The Point

What Aussie investors can learn from drama in European markets

Dramatic changes in European equity markets over the past six weeks — and energy prices over a longer time frame — provide poignant lessons for investors everywhere.

“It shows that investors, no matter where they are, always need to think about pricing power and relative resilience,” says Paul Wild, who runs a European equities fund at Pendal’s UK-based asset manager J O Hambro.

“The opportunity set for investors can change very quickly. In Europe it has shifted hugely since the beginning of the year and investors need to alter their stance,” Paul says.

“People in different parts of the earnings spectrum react differently. Household fuel bills will be more impactful on low-income households.”

Paul expects luxury demand to hold up better than other retail categories. “We’ve seen prices rising for jewellery and watches at the very high end.”

Healthcare is also less affected, demonstrated by the share prices of big drug companies. “Utilities as well because of the expansion of renewable assets, notwithstanding those more exposed to Russian gas exports.”

Brenton Saunders: What’s driving the ASX this week?

ASX midcaps: It’s a good time to focus on interest rate-sensitive growth stocks

Brenton Saunders: ASX gold sector shines, but investors must be selective

The ASX gold index is up about 20 per cent this year on the back of continued strength in the precious metal’s spot price. Can it keep going? And how best to get exposure via the ASX?

“Gold is being helped by elevated inflation and strong liquidity,” says Pendal PM Brenton Saunders.

Brenton manages Pendal’s midcap strategy and is also a geologist with experience in gold mining and gold-related equities. He’s long been an advocate for selected stocks in the ASX gold sector.

“Typically what happens in gold companies at this point of the cycle is they quickly repair balance sheet issues, then they generate cash and become acquisitive.”

But investors need to be selective. “Top-of-the-cycle acquisitions by gold companies generally end badly,” he cautions.

“The gold price is up 9 per cent in Australian dollar terms this year and a lot of ASX-listed gold stocks have done incredibly well in that time.

“Gold exposure has been incredibly helpful to our portfolio. We have long held a strong position, and it has all come together in the last three months.”

Brenton Saunders: Traditional energy sectors look like winners in a Trump world

Sweeping policy changes under a unified US Republican government signal significant shifts for investors, with traditional energy and nuclear set to benefit amid a slower path to rate cuts.

That’s the view of Brenton Saunders, who has more than 25 years of experience in resources. Brenton leads Pendal’s midcap strategy, which offers exposure to fast-growing ASX sectors.

“As a broad brush, you could see more of a reversion to traditional energy. There’s an expectation for more traditional oil and gas production, certainly in the US and the Gulf of Mexico,” he says.

“That should keep energy availability relatively elevated, which ultimately should benefit economic growth and the consumer.”

But geopolitical uncertainty means investors should be relatively conservative for now.

“Diversification is probably the most important part of the next three to six months.”

ASX mid caps: Global uncertainty calls for a balanced approach to investing

Right now equities investors are forced to consider a complex interplay of factors when making asset allocation decisions.

“Escalation of tensions in the Middle East has had a tangible impact on energy markets, raising concerns about inflation and causing bond yields to rise,” notes Pendal mid-cap equities portfolio manager Brenton Saunders.

Strong US jobs numbers are contributing to upward pressure on yields, while there is uncertainty about China’s stimulus plans.

“This has sparked a notable rotation in Australia, with investors shifting away from large-cap financials and growth stocks towards resources and value-oriented equities,” says Brenton.

In the face of these competing forces, Brenton emphasises the importance of a balanced portfolio approach.

“Our base view is that markets will remain strong through the end of the year, as interest rates are expected to come down, albeit slightly slower than previously anticipated,” he says.

“[But] it’s important not to have big macro tilts in your portfolio and to be able to produce steady returns through any outcome.”

ASX mid caps: Opportunities amid the noise

“Investing in companies that will be beneficiaries of an ongoing interest rate easing cycle – real estate investment trusts being an obvious one – along with long duration, high multiple sectors, especially the growth stocks, should provide rewards,” says Brenton Saunders, portfolio manager at Pendal’s MidCap Fund.

But that doesn’t mean investors should buy into all interest rate sensitive sectors.

“Discretionary retail is still a tough one to call. Some parts of it are doing really well and others are quite challenged,” he explains.

“Some of the deeper cyclicals, whether they be industrials or resources, will probably take longer to improve in a convincing way. Commodities will depend on the efficacy of ongoing Chinese stimulus, which to date has been unconvincing.”

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