The Point

Crispin Murray: Pollution law shows investors need to keep a close eye on government

Government policy is a significant risk to investors, particularly in the resources and energy sectors, says our head of equities, Crispin Murray.

Sovereign risk can be more unpredictable than competitor risk, Crispin told a recent AFR conference.

“Competitors are largely focused on returns, so you can anticipate what they’re likely to do. But governments overlaying policy agendas can create quite unpredictable risks.

As an example, Crispin points to the federal government’s “safeguard mechanism” law which will regulate Australia’s 215 biggest polluters from July.

“They are still negotiating on details, but it means we’re asking mining companies, as an example, to quickly cut their scope-one emissions.

“That means cutting diesel emissions over the next seven years – and there’s no solution to that.

“I think we will see carbon price go up more than people realise. And it’s not beyond the realms of possibility we’ll see a carbon price by the end of the decade.”

How Pendal investors helped make the world a better place in 2022

As “stewards of capital”, Pendal undertook 562 ESG-related meetings with investee companies and issuers on behalf of investors in 2022.

These “engagements” – where we seek to influence positive outcomes on ESG matters – are one of the benefits of investing with an “active” investment manager.

Deep, fundamental research capabilities in this area are increasingly important, says Pendal’s Richard Brandweiner in our 2022 stewardship report (which you can find here).

“The challenge for investors is identifying authentic leadership that can leverage non-financial factors to generate real economic value,” Richard says.

“Since many of the basic hygiene factors are already considered, it will become particularly difficult for systematic processes like those used by the mainstream ESG score providers to assess this.”

Fixed Interest wrap: Our views on latest inflation data, the RBA review and YFYS reforms

Yesterday’s March-quarter ABS data showed goods inflation almost flat-lining as supply chains return to normal, while services inflation jumped to 6.1%.

Given it’s a one-third / two-thirds split between goods and services, this leaves the medium-term annual inflation pulse near 4%, says our head of bond strategies, Tim Hext.

“The RBA will be encouraged that inflation is falling,” says Tim. “Their 4.75% forecast for 2023 now looks high and will likely be revised down in May.

“This means no more rate hikes, with the fixed-rate cliff doing the work on the domestic economy for the rest of 2023.”

But those looking for rate cuts late this year or early next year will be disappointed, Tim says.

“The easier work on inflation is done. The harder work of reining in services inflation and the domestic economy, is very much a work in progress.

“It will not be smooth or pretty and will require rates stuck here for the rest of this year.”

“Overall the latest data supports our duration-friendly view on markets, but as always levels will determine our risk.”

Emerging Markets: Take care with Asian tech leaders such as Korea and Taiwan

Emerging markets investors will be aware that media and analysts have recently been talking up the prospects of a return to growth for key Asian tech hardware export markets.

But Pendal’s James Syme warns investors to take care before jumping into Korea and Taiwan on the back of bullish semi-conductor export expectations.

Both countries continue to face historically weak conditions in their key computer chip and electronics export industries, says James, who co-manages Pendal Emerging Markets Opportunities fund.

“We’ve seen a lot of investors go back to the playbook of what worked for the last couple of years – Chinese Internet stocks and Korean and Taiwanese tech hardware names.

“But when we look at the data, we see no evidence of that at all.”

Instead, James believes investors should stick to the EMs best suited to current global economic conditions, such as Mexico, Poland, Hungary and Czech Republic.

Crispin Murray: Four government intervention areas investors must watch

Investors should keep a close eye on a growing trend toward government policy intervention in business, says Pendal’s head of equities, Crispin Murray.

“As investors our focus is on the practical reality of the market environment,” Crispin says in his biannual Beyond The Numbers webinar.

“One key shift we have seen is the number of companies referencing the growing influence of government policy on their outlook.”

Investors should be aware of government influence from four perspectives, he says:
1 Determining award wages
2 Power and gas policy
3 The carbon reduction pathway
4 Potential new regulations for the big banks