When Regimes Shift, So Should Portfolios

East Coast Capital Management

September 2025

Funds operated by this manager:

ECCM Systematic Trend Fund

Hedge Clippings | Friday, 03 October 2025

At its board meeting this week, the RBA kept the cash rate steady at 3.60 per cent - exactly as expected. In fact, so widely anticipated was the decision that it barely rated more than a passing mention in the media. What caught the RBA's attention was last week's partial monthly inflation number for August, which ticked up to 3.0 per cent - right at the top of their 2-3% target range. That result raises the prospect that the outcome for the full September quarter CPI, due out on October 29 (just in time for the Cup Day meeting), could spoil the party for homeowners still hoping for relief.

Governor Michele Bullock avoided conceding that inflation is on the rise, instead noting more cautiously that "the decline in underlying inflation has slowed." In doing so, she sidestepped any suggestion that the board had jumped the gun by cutting rates in August. She did, however, stress that outside the strong and steady labour market, the broader outlook remains uncertain, but that the RBA remains well placed to respond decisively to local and global developments as needed - giving her cover to move rates in either direction.

That said, if the RBA's next move is up, it will certainly make headlines - and dent the wallets of mortgage holders who have only just banked some repayment relief. Our take is that reversing the direction of rates after three cuts is the last thing the RBA will want to do, so if the September quarter CPI does disappoint, they'll likely hold them steady for longer. Looking ahead, we don't see inflation falling a great deal further, so the best borrowers can realistically hope for is one more cut before Christmas, and if they're very lucky, one more after that.

Adding to Bullock's sense of uncertainty is the outlook offshore. In the US, Donald Trump's tariff policies continue to fuel concerns about inflation, but that's now being compounded by the impact of yet another US government shutdown - with no one quite sure how long this one will drag on. History suggests they're getting longer: Trump's previous effort in his first term lasted 35 days, Clinton's in 1995-96 ran 21 days, and Obama's in 2013 went for 16 days. Go back further, and the tally is just as messy: Reagan presided over eight shutdowns for a total of 14 days, Carter had five for 56, Clinton had two for 26, and this is Trump's fourth - already 40 days in total, and counting.

Beyond the trivia, and the cost to jobs and the economy, the potential is that Jerome Powell and his colleagues at the Fed risk being left without the economic data they need to frame their interest rate decisions. And if central banks are flying blind, that's when investors should fasten their seatbelts.

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Equities can continue grinding higher

if these risks remain contained

Pendal

September 2025

5 minutes read time

Historically high valuations don't mean markets cannot keep going up. Crispin Murray explains what's driving markets - and the risks to watch for

EQUITY markets are trading at historical highs - but can continue grinding higher if key risks facing the US economy remain contained, says Pendal's head of equities Crispin Murray in a new webinar.

In the US, the S&P 500 is trading at about 23 times earnings, while the NASDAQ is around 28 times.

"That's right at the high end of those historic ranges," says Murray in his latest Beyond The Numbers bi-annual ASX outlook.

"It means markets are vulnerable if there is a dramatic change - whether it's earnings or the economy."

That said, valuations are not uniform across the market.

Excluding the five-biggest names reduces the S&P 500's PE to about 21 times - still high, but not extreme - while an equal�'weighted S&P 500 sits closer to 17 times, near historical averages, says Murray.

"That's telling you that a large part of this US market is not excessively valued, and it's very much a concentration in those tech-related names."

Meanwhile Australian shares powered 11 per cent higher over the six months to September, despite dipping into correction territory during that period as growth and liquidity outweighed policy uncertainty.

(Scroll down for Crispin's take on ASX reporting season.)

"It's certainly been a roller coaster ... that just highlights how the market is not particularly efficient in pricing," says Murray.

"At Pendal, we believe you make money by anticipating change and taking advantage of a market that has become very focused on the short term."

The risks to watch

Risks to the current market rating include:

• The looming threat of stagflation driven by policy headwinds

• Market concerns about US fiscal sustainability

• A risk that the AI boom fades

• Any potential removal of liquidity if retail flows slow or corporations reduce stock buy-backs

US government policy is at the core of the challenges.

Lower immigration is curbing population growth - a key driver of GDP - while tariffs are feeding through to prices, with roughly 40 per cent of their impact already visible in consumer prices, says Murray.

Meanwhile, monetary policy remains very tight.

"What that means is the outlook for the economy is quite different today than where it was at the beginning of this year.

"Looking into the fourth quarter, US growth is set to be below 1 per cent, inflation heading towards 4 per cent.

"It does look a lot like stagflation - and clearly, if we did have that tipping point in the economy, earnings go down, and the market won't sustain its current multiple."

Positive drivers remain in place

Still, that scenario appears unlikely.

"Corporate profitability continues to be good," points out Murray.

"This is important, because it means companies still have the ability to invest, and it also means that they're less likely to undertake substantial job-cutting programs.

"There's been enormous growth in the data centre and the power area of the economy - and that is helping prop up growth.

