beneficiaries of elevated refining yields for some time.
there are a couple of gold companies we really like, not just for their gold exposure, but just because of what’s going on inside of those companies. They’re they’re very well managed and and good growth companies, companies like Capricorn, Genesis, Greatland Gold. you know, we’ve got a number of touch points of gold in in the benchmark. we we own about half, we own some of about half of them or or just just less than just less than half of them.
in the contractors, you know, we we like things like Ventia. whilst we’re attracted to things like Monodelphus and NRW, we’re just a little bit concerned that the valuations are a little bit stretched at this stage. But definitely the the direction of travel for those companies just by virtue of the momentum in their businesses is is very strong. And then in the more growth space, you know, we we like things like Kodan.
zip has been a fairly long time favorite of us and has managed to has managed to perform reasonably against the backdrop of a very soft of a very weak software backdrop and and that business continues to go from from strength to strength. And then on the on the consumer side, we have very limited active exposure. the primary one being light and wonder, just by virtue of the fact that.
Brenton Saunders (12:47.614)
also a business going from strength to strength, is is carrying more debt than it would like to in the long term, but that debt level is coming down. And there’s a very big sort of differential, multiple gap between that and aristocrat and some of its other comparatives globally. So so there’s a there’s another one we like in the diversified financials, this is a sector that really deserves a mention because for the longest time it was populated by
A number of challenged companies. and and in the last sort of 18 months, two years, there’s a number of good companies that have either come into the benchmark by virtue of growth or just the backdrop for them has improved materially. And and the ones we like and I’ll call out there are things like Challenger, AMP, you know, AMP was long considered to be highly challenged and you know, management have managed to turn that that story around quite dramatically.
And then, you know, the other big thematic in our space is just the the rise and rise of private superannuation, which is hu of huge benefit to the platforms, the likes of Net Wealth, which is our preferred exposure, but also things like the hub. actually AMP benefits from that as well, and and generation development as well. So so that sector really has come alive. It’s it’s not just populated by
funds managers anymore. It it really has some good some good product offerers in that space now as well.
Simon Anderson (14:23.393)
Brenton, thanks for talking to us today.
Brenton Saunders (14:26.146)
Thanks, Simon. Appreciate it.
Simon Anderson (14:27.413)
You’ve been listening to another podcast from Pendle, I’m Simon Anderson.
This article is more than 12 months old. Find our latest insights here
Here are the main factors driving the ASX this week, according to Pendal portfolio manager PETE DAVIDSON. Reported by head investment specialist Chris Adams
GLOBAL equity markets are climbing the wall of worry, with most indices now 25% above their post-Liberation Day lows and close to all-time highs.
This suggests investors are backing a Goldilocks version of the US economy with not too much inflation from tariffs (as exporters “pay to play” by absorbing tariffs through lower production margins) and just enough spending growth from consumers to keep growth intact.
The US technology sector has reached record highs, fuelled by optimism that strong earnings will persist following the passage of Trump’s One Big Beautiful Bill Act (OBBBA) on 4 July, which includes tax cut extensions for individuals and new permanent capital expenditure deductions for companies.
NVIDIA’s market capitalisation reached a historic US$4 trillion last week, equivalent to 2.3x the total value of the ASX200 and approximately 30 times the size of Commonwealth Bank (CBA).
Additionally, NVIDIA is reportedly planning to launch a new AI chip specifically designed for the Chinese market in September.
Last week’s key headlines included US copper tariffs, a US Department of Defence rare earth offtake agreement and, domestically, an unexpected pause in rate cuts by the RBA.
On tariffs, the Trump administration noted a pending letter to the European Union – delivered over the weekend and imposing 30% tariffs on both it and Mexico – alongside threats of a 35% tariff on Canada and plans for a blanket 15% or 20% tariffs on most other trading partners.
The market was largely inured to these developments last week, perhaps seeing them as a negotiating tactic and preferring to wait for final resolution.
The S&P/ASX 300 fell 0.3% last week. Resources (+0.5%) fared better on a firmer iron ore price – underpinned again by tariff news with the US threat to hit major iron ore producer Brazil with a 50% tariff.
The S&P 500 was also off 0.3% and is +7.2% for the year.
There has been a change in leadership so far in 2025 with European (Euro STOXX 50 +12.8%) and UK (FTSE 100 +11.8%) markets performing well on expectations of far greater fiscal stimulus and a reindustrialisation of Europe. German defence names have been particularly strong.
At the margin these markets are also benefitting from a shift away from dollar assets, with the US Dollar trade-weighted index (DXY) down 10% for the year.
Indian and Chinese equities are also lagging.
US treasuries were relatively quiet, with 10-year bond yields edging up 7bps and remaining contained at the long end.
Commodities were generally stronger, led by copper which jumped 9% after the announcement it will face a 50% US tariff – the same rate as steel and aluminium.
The US uses about 6% of global copper and is expecting a surge in demand, mostly in tech and data centres applications. The Trump administration wants to secure its sovereign supply and bring smelting and refining back onshore.
Copper is now up just under 40% for the year. Lithium remains soft, down 18.5% for the year, in part reflecting reduced EV subsidies in many countries.
US macro and policy
It was a slow news week for macro data in the US.
The June FOMC minutes showed most members are waiting for more clarity on the effects of tariffs before altering rates.
