ABEWeekly 11-03-22

“In the middle of every difficulty lies opportunity.”

  • Albert Einstein

Key Points

  • Investment markets remain volatile as they respond to day-to-day developments in the conflict between Russia and Ukraine.
  • These heightened uncertainties and risks are a salutary reminder about the benefits of ensuring that investment portfolios are sufficiently diversified across asset classes. As well as offering higher yields and regular and reliable income, investment in carefully selected corporate debt securities provides an opportunity to increase portfolio diversification.
  • Central banks have to continue to balance three critical issues. These are dealing with the outcomes of the conflict in eastern Europe, and responding to an existing – and now stronger – inflationary surge, while not damaging the economic recovery from COVID-19.

Australia

The Australian economy and companies remain in good health.

Gross domestic product was up a vigorous 3.4% over the three months to 31 December. This was largely a result of a surge in consumer spending in Victoria and New South Wales after the lifting of COVID-19 restrictions.

Business conditions and confidence strengthened in February, according to NAB’s monthly survey, as the threat to the economy from the Omicron outbreak receded. ANZ’s monthly survey of job ads also rebounded to a new pandemic high.

Strong demand and higher prices for natural gas and grain are providing support for the Australian dollar. While national income will take a hit from the Queensland and New South Wales floods, the clean-up will stimulate the construction sector. The federal budget on 29 March will deliver further support for households and corporations.

Having left its policy cash rate unchanged at 0.10% last week, by its June meeting the Reserve Bank will have data on inflation and wages growth from the March quarter.

Sustained higher inflation and wages growth will at some point prompt the Bank to raise its cash rate. The bond market is anticipating the first increase in nearly 12 years in July.

Reserve Bank Governor Philip Lowe said, however, that the war in Ukraine was a major new source of uncertainty, and that “how long it takes to resolve the disruptions to supply chains is an important source of uncertainty regarding the inflation outlook, as are developments in global energy markets”.

We discuss the potential implications of an extended conflict in eastern Europe in more detail below. If not resolved reasonably quickly, however, these uncertainties could prompt the Reserve Bank to delay raising its cash rate for longer than it might otherwise have done.

Global

The major theme in the global economy is energy supply and prices.

Russia’s invasion of Ukraine triggered what Oil & Energy Insider described as “arguably the wildest week in oil trading since Saddam Hussein’s attack on Kuwait back in 1990”. The risk of disruption to Russian oil supplies pushed the price of West Texas crude oil to over US$120/barrel. Instability in another major producer, Libya, could also contribute to continuing oil price volatility.

The United States has announced a ban on Russian oil, natural gas, and coal imports, and the United Kingdom has announced it will attempt to phase Russian oil imports out by the end of this year.

These and other sanctions will have a significant effect on the Russian economy, although workarounds are already appearing. Chinese state-owned oil trader Unipec and Chinese refineries are apparently circumventing payments sanctions by resorting to cash payments and barter for Russian oil.

Unlike the United States, however, Europe depends heavily on Russian oil and natural gas.

Signalling this energy dependence, German Federal Economic Affairs Minister Robert Habeck stated last week that although his country would join other European nations in sanctions against Russia, Germany would not support an embargo on Russian fossil fuel imports. The European Commission published plans this week to attempt to reduce this dependency, although this will take time and is unlikely to be easily achieved.

The term ‘stagflation’ is being bandied about seriously for the first time in many years. Last widely used to describe economic conditions in the 1970s, this is the phenomenon whereby slow economic growth and higher unemployment are accompanied by high inflation.

The bond market is still pricing in a 25 basis point hike in the U.S. federal funds rate on 16 March. February U.S. consumer price index data out at the end of this week is expected to show another jump in inflation, with economists picking annual inflation to rise from 7.5% to 7.9%.

Fed Chair Jerome Powell stated last week that if inflation did not cool as quickly as expected, the U.S. central bank would be ready to move more aggressively with larger or more frequent increases to its cash rate.

“We have an expectation that inflation will peak and begin to come down this year. To the extent inflation comes in higher or is more persistently high… we would be prepared to move more aggressively by raising the federal funds rate by more than 25 basis points at a meeting or meetings.”

The energy price spike is also ramping up Eurozone inflation, which is almost three times its target rate. This will put pressure on European Central Bank Governor Christine Lagarde to walk back on her guidance earlier this year that a rate hike was “very unlikely”.

Central banks have to continue to balance three challenging concerns. These are dealing with the outcomes of the conflict in eastern Europe, and responding to an existing – and now stronger – inflationary surge, while at the same time not damaging the economic recovery from COVID-19.

The prospect of a prolonged conflict in eastern Europe could give the U.S. Federal Reserve the ‘cover’ it needs to avoid tightening monetary policy too soon and too much, preventing harm to the ongoing economic recovery.

As Westpac Chief Economist Bill Evans commented this week, however, “central banks in countries where inflation has been rising must adopt a determined process to contain inflationary expectations even in the face of some concerns that the current high inflation and uncertainty will threaten economic activity.”

As always, the heightened uncertainties and risks are a salutary reminder about the benefits of ensuring that investment portfolios are sufficiently diversified across asset classes.

As well as offering higher yields and regular and reliable income, investment in carefully selected corporate debt securities provides an opportunity to increase portfolio diversification.

Current Investment Opportunities

We currently have a number of opportunities in the pipeline which we will be announcing in the near future.

FHIM Trade Logistics

This Australian dollar-denominated note is linked to a shipping and trade finance fund from TradeFlow Capital Management.

TradeFlow is a fintech-powered commodity investment strategy and business which enables physical commodity trading for small and medium-sized firms. The company uses a proprietary digital trade services platform to manage and monitor cargoes globally, now possible because of the advent of Internet of Things (IoT) devices, artificial intelligence, and lower technology costs.

This senior unsecured unsubordinated note will pay a 5.50% fixed rate quarterly, maturing in October 2025. All coupons and any final value will be in Australian dollars. The note is available on the IRESS platform to improve secondary market liquidity. It’s suitable for sophisticated/wholesale investors and has an A$10,000 minimum investment.

Full documentation for this offering is available here.

Xerox

You can still invest in an Australian dollar fixed coupon credit-linked note over Xerox Holdings Corporation, a 6.5-year note offering a 4.50% per annum fixed rate with coupons paid half-yearly.

This is an opportunity to invest in debt linked to a Fortune 500 corporation which provides digital document products and services in more than 160 countries and pioneered office technology.

Full documentation for this offering is available here.

Pallas Capital

You can also still invest in the 7.5% fixed rate senior secured note issued by real estate financier Pallas Capital (wholesale investors only).

Contact us if you have any questions or would like any assistance.

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