ABE Weekly 15/07/2020

Market Update  

 

The big news once again belonged to the second or third wave of renewed COVID-19 outbreak with Melbourne’s renewed lockdown costing an estimate $1bn per day. Westpac’s Bill Evans estimated a further 0.2 percentage point hit for overall growth this year. ‘‘We have slightly lowered our annual forecast for 2020 from a contraction of 4 per cent to 4.2 per cent,’’ he said. Mr Morrison and Mr Frydenberg warned that while the Victorian economy would take a serious hit, business and governments should not drop the ball on the broader nationwide economic recovery which had so far seen a strong bounce in consumer spending as well as early signs of a jobs recovery with 124,000 jobs added in May. The government will release an updated economic statement on July 23, which will include the much anticipated future of JobKeeper following a review. 

 

Interesting to note that Australians currently hold over $1 trillion in either bank or term deposits (source APRA) earning rates of just over 1% on average in contrast to the rates of circa 4-5% they could earn on a diversified portfolio of quality high yielding bonds. As TD rates continue to slide and investors become more aware of the OTC bond market, we expect to see a huge movement of funds into Corporate Bonds. This will be made all the easier through our Iress connectivity partnership. 

 

The forthcoming profit results season will show how COVID-19 has hit corporate Australia. Capital raisings will inevitably follow. Australia so far accounted for $31.7 billion of the capital raised globally in the first half of the year and led the rebound in global equity issuances from the beginning of the pandemic. 

In the US overnight, financials held slim gains following mixed earnings from banks as JPMorgan and Citigroup beat consensus estimates, thanks to strong trading revenue, while Wells Fargo cut its dividend by 80% and reported its first-quarter loss in more than a decade. The cut in dividend is clearly are worry for income hungry investors and our Australian banks have already warned that they will follow this global trend and protect their capital in these very uncertain times. 

On a more lighter note, we came across some fun facts about bonds this week. Talk about having history, the first recorded bond dates to 2400 B.C. when grain was currency at the time and used to pay the principal – this came from a stone discovered at Mesopotamia, now present-day IraqWe then turn to the city of Uruk, in the month of Ululu on the 11th day of the 9th year of Nebuchadnezzar (or 595 B.C) a man named Nabu-usabi lent a half mina (about half a pound )  of silver to Nabu-sar-ashesu. They signed an agreement witnessed by a holy priest and four countrymen. The agreement stated that within one yearNabu-sar-ashesu would return to Nabu his half mina of silver plus 10 sheckelsEach sheckel equal to about a pound of silver – that’s a return of just under 34%. – respectable in anyone’s language! 

Just one other fun fact. The first ever Government Bond was issued by the Bank of England in 1693 to raise money to fund a war against France. If nothing else, we can say that Bonds have stood the test of time as a form of borrowing and investment, and this has no chance of changing any time soon.