An upgrade to the financial system's plumbing Pendal April 2024

THE plumbing of Australia's financial system is a bit like the plumbing in your house - of little interest until something goes wrong. For those few who do take an interest in the RBA and our financial system's plumbing, the Assistant Governor Chris Kent gave a speech on Tuesday last week: "The Future of Monetary Policy Implementation". By the end of this year, he explained, Australia will have a new system called "Ample Reserves". In short, the central bank will set a price for "Open Market Operations" (repos) and offer unlimited quantity - instead of setting the quantity and letting the market determine the price, as was the previous system. Banks have been flush (so to speak) with liquidity since early 2020, courtesy of RBA quantitative easing and the term funding facility over the pandemic. These are now slowly rolling off, reducing excess reserves in the system. The RBA is worried that the pre-pandemic "corridor and low reserve" system may not work so well. That system relied on the RBA accurately forecasting government inflows and outflows into the system (think taxes and welfare payments) and offsetting them by adding or draining the cash back into the system through repos and reverse repos. You lend them securities and they give you cash that you then pay interest on or vice versa. The corridor meant banks could always borrow or lend unlimited funds with the RBA at 0.25% above or below target cash, but hardly ever did. With Ample Reserves, banks can go to the RBA and offer unlimited securities to repo in return for cash (OMOs) at a pre-set margin to the official cash rate. The price and frequency of these operations are yet to be determined but look like at least weekly and something like the target cash rate plus five basis points (currently 4.40%). The RBA will release more details later in the year after market consultations. So, what does this mean for investors? The good news for leveraged portfolios is that there is now an "ample" supply of central bank liquidity at a reasonable price. For investors, the good news is that overnight cash should eventually drift back towards target cash levels rather than sit at the ES level. This would mean closer to 4.35% than 4.25% at current cash targets. The bad news for investors, however, is that bank bills are less likely to drift too far above cash again. Also, for relative value funds, government bond baskets (where bonds trade to futures) are less likely to get too cheap again. Overall, it is a new era for the RBA. It is not only temporarily moving out of the asbestos-ridden 65 Martin Place while expensive and long overdue renovations are undertaken, but it now has a new way of ensuring system liquidity is always rock solid. Author: Tim Hext, Pendal portfolio manager and head of government bond strategies

Funds operated by this manager: Pendal Focus Australian Share Fund, Pendal Global Select Fund - Class R, Pendal Horizon Sustainable Australian Share Fund, Pendal MicroCap Opportunities Fund, Pendal Sustainable Australian Fixed Interest Fund - Class R, Regnan Global Equity Impact Solutions Fund - Class R, Regnan Credit Impact Trust Fund

This information has been prepared by Pendal Fund Services Limited (PFSL) ABN 13 161 249 332, AFSL No 431426 and is current as at December 8, 2021. PFSL is the responsible entity and issuer of units in the Pendal Multi-Asset Target Return Fund (Fund) ARSN: 623 987 968. A product disclosure statement (PDS) is available for the Fund and can be obtained by calling 1300 346 821 or visiting www.pendalgroup.com. The Target Market Determination (TMD) for the Fund is available at www.pendalgroup.com/ddo. You should obtain and consider the PDS and the TMD before deciding whether to acquire, continue to hold or dispose of units in the Fund. An investment in the Fund or any of the funds referred to in this web page is subject to investment risk, including possible delays in repayment of withdrawal proceeds and loss of income and principal invested. This information is for general purposes only, should not be considered as a comprehensive statement on any matter and should not be relied upon as such. It has been prepared without taking into account any recipient's personal objectives, financial situation or needs. Because of this, recipients should, before acting on this information, consider its appropriateness having regard to their individual objectives, financial situation and needs. This information is not to be regarded as a securities recommendation. The information may contain material provided by third parties, is given in good faith and has been derived from sources believed to be accurate as at its issue date. While such material is published with necessary permission, and while all reasonable care has been taken to ensure that the information is complete and correct, to the maximum extent permitted by law neither PFSL nor any company in the Pendal group accepts any responsibility or liability for the accuracy or completeness of this information. Performance figures are calculated in accordance with the Financial Services Council (FSC) standards. Performance data (post-fee) assumes reinvestment of distributions and is calculated using exit prices, net of management costs. Performance data (pre-fee) is calculated by adding back management costs to the post-fee performance. Past performance is not a reliable indicator of future performance. Any projections are predictive only and should not be relied upon when making an investment decision or recommendation. Whilst we have used every effort to ensure that the assumptions on which the projections are based are reasonable, the projections may be based on incorrect assumptions or may not take into account known or unknown risks and uncertainties. The actual results may differ materially from these projections. For more information, please call Customer Relations on 1300 346 821 8am to 6pm (Sydney time) or visit our website www.pendalgroup.com

