ABE Weekly 03/02/2021

Market Update  

You only live once, but if you do it right, once is enough – Mae West 

I can now fully appreciate how difficult it must be to do stand-up comedy. To come up with new material day after day, week after week, is incredibly challenging. I can relate to this scenario now given somewhat lack of new news or themes in financial markets across the globe. This is clearly reflected by the sharp drop in the VIX or Fear Index as it is known, which, in the last week has fallen over 30% to 25.5 a level which still suggests the market is becoming less risk averse but not quite complacent just yet. It is said markets are in equilibrium when the index is between 10 and 20. 

On the home front the RBA left rates unchanged at 10bps this week. It also announced the extension of its QE program in February rather than March emphasising its confidence to maintain a very stimulatory policy despite the faster than expected recovery. The RBA made the following statement: “The Board will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range. The Board does not expect these conditions to be met until 2024 at the earliest. In November and December 2020, it was stated that The Board is not expecting to increase the cash rate for the next 3 years. 

 

The last comment is very significant as it shines the light on alternate income generating securities such as our recent Pallas issue which is paying a coupon of 7.5% which stacks up more than favourably against other alternatives. The analogy is very straight forward, you can eat on 7.5% but at 0.5% you are standing still if not going backwards.  

 

In the context of zero interest rates ABE is already starting to see an increasing shift towards enhanced yield and private debt securities such as Pallas Capital. It’s understandable that investors are sceptical about these types of securities and that they are considered high risk. But an investment in a conservative and well-established business with a better than average yield is possibly no riskier than an investment in quality equities as evidenced by the volatility during COVID.