The Point

Ashley Pittard: Why US is set to enjoy a decade of growth

Don’t worry about a US recession, says Pendal’s head of global equities Ashley Pittard.

Instead, get set for a decade of growth underpinned by a rebound in capital spending as US businesses re-build their domestic supply chains.

Capital expenditure is a critical driver of economic growth, says Ash, who manages Pendal Concentrated Global Share Fund.

The Biden government this month opened applications for US$53 billion in manufacturing subsidies under the CHIPS and Science Act, which seeks to boost semiconductor and high-tech manufacturing.

Already, US$138 billion of capital spending has been committed from companies including Intel, Samsung and Texas Instruments.

“It’s just like Warren Buffett says: never bet against America.”

US equities: Earnings are looking better than expected

The macro-economy – inflation, growth, employment – drives top-line sentiment among investors, observes our head of global equities Ashley Pittard.

But earnings in sectors and companies drive the valuation of specific stocks, he says.

Take Facebook owner Meta, which gained 25 per cent last week after a better-than-expected result. Then the stock fell back sharply, albeit briefly, when strong US labour force hinted at further rate rises.

Overall, the latest quarterly US reporting season is looking better than expected at the halfway point, says Ashley.

Earnings growth is down about 3 per cent “which is marginally better than what was forecast”.

Ash believes it’s time to “take a little bit of money off the table” when it comes to energy stocks.

Ashley Pittard: US recession will be shallow

“It’s highly, highly likely that there’s going to be a US recession this year,” says our head of global equities Ashley Pittard.

“But there’s a difference this time around because of robust capital expenditure.

“It’s clear this recession is going to be shallow. Invest through it, because valuations are compelling.

“There’s been a de-rating of the market and we are going to have earnings growth when we get out of this downturn.”

Which sectors? “Last year we were pushing the Covid losers – financials and energy – and they’ve done very well,” says Ashley.

“Going forward you still want some of those names, but also you need some of the 2022 losers.

“Names like Amazon, Netflix and other media streaming assets. You want to have Covid losers plus selective 2022 losers.”

Three big questions facing ESG investors (and how to answer them)

Sustainable investor Regnan continues to strongly believe that including ESG criteria in the investing process provides information to make better investment decisions.

The challenge is, the more it evolves, the more complicated it becomes for investors trying to judge the effect of these criteria on their investments.

In a new article, Regnan senior ESG and impact analyst Murray Ackman outlines the three big questions facing investors:

1. ESG data providers often have different views and methodologies for rating different companies. That means ESG requires more interpretation than, for example, credit ratings
2. A lack of standard language and ESG definitions means it’s sometimes difficult to compare apples with apples
3. It’s not always clear if or how ESG is actually affecting an investment

While there is progress in solving these chellenges, these questions still require deep expertise.

Advisers also need to be able to help clients work out their own ESG needs.

Murray Ackman: Ignore the billionaires – diversity, equity and inclusion are good for investors

US billionaires seem to be picking fights with big brands and civil rights groups over whether corporate diversity, equity and inclusion (DEI) policies are a negative.

Tesla’s Elon Musk, hedge fund manager Bill Ackman and Lululemon founder Chip Wilson have recently criticised DEI as discriminatory or even responsible for aircraft malfunctions.

“DEI must DIE,” said Musk on his X social network. Does he have a point?

It is true that many businesses think about DEI in a flawed way, writes Pendal ESG credit analyst Murray Ackman.

For example, DEI policies often focus on the needs of minority groups, while majorities are not always adequately considered.

“Organisational settings should allow all talent to flourish – including ‘majority talent’,” says Murray.

But there are plenty of studies – including from Pereptual’s Regnan sustainable investing business – suggesting DEI can drive business outperformance. And it is still a good indicator of how well a company is managing risk.

New guidelines warn investors away from ‘nature-negative’ companies

More than half of global GDP depends on natural resources – and these days investors are well aware of biodiversity risk when making portfolio decisions.

Now a group of companies representing sectors exposed to the impact of nature loss is guiding investors away from what they call “nature-negative outcomes” towards “nature-positive outcomes”.

The Australian-backed Taskforce on Nature-related Financial Disclosures is made up of 40 organisations in agribusiness, the blue economy, food and beverage, mining, construction and infrastructure.

Last month, the taskforce issued a set of guidelines which aims to integrate nature into decision-making and give organisations a complete picture of their environmental risks, says Pendal ESG credit analyst Murray Ackman.

“Biodiversity should be considered in managing business risks, and also in terms of system-wide risks,” says Murray. “It can be seen as a proxy for resilience.

“Companies that have an understanding of their biodiversity risk are more likely to have a multi-faceted understanding of all their risks.”

Why ‘true’ social bonds are in short supply

Most social bonds investors have the same aim: to make money while making a positive difference in society.

An example is the National Housing Finance and Investment Corporation, which last year issued $200 million in social bonds, making returns for investors while providing cheap funding for social and affordable homes.

But not all social bonds are equal when it comes to use of proceeds, cautions Murray Ackman, a credit ESG analyst with Pendal’s income and fixed interest team.

Pendal takes a relatively refined view, focusing on social bonds where the proceeds benefit the underprivileged.
Social bonds “don’t always meet our criteria”, says Ackman.

“For example, in the Netherlands around 70 per cent of the population is eligible for social housing. So, a Dutch Housing Authority ‘social bond’ isn’t going to fit our criteria.

“Our view is that a social bond should be an instrument to serve the underprivileged in society.”