"Consumers have seen their net worth rising dramatically over the last few years, and that's estimated to support growth by between half and 1 per cent.

"And the final issue, which I think is probably the most important for now, is that the policy environment - which has been negative - is turning more constructive for growth.

"Five rate cuts are priced into the market, fiscal stimulus from the budget Bill next year is estimated to be close to 1 per cent positive, and clearly the US has been set up to the electoral cycle and ensuring the economy is in good shape ahead of the mid-terms.

"So, we don't think we do cross that tipping point, but it's clearly a major risk."

Lessons from ASX reporting season

In Australia, several themes stood out in the recent full-year ASX earnings season, including high levels of post-result volatility.

Somewhat unusually, the best-performing sectors during reporting season were not correlated to earnings.

Resources stocks were buoyed by optimism around China, while gold stocks lifted on concerns about government financing and central bank buying.

On the negative side, earnings were a driver of underperformance - led by building materials and steel where ASX companies with exposure to the US suffered weakening demand.

"Overall, earnings revisions weren't that exciting but when you dig down into it, most of the negatives were quite stock specific.

"It was companies that were not necessarily executing as well as they should [or] those exposed to the US.

"Outside of those names, though, most companies were either reasonably comfortable with the outlook or actually quite positive.

"So generally speaking, I think the outlook for earnings is stable to slightly positive as a result of what we saw in that earnings season.

"We still get mid-single-digit earnings growth, which means returns aren't exciting in Australia, but we still get a reasonable outcome."

Data centres a good way to play AI

One question on investors' minds is the prospect of the AI boom continuing.

"There is scepticism that the money being spent is not generating a return - and it's something we're watching carefully," Murray says.

"But one thing I'll emphasise is that the spend is real - and the people who are investing have the money.

"These hyper scalers - Amazon, Google, Microsoft, Meta and Oracle - have the financing to spend this money, and they believe they are getting a return.

"Consumers are also increasingly using these products."

Murray says the world has a shortage of "compute" - an industry term for the processing power, memory and storage needed to perform calculations and run applications - and this is an opportunity for Australia and particularly local data centres.

"One of the challenges with investing and building data centres in Australia is access to land, access to capability, getting planning approval and getting power access.

"These things mean that there is a structural under-supply of capacity in Australia, and the companies that can deliver it are very well positioned.

"We still believe the market underestimates the confluence of not just AI demand, but the requirement for companies to move to the cloud to enable themselves to take part in utilising AI to run their businesses better."

Funds operated by this manager:

Pendal MicroCap Opportunities Fund , Pendal Global Select Fund - Class R , Pendal Sustainable Australian Fixed Interest Fund - Class R , Pendal Focus Australian Share Fund , Pendal Horizon Sustainable Australian Share Fund , Regnan Credit Impact Trust Fund , Pendal Sustainable Australian Share Fund , Pendal Sustainable Balanced Fund - Class R , Pendal Multi-Asset Target Return 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

Turning turbulence into triumph: 5 themes reshaping

the investment landscape

Alphinity Investment Management 

September 2025

3 minutes read time

There are five powerful themes reshaping the investment landscape and driving corporate performance, creating winners and losers across global markets.

The AI revolution stands as the defining narrative across global markets, driving fundamental shifts in capital allocation and valuation frameworks. But there are far more factors shaping the current investing landscape.

Lower interest rate expectations and regulatory reform have reignited investor confidence, while US President Donald Trump's tariff agenda has injected supply chain uncertainty and continues to impact both corporate margins and consumer spending power. Meanwhile, geopolitical tensions are fuelling unprecedented defence spending and strategic consolidation as companies position for an increasingly fragmented world.

These converging forces created a tale of two markets during the recent 2Q25 US earnings season.

On the surface, the numbers appeared robust: over 80 per cent of US companies beat earnings expectations, guidance upgrades accelerated to double the 1Q25 rate, and consensus pushed earnings growth forecasts to an impressive 11 per cent and 13 per cent for 2025 and 2026, respectively. Yet beneath this veneer of strength lay a more complex reality. Earnings growth concentrated heavily within just three sectors and performance diverged sharply among industry peers.

US 2Q25 Reporting Season - Strong overall growth of 12%, but largely driven by 3 sectors

This polarised landscape has created an unforgiving environment where companies skilfully navigating these themes are thriving, while those stumbling face harsh consequences.

Five themes defining corporate performance

We see these five powerful themes reshaping the investment landscape and these only further evolved and intensified through the latest US earnings cycle:

1. AI from speculation to implementation. While the mentions of AI remain near historic highs, business language has evolved from speculative possibilities to concrete implementation. Management teams are increasingly providing specific use cases rather than broad theoretical benefits, though most companies acknowledge they remain in the early stages of realising meaningful productivity gains.

2. Defence spending accelerates. Global defence expenditure has surged amid a pronounced strategic pivot towards deterrence capabilities and military modernisation. NATO member commitments are escalating from 2 per cent to a targeted 3.5-5 per cent of gross domestic product by 2030, exemplified by Germany's €500 billion defence infrastructure fund. Global defence spending is projected to expand at 9 per cent annually from a $2.5 trillion baseline.

