The Point

Brenton Saunders: ASX mid-caps offer exposure to fast-growing sectors such as battery metals

Australia finally has a national strategy to “encourage greater use of cleaner, cheaper-to-run electric vehicles”.

The new ALP policy, alongside similar plans around the world, should help boost demand for “battery metals” such as lithium, produced by a range of ASX-listed miners.

What’s the best way to get exposure to quality stocks in this sector?

Pendal PM Brenton Saunders argues in favour of Aussie mid-cap portfolios.

Mid-cap portfolios are typically less concentrated and offer access to fast-growing industries such as cloud computing, medical innovation and battery metals.

Medium-sized companies tend to offer higher earnings growth than large-cap companies, often with less risk than small caps, says Brenton.

Brenton manages Pendal MidCap Fund, which invests in the 100 biggest companies outside the ASX50, with market caps ranging from around $1 billion to $10 billion.

“It’s really the sweet spot of corporate Australia. It’s a very useful addition to any balanced portfolio.”

Brenton and Australian lithium industry pioneer Ken Brinsden explained the opportunities in a recent webinar.

Aussie equities: What we can expect from earnings in the second half

Australia’s economic cycle has gone on longer than expected – and it showed in the recently ended ASX earnings season.

Somewhat surprisingly, most parts of the economy are still in reasonably good shape despite a string of interest rate rises.

The strong jobs market is a factor, helping prop up consumer spending.

“But the expectation is that higher interest rates will likely hurt earnings in the rest of the financial year,” says Brenton Saunders, who manages Pendal MidCap Fund.

“Across the market as a whole, revenue beats were pretty widespread even though many companies missed earnings forecasts at the bottom line. Revenue beats were much higher than profit beats.

“We saw profit margins reduce and that relates to higher costs. In many cases, despite high product price increases, costs increased at a faster rate, resulting in margin pressure.”

Why passive investing isn’t as passive as you may think

Passive investing has become popular due to low costs and high diversification.

But it often means owning poor performers that an active manager can avoid, argues Pendal’s Samir Mehta.

Many investors fail to appreciate the process of selecting securities for an index is an active investment process that carries a level of risk, says Samir, who manages Pendal Asian Share Fund.

“Investors should think about this presumption that passive investment is really passive.

“There’s a group of people deciding which stock goes into which index, in what proportion — and there is a timing element as well.

Samir points to Tesla which was added to the S&P 500 in 2020 after a ten-fold share price rise. Index fund investors who passively bought the shares then are now down on their investments.

“Active managers contribute not only by identifying good businesses, but also by taking a view on what not to own,” says Samir.

Brenton Saunders: what to watch in ASX earnings season

Company outlook statements will heavily influence share performance in the ASX half-year earnings season, says Pendal’s Brenton Saunders.

Australian listed companies will report results for the December half over the next few weeks.

Reporting season comes against a backdrop of uncertain global macro-economic data which has the markets on edge as investors try to assess the outlook for inflation and interest rates.

“Most of the focus is going to be on the outlook statements rather than the results companies produce on the day, says Brenton, who manages Pendal MidCaps Fund.

Companies with strong retrospective earnings results and weak outlook statements could be sold off by a market “trying understand what 2023-24 will look like”, says Brenton.

“In general, we expect a complicated reporting season and no real trends.”

Samir Mehta: Protectionist Indonesia is looking attractive in 2023

Investors should take a new look at Indonesia, where export restrictions are driving new domestic industries, says Pendal’s Samir Mehta.

The protectionist policies of President Joko Widodo are driving transformation in a country once dubbed the ‘sick man of Asia’, says Samir, who manages Pendal Asian Share Fund.

A ban on nickel exports has encouraged a domestic stainless steel industry that’s now among the world’s biggest exporters.

A ban on exporting the bauxite used to make aluminium will come into force this year. Capturing the supply chain for electric vehicle batteries is also on the Indonesian agenda.

Indonesia’s trade balance could be in a sustained surplus while foreign direct investment rises, says Samir.

Lower interest rates, reduced currency volatility and higher growth could compound benefits for investors.

How long will the ASX keep going? Here are the factors to watch

It’s been a strong start to the year for the ASX. What will determine how long it keeps going?

Three things are driving a rapid turnaround from last year, says Brenton Saunders, who leads Pendal MidCap Fund:

• The faster-than-expected re-opening of China
• Signs that inflation is reaching a peak
• Increasing evidence that a hard-landing global recession can be avoided

But there are still clouds over the global economy including the prospect of a downturn later this year and the uncertainty of the Russia-Ukraine conflict.

“This year is probably going to be quite choppy, because we have improving longer-term expectations but still with the prospect of some potentially severe short-term implications.

“We still think there’s a fairly high level of binary risk out there that is yet to be quantified.

“Earnings is still the area that we’re most worried about — ratings are starting to improve but there’s still material risk around earnings.”

Brenton Saunders: What you should really be watching as markets rally

The market’s up since the start of October. How should investors interpret this?

Rallies are a sign the market is looking for a slowdown in rate rises. But investors are better off relying on hard economic data than trying to pick a pivot point, says Pendal’s Brenton Saunders.

With labour markets still strong and inflation rising, it is likely too early to suggest central banks are changing their approach, says Brenton, who manages Pendal MidCap Fund.

“Many of the drivers of inflation continue to run hot — and more importantly headline and core inflation remain stronger than expected.

“The Fed has been incredibly clear in terms of their objectives of getting inflation under control.

“We have no reason to doubt them. It just feels like the market is trying to trough a little early.”

Keep an eye on jobs data and earnings downgrades, especially retail, housing and even resources, says Brenton.