A July rate cut is unlikely, but weaker labour data could prompt action in September.
The committee expects possible 25bp cuts in September, October, and December, though opinions remain divided.
The NFIB Small Business Optimism index inched down to 98.6 in June from 98.8 in June. This is better than this year’s lacklustre average of 93.0, though still far from its peak at 105.1 post Trump’s election, before tariffs dampened the mood.
While business owners’ optimism bounces around, hard data like hiring and investment plans remain soft. With fewer respondents than usual even bothering to answer the survey, things might be rougher than they appear.
Mortgage Applications leapt by 9.4% in the week ending 4 July to reach their highest level since February 2023.
The gradual decline in the 30-year average conventional mortgage rate to 6.77%, from 6.93% four weeks ago, is likely to have helped to bolster demand.
Some consumer surveys, however, also point to a pick-up in optimism and improved perceptions of job security over the last couple months.
The further decline in Initial Jobless Claims (to 227K last week, from 232K the week before) was largely driven by states with relatively large auto sectors where figures can be noisy due to annual summer shutdowns.
Meanwhile, continuing claims increased to 1,965K in the week ending 28 June, continuing to suggest a future rebound in the unemployment rate, which fell from 4.2% in May to 4.1% in June.
There were several developments on the tariff front, with the Trump Administration announcing:
- A 50% tariff on copper, in line with aluminium and steel.
- A 35% tariff on Canadian imports starting next month
- A 50% tariff against Brazil – which is a major supplier of beef, coffee and orange juice to the US. As a major supplier of iron ore, a large tariff is potentially positive for Australia.
- Intended tariffs of 15% or 20% on most other trade partners.
- A 200% tariff on pharmaceuticals is being considered – but the US will give companies extended time to build the manufacturing facilities in the US before applying tariffs if they don’t. Like copper, the aim is to bring manufacturing back to the US.
Tariff revenues have quickly risen from the range of US$6-8bn per month, to over $20bn in May.
A projected US$30 bn per month would equate to US$360bn per annum – the problem is that the US Budget Deficit is US$1800bn and is increasing, thanks to the Trump OBBA, which is projected to add US$240 bn in deficits per annum for next decade.
China macro and policy
Beijing has announced further population growth stimulus measures – with cash payments for children born after January 2025.
There was also further rhetoric related to recent comments around the need to remove excess capacity in core industries – such as steel. The risk here for Australia is that reduced steel capacity results in lower demand and pricing for iron ore, despite higher steel margins.
There was also some social media speculation that the leadership will be holding a meeting to help revive the property sector.
Australia macro and policy
The RBA surprised the market with its decision to leave the cash rate unchanged at 3.85% against expectations of a 25 bp cut.
The decision to pause the easing cycle was “about timing rather than direction” with the RBA just “looking for further confirmation we are on the forecast path”.
Governor Bullock reasoned a “cautious approach” was warranted, because year-over-year growth in the quarterly trimmed mean inflation had only just returned to the 2-3% target band (2.9%yoy), labour conditions were tight with negligible productivity growth, and because global uncertainty remains elevated.
The high number of dissents – the vote passed 6-3 in favour – also caught attention, highlighting clear debate over the appropriate policy stance.
Multiple economists previously calling for a July rate cut pushed back those expectations, but retained terminal rate forecasts of 3.10%, implying three more 25 bp cuts. Bond yields shifted ~14 bp higher across the curve.
Australian equities
July has seen a continued rotation from growth into resources/cyclicals, despite a slight bounce in US bond yields and further tariff agitation from Trump.
Stocks like James Hardie (JHX), BlueScope Steel (BSL) and Sims (SGM) have all benefitted from sector rotation, as have some of the weaker stocks in FY25 such as Amcor (AMC), Orora (ORA) and Light & Wonder (LNW).
The re-rate looks to be outpacing fundamentals in some instances – for example, BSL’s North American steel spreads have stabilised and there is an emerging risk around cost inflation and increased discounts.
Since the RBA surprise “hold” decision, the ASX 200 is flat, while the AUD/USD cross is +0.3% and Australian Government 10-year yields are +10bps.
Banks notably outperformed after the decision while, interest sensitive and defensive sectors have been weaker.
AREIT update
The AREIT sector returned 12.9% in FY25, against 13.8% for the S&P/ASX 300.
Performance was led by Charter Hall Group (CHC, +76.6%), driven by lower bond rates and signs that commercial real estate values have bottomed and, as a result, we have seen a pickup in fund flows and transaction activity.
Goodman Group (GMG, -0.6%) was a drag on the sector, unwinding previous outperformance with the market concerned about the capital required to build its data centres.
We expect stronger EPS growth for the sector, particularly from the retail REITs, affordable housing and fund managers.
We see a stronger-for-longer cycle for quality asset owners, as rising demand (helped by population growth) is met with limited supply – with higher construction costs meaning a majority of proposed developments are uneconomic.
Residential apartments, like many other forms of commercial real estate, are trading below replacement costs.
The sector has a twelve-month-forward dividend yield of 3.4% (5.5% excluding GMG), a price/earnings of 19x (14.7x excluding GMG) and three-year EPS growth rates of 5-6% or more, which is a historical high (4.2% excluding GMG).
Meanwhile we are seeing signs of equity managers buying AREIT cover and reducing active underweights.
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.
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