Tim Hext: What we learned from the latest GDP data Pendal March 2024

The December-quarter GDP numbers just stopped short of the "no-growth" scenario we were slowly sliding towards last year. Pendal's head of government bond strategies  explains Tim Hext what it means for markets Weakness largely derived from consumer spending On a nominal basis, the picture looks better Why bonds, why now?  THE December-quarter GDP numbers just stopped short of the "no-growth" scenario we were slowly sliding towards last year. Q4 GDP came in on forecast at just 0.2%, as you can see in the ABS graph below. After 2.3% growth in 2022, 2023 finishes with GDP at 1.6%. Source: ABS, 2024 In per capita terms, we went backwards for the third quarter in a row (-0.3% for the quarter) and are down 2.4% over 2023. The weakness is largely from consumer spending, which is going almost nowhere - this was up 0.1% for the quarter and 0.1% for the year. Remember, this was a year where almost 600,000 people entered the country so, on average, we are all spending less than in 2022. Interestingly, we are earning more, but it is all being swallowed up by inflation, interest rates and tax creep. In fact, compensation of employees was up 8.1% in 2023, but taxes paid 11.5%. The Stage 3 tax cuts (beginning July) will only partly remedy this. If you feel like money is going out just as fast as it comes in, you have good reason. The GDP you hear reported is a volume measure (called chain volume) of output for the economy. Most of us think in nominal terms. On a nominal basis things look better - with GDP at 1.4% for Q4 and 4.4% for 2023. Higher prices and improving terms of trade has helped cushion the blow in the real economy. Government and business investment propping up the economy So, if consumer spending - which makes up 50% of the economy - is flatlining, then where is the modest growth coming from? Government spending and investment continues to be strong. Government spending was up 0.6% for the quarter and 2.7% for the year, while government investment was slightly down for the quarter but up a massive 13.6% in 2023. Private investment was up as well, but modest overall. Data centres and warehouses are driving solid growth. Concerningly though, dwelling investment was down 3.8% for the quarter and down 3.1% on the year. Hopes of a building boom to help the housing shortage fly in the face of higher interest rates. Rents go up, so inflation goes up, so interest rates go up, so housing investment falls - if you follow the logic of rate hikes to tackle rental inflation, you are smarter than me. Hours worked still falling The GDP numbers also include data on hours worked. This fell for the second quarter in a row and is now down 1% from mid-year. The RBA will take some comfort that firms are responding to slower conditions by reducing hours of existing employees and not hiring new ones, rather through layoffs - at least for now. So, what does this mean for markets? First of all, the rate hikes have worked. While the fixed rate cliff has been more of a speed bump, the RBA will be pleased that higher rates are reducing demand in the economy. Lower immigration in the year ahead will also help. At the same time, the supply side of the economy is another year away from the pandemic and has now largely normalised. This will give the RBA further comfort that its path back to inflation below 3% is realistic and achievable. This, in turn, opens the door to rate cuts later in the year. We still think three cuts - in September, November and December - are realistic. By then, the US Federal Reserve should be well into rate cuts, and inflation - while sticky around 3% - would be considered under control. In turn, GDP would be allowed to push back up towards 2% or above without threatening the inflation outlook - and this would be a good outcome for all and meet the objectives of the RBA. Author: Tim Hext

Funds operated by this manager: Pendal Focus Australian Share Fund, Pendal Global Select Fund - Class R, Pendal Horizon Sustainable Australian Share Fund, Pendal MicroCap Opportunities Fund, Pendal Sustainable Australian Fixed Interest Fund - Class R, Regnan Global Equity Impact Solutions Fund - Class R, Regnan Credit Impact Trust Fund

