ABE Weekly 11/11/2020

Market Update  

 

The big news this week is that we have a new leader of the free world in Joe Biden. Howeverdespite what appears to be a convincing win The Donald is not giving up without a fight. If the equity market is anything to go by the result was well received – change is as good as a holiday as they say. It will be interesting to see if Trump actually vacates the White House. Anywaythere is always a honeymoon period so let’s see how the plan unfolds in the coming months. 

 

After much anticipation the Bond Exchange launched the Pallas Capital Note offer this week and the book build is officially open and growing by the day. Please refer to link: https://www.fixedincomenews.com.au/pallas-capital-high-yield-bond-paying-7-5p-a/ and to apply https://www.bondexchange.com.au/products/pallas-capital/ 

 

We can’t emphasize enough that interest rates look like they will continue to fall going forwards. With official cash rates at 10bp there is still room for another cut. Despite what the experts say regarding negative rates we are almost there.  

 

We can’t be more supportive of Pallas. Sure there are always risks as with any investment but at 7.5% and secured by bricks and mortar for 4 years it certainly compares more than favourably with even some of the most sought after equity investments. 

 

On average, investors remain far too overweight equities compared to other asset classes. We still believe investors are still in the dark to some extent on the benefits of fixed income. Bank stocks once the staple of income generation is now not as reliable as they once were. Dividend cuts and heightened market volatility only strengthen the case for investments like Pallas.  

 

Our concern is that if dividends continue to be cut on the back of falling profits, the income people rely on to live will fall and investors may be forced to sell down their positions to make ends meet. Not only that, but if we use the COVID experience, it would be unfortunate to have to sell stock after a massive market fall. This just further strengthens the case for investing in fixed income which provides income, security and stability. 

 

Below is a chart of the VIX which tracks equity market volatility – on average the index tends to trade between 10-20, generally regarded as market equilibrium. However, you can see the two extremes: the GFC and COVID where the index reached historical levels. This is our fear that with the future more uncertain than at any time in the last 100 years could we have another black swan event. 

VIX Chart