The positive feedback loop we're expecting to see in emerging market economies

Pendal

June 2025

Uncertainty remains high in financial markets among participants and policy makers.

This uncertainty is driven by global trade policy and how it will affect growth, inflation and ultimately interest rate decisions (and market expectations of those decisions). The International Monetary Fund now believes today's tariff-driven environment is more challenging than the COVID era.

"[Early in the pandemic] central banks everywhere were moving in the same direction in the sense of easing monetary policy very quickly," IMF deputy Gita Gopinath said last week.

"But this time around the shock has differential effects."

Looking at previous cycles in emerging markets - especially considering the impact of a weaker US dollar and incoming capital flows - Pendal's EM team believes emerging markets are mostly in an extended period of cutting policy interest rates.

We believe this will be supportive of emerging economies and emerging equity markets.

Emerging markets cutting rates

Last year we saw rate cuts in many advanced economies as the 2022 inflation surge eased.

But this year global central banks have been more cautious, either in their statements or the speed or extent of rate cuts.

Why? Because volatility in trade policy creates significant uncertainty about growth and inflation.

In the emerging world, however, most central banks have continued cutting rates.

The 19 independent central banks in the MSCI Emerging Market Index members (Greece uses the Euro and the four Arabian Gulf nations have USD pegs) have delivered 24 policy rate cuts and only four hikes in the first five months of 2025.

(Of those hikes, three were in Brazil where economic growth remains very strong, and the other was in Turkey after three big cuts.)

A clear pattern

There is a clear pattern here.

GDP growth forecasts for 2025 and 2026 have been revised lower in emerging Asia (and sharply lower in developed markets) but have held largely steady in EMEA and Latin America.

Many of the central banks on hold are in emerging Asia - China, Taiwan, Malaysia - despite this region's more-challenging growth outlook.

We believe this is because those countries - with their export-based economic development models and big current account surpluses - have been less sensitive to the strong US dollar in recent years, and have been able to keep interest rates lower than the current account deficit countries.

For example, Taiwan had a 2024 current account surplus of 14.1% of GDP.

Its central bank has been on hold at 2% for more than a year despite CPI inflation in the first five months of 2025 averaging 2.2%.

By comparison, South Africa ran a 2024 current account deficit of 0.7% of GDP.

Its CPI inflation averaged 3.1% in the first four months of 2025 - but the central bank started the year with policy rates at 7.75% and has been able to cut rates twice so far this year.

What it means for investors

In terms of portfolio positioning, we expect global investor concerns about US trade and economic policy to continue driving capital flows into emerging markets.

We think this will be supportive of currencies, allowing stronger growth, lower inflation and faster/further rate cuts.

This, we believe, is the principal trigger of a positive feedback loop we've seen in emerging economies in previous up-cycles.

We prefer domestic-demand-driven emerging markets, with historically weaker current account balances and the ability to cut rates from higher real levels.

We remain constructive on the asset class, and overweight Mexico, Indonesia, South Africa and Brazil.

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

Market Commentary - May

Glenmore Asset Management

June 2025

Funds operated by this manager:

Glenmore Australian Equities Fund

Hedge Clippings | 13 June 2025

Following the overnight attack on Iran's nuclear facilities by Israel, the world has become a more dangerous place, although there are those who will claim that in the longer run, for Iran not to have a nuclear capacity (energy or arms) will make it safer. Unfortunately, it's going to go one way or the other, so we'll never know which outcome is correct.

In the meantime, it certainly feels more dangerous, and even the US is shying away from becoming actively involved in the air or on the ground at this stage. Hopefully, that lessens the chances of escalation. Meanwhile, the immediate effect on financial markets was an inevitable after-market fall in US stock futures, and an almost 10% spike in crude oil prices, and a smaller increase in gold, now not far off US$3,500 per ounce.

Possibly of greater risk to US markets is the potential for the demonstrations against Trump's deportation orders and subsequent deployment of the National Guard and the Marines to escalate over the weekend, and spread to other states and cities. By all accounts, Trump is itching for a showdown at home, while avoiding one overseas.

Whether either or both of the above crises is sufficient to scupper Albo's chances of a meeting with Trump to discuss either tariffs, or the US review of AUKUS on the sidelines of the G7 leaders' meeting in Canada remains to be seen. The Australian government's sanctioning of two right-wing members of Israel's cabinet against the wishes of the US won't have helped his chances of success.

Meanwhile, looking at May's fund performance (which we accept is looking in the rear-view mirror) shows a positive month, particularly by the various equity peer groups.

While the ASX200 Total Return was up 4.2% for the month, and the S&P500 up 6.29% (taking their 12 month returns to 13.36% and 13.52% respectively), this is not surprising, but there were 20 or more funds with double-digit returns for the month, and close to 60% of equity based funds out performed the ASX200, while 94% of all funds produced positive returns for the month, and 91% over the past 12 months.

A selection can be found below.

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