This information has been prepared by Pendal Fund Services Limited (PFSL) ABN 13 161 249 332, AFSL No 431426 and is current as at December 8, 2021. PFSL is the responsible entity and issuer of units in the Pendal Multi-Asset Target Return Fund (Fund) ARSN: 623 987 968. A product disclosure statement (PDS) is available for the Fund and can be obtained by calling 1300 346 821 or visiting www.pendalgroup.com. The Target Market Determination (TMD) for the Fund is available at www.pendalgroup.com/ddo. You should obtain and consider the PDS and the TMD before deciding whether to acquire, continue to hold or dispose of units in the Fund. An investment in the Fund or any of the funds referred to in this web page is subject to investment risk, including possible delays in repayment of withdrawal proceeds and loss of income and principal invested. This information is for general purposes only, should not be considered as a comprehensive statement on any matter and should not be relied upon as such. It has been prepared without taking into account any recipient's personal objectives, financial situation or needs. Because of this, recipients should, before acting on this information, consider its appropriateness having regard to their individual objectives, financial situation and needs. This information is not to be regarded as a securities recommendation. The information may contain material provided by third parties, is given in good faith and has been derived from sources believed to be accurate as at its issue date. While such material is published with necessary permission, and while all reasonable care has been taken to ensure that the information is complete and correct, to the maximum extent permitted by law neither PFSL nor any company in the Pendal group accepts any responsibility or liability for the accuracy or completeness of this information. Performance figures are calculated in accordance with the Financial Services Council (FSC) standards. Performance data (post-fee) assumes reinvestment of distributions and is calculated using exit prices, net of management costs. Performance data (pre-fee) is calculated by adding back management costs to the post-fee performance. Past performance is not a reliable indicator of future performance. Any projections are predictive only and should not be relied upon when making an investment decision or recommendation. Whilst we have used every effort to ensure that the assumptions on which the projections are based are reasonable, the projections may be based on incorrect assumptions or may not take into account known or unknown risks and uncertainties. The actual results may differ materially from these projections. For more information, please call Customer Relations on 1300 346 821 8am to 6pm (Sydney time) or visit our website www.pendalgroup.com

Murray Ackman: Ignore the billionaires - diversity, equity and inclusion are good for investors Pendal February 2024

AMERICAN billionaires seem to be picking fights with big brands and civil rights groups over whether corporate diversity, equity and inclusion (DEI) policies are discriminatory. Or even whether they cause aircraft malfunctions. If you've been following the "woke backlash", you'd be familiar with recent flash points such as the campaign against Harvard's first Black female president Claudine Gay. Tesla's Elon Musk, hedge fund manager Bill Ackman and Lululemon founder Chip Wilson have all been engaging in civil discourse on social media recently, expressing anti-DEI views. Musk went as far as suggesting that Boeing, fresh from having a fuselage panel fall off mid-flight last month, was prioritising diversity over safety. That drew a swift rebuke from civil rights groups. "DEI must DIE," Musk said recently on his X social network. "The point was to end discrimination, not replace it with different discrimination." This week the Tesla CEO erased mention of DEI in the electric vehicle maker's corporate filings. Do DEI critics have a point? And what does that mean for investors and companies? What are the concerns about DEI? Musk's criticism of Boeing centred around the impact and unintended consequences of connecting executive pay to diversity targets and ESG metrics. At the start of 2022 Boeing altered its bonus scheme, rewarding executives who hit certain climate and DEI targets. Boeing is certainly not alone here. In 2011, just 1 per cent of listed companies had such a policy. By 2021 it was 38 per cent, and the trend continues. Supporters argue this is positive for companies and shareholders. The idea is that such policies safeguard future economic results from risks while aligning the managerial objectives with shareholder interests. Sharemarket analysts look for such policies as a sign that a business cares about a particular issue. Who's right? Does linking executive pay to diversity improve a business? Or are such corporate DEI policies a sign of excess? There are plenty of studies - including from Pereptual's Regnan sustainable investing business - suggesting DEI can drive business outperformance. A 2021 study from sustainable investing leader Regnan found that DEI - and especially equity and inclusion - can drive business outperformance. A series of McKinsey & Company reports found "not only that the [DEI] business case remains robust but also that the relationship between diversity on executive teams and the likelihood of financial outperformance has strengthened over time". Yet Regnan also found many businesses think about diversity and inclusion in a flawed way. For example, DEI policies often focus on the needs of minority groups, while majorities are not always adequately considered. For investors and companies alike, we believe organisational settings should allow all talent to flourish - including 'majority talent' as well as talent that is traditionally under-represented. These are essential pre-requisites for an equitable and inclusive workplace. Businesses benefit from fair employment practices, supportive cultures and open decision-making. What it means for investors While there is now a lot of ESG measurement going on inside companies, it's fair to say there could be a deeper discussion about how inclusive culture can be good for a business. But is Elon Musk right to say there is undue focus placed on DEI? The billionaire's complaints could make sense in the context of a boot-strapped start-up operating from the proverbial garage. But it feels provocative coming from the CEO of a business with one of the highest market caps in history. Based on our experience at Pendal, businesses clearly demonstrate what they care about by what they report. And that is useful for investors. Investors should expect to see comprehensive DE&I plans from companies. And take caution with companies that ignore these responsibilities. And they should look beyond the reported diversity numbers to understand if a business has the right structure to allow for diversity and growth. While it's entertaining to see billionaires argue among themselves, investors must understand how a company thinks about diversity and inclusion if they want to understand whether it is managing risks. Author: Murray Ackman