3. Adapting to the tariff reality. The shift from uncertainty to operational reality has prompted comprehensive corporate responses across multiple fronts. Three-quarters of affected companies are actively restructuring supply chains and renegotiating supplier agreements, while over half are implementing customer price pass-throughs. Strategic import frontloading ahead of tariffs has complicated near-term financial interpretations.

4. Strategic M&A consolidation. Acquisition activity has intensified with a pronounced focus on strategic technology capabilities rather than traditional scale benefits. Well-capitalised companies with proven execution are pursuing disciplined transactions targeting AI competencies, industrial consolidation opportunities, and infrastructure enhancement despite broader economic uncertainties.

5. Consumers not out the woods yet. Despite some recovery from the prior quarter's sharp deterioration, consumer sentiment remains fragile with management guidance pointing to a challenging second-half outlook. Real consumer spending growth is projected at just 1 per cent annualised through H2 2025, driven by softer employment growth, tariff-induced inflation, and scheduled transfer payment reductions. This environment favours companies with defensive, non-discretionary revenue streams as price-sensitive consumers prioritise essential spending.

Navigating complexity

Today's investment landscape rewards execution excellence while punishing missteps, as these five forces - AI implementation, defence modernisation, tariff adaptation, strategic M&A, and consumer resilience - create clear winners and losers even within sectors.

Success requires identifying companies that transform these forces into competitive advantages. As earnings dispersion widens and market patience diminishes, broad sector exposure is insufficient.

Investors must focus on best-in-class operators with proven execution capabilities and structural competitive advantages that benefit from, rather than merely endure, the forces reshaping the global economy.

Funds operated by this manager:

Alphinity Australian Share Fund , Alphinity Concentrated Australian Share Fund , Alphinity Sustainable Share Fund , Alphinity Global Equity Fund , Alphinity Global Sustainable Equity Fund

This material has been prepared by Alphinity Investment Management ABN 12 140 833 709 AFSL 356 895 (Alphinity). It is general information only and is not intended to provide you with financial advice or take into account your objectives, financial situation or needs. To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information. Any projections are based on assumptions which we believe are reasonable but are subject to change and should not be relied upon. Past performance is not a reliable indicator of future performance. Neither any particular rate of return nor capital invested are guaranteed.

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Hedge Clippings | 26 September 2025 - Helicopter view of the Economy

Across the Pacific, the US economy surprised to the upside in the second quarter. Revised figures show GDP running at an annualised 3.8%, well ahead of the initial 3.3% estimate and the fastest clip in almost two years. The driver was the consumer, with spending up 2.5%, supported by an upswing in investment in intellectual property - particularly software and AI.

Not all sectors pulled their weight, but financial services, information technology, and manufacturing made solid contributions. Economists, however, were quick to point out the obvious caveat: while the data looks strong, its durability is less clear. A still-uncertain trade policy environment, persistent tariff disputes, and the shadow of slowing global demand could yet put a lid on momentum, while the previous week's soft employment numbers, and the upward inflation pressures remain.

Back home, the inflation story also continues to play out. The monthly Consumer Price Index (CPI) indicator rose 3.0% in the 12 months to August 2025, according to the ABS - up from 2.8% in July, and the highest annual rate since July 2024. Housing (+4.5%), food and non-alcoholic beverages (+3.0%), and alcohol and tobacco (+6.0%) were the largest contributors.

The annual trimmed mean inflation rate edged down slightly to 2.6% in August from 2.7% in July, but the CPI excluding volatile items and holiday travel accelerated to 3.4%, compared with 3.2% previously. Housing inflation, in particular, reflected higher electricity costs, with the annual rise skewed by the expiry of one-off rebates. In August last year, households in Queensland, WA and Tasmania were cushioned by State Government rebates of $1000, $400, and $250 respectively. With those programs now finished, out-of-pocket costs have risen, leaving electricity prices up 5.9% year-on-year once rebates are stripped out.

On a monthly basis, however, electricity costs fell 6.3% in August, mainly due to NSW and ACT households receiving the first payments of the extended Commonwealth Energy Bill Relief Fund rebates. The shifting landscape of rebates makes the data noisy, and while the ABS' monthly indicator grabs headlines, the RBA remains more focused on the quarterly numbers - with the September quarter CPI not due until the end of October.

Which begs the question: what will the RBA Board do when it meets next week? Having just cut rates by 0.25% at their last meeting, was the Board a little too quick to bow to pressure from the media and the market? Our experts - Nick Chaplin (Seed Funds Management) and Renny Ellis (Arculus) - might be tempted to say, "I told you so." For now, it seems inevitable that the Board will sit on its hands until at least their November meeting. With some banks and economists starting to backtrack on their expectations of multiple cuts before Christmas, the latest inflation uptick adds an uncomfortable wrinkle.

Maybe only one at the most?

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