ABE Weekly 09/12/2020

Market Update  

 

In search of interest income, thou shalt be open minded 

 

As we approach the end, of what can only be described as a most challenging and very unusual year, we look towards 2021 and what lies ahead. In short it looks like 2021 will be a much better year all round for Australia with forecast increases in GDP, consumer sentiment and falling unemployment. With cash rates expected to remain low for an extended periodthe property market will be well supported all around Australia with Sydney and Melbourne already showing some extraordinarily robust growth numbers 

 

The issue of cash rates is still a point of contention. With the official rate at 10bps and potentially going lower, people who are relying on interest income are really starting to struggle to make ends meet. With the average term deposit paying 50bps and inflation running at 150bps it makes it extremely hard to get aheadAs stated previously investors continue to remain significantly underweight defensive assets such as fixed income.  

 

We continue to be ardent supporters of our current bond offer in Pallas Capital which is paying 7.5% p.a. secured by senior first mortgages over premium real estate. This offer has met all ABE’s strict admission and credit criteria. and will be the first of its kind to have an open secondary market giving investors the ability to trade in and out of holdings 

 

Whilst things look good on the home front, we are still exposed to what is happening with the global COVID situation, which in many parts of the world is still a riskThere is growing hope for a successful vaccine and early vaccination has started however there is still a long road ahead to return to some form of normality. 

 

In summary, we think bond yields will continue to stay low and the tsunami of cash will continue to desperately look for a home. Cash rates will stay near zero % for the near future despite improving economic conditions and investment options will be limited with asset price bubbles emerging everywhere. It is interesting that 7 months ago the world was on an incredibly unstable footing and now it seems like a distant memory. Somehow it does not feel right but, as they say, markets can remain irrational longer than one can stay liquid. 

 

Just a bit of trivia, the below chart illustrates US debt as a % of GDP and one of the reasons behind the global zero rate environment.