Funds operated by this manager: Pendal Focus Australian Share Fund, Pendal Global Select Fund - Class R, Pendal Horizon Sustainable Australian Share Fund, Pendal MicroCap Opportunities Fund, Pendal Sustainable Australian Fixed Interest Fund - Class R, Regnan Global Equity Impact Solutions Fund - Class R, Regnan Credit Impact Trust Fund

This information has been prepared by Pendal Fund Services Limited (PFSL) ABN 13 161 249 332, AFSL No 431426 and is current as at December 8, 2021. PFSL is the responsible entity and issuer of units in the Pendal Multi-Asset Target Return Fund (Fund) ARSN: 623 987 968. A product disclosure statement (PDS) is available for the Fund and can be obtained by calling 1300 346 821 or visiting www.pendalgroup.com. The Target Market Determination (TMD) for the Fund is available at www.pendalgroup.com/ddo. You should obtain and consider the PDS and the TMD before deciding whether to acquire, continue to hold or dispose of units in the Fund. An investment in the Fund or any of the funds referred to in this web page is subject to investment risk, including possible delays in repayment of withdrawal proceeds and loss of income and principal invested. This information is for general purposes only, should not be considered as a comprehensive statement on any matter and should not be relied upon as such. It has been prepared without taking into account any recipient's personal objectives, financial situation or needs. Because of this, recipients should, before acting on this information, consider its appropriateness having regard to their individual objectives, financial situation and needs. This information is not to be regarded as a securities recommendation. The information may contain material provided by third parties, is given in good faith and has been derived from sources believed to be accurate as at its issue date. While such material is published with necessary permission, and while all reasonable care has been taken to ensure that the information is complete and correct, to the maximum extent permitted by law neither PFSL nor any company in the Pendal group accepts any responsibility or liability for the accuracy or completeness of this information. Performance figures are calculated in accordance with the Financial Services Council (FSC) standards. Performance data (post-fee) assumes reinvestment of distributions and is calculated using exit prices, net of management costs. Performance data (pre-fee) is calculated by adding back management costs to the post-fee performance. Past performance is not a reliable indicator of future performance. Any projections are predictive only and should not be relied upon when making an investment decision or recommendation. Whilst we have used every effort to ensure that the assumptions on which the projections are based are reasonable, the projections may be based on incorrect assumptions or may not take into account known or unknown risks and uncertainties. The actual results may differ materially from these projections. For more information, please call Customer Relations on 1300 346 821 8am to 6pm (Sydney time) or visit our website www.pendalgroup.com