ABE Weekly 19/08/2020

Market Update   

 

Bank term deposits are for many investors close to retirement traditionally their primary source of income and recent statistic show that Australian household deposits are now over $1 trillion¹. They are of course particularly popular in these uncertain times because they offer savers less risk and volatility than many other investments. However, at rates of 1% or less they are hardly appealing and are forcing investors to rethink their strategies. 

 

Another traditional source of income has been high dividend yielding shares. While both are valuable assets, it’s important to recognise the limitations of each. Dividends are a primary motivator for investors seeking income but as we’ve seen recently, they are not a sure thing and can be cut and deferred altogether. 

 

Not to talk our own book, but the higher yield corporate space is attracting more and more attention – bonds with yields of 4-5% with maturities of 2-3 years are available.  We are also currently working on new first mortgage deal in the residential property space which is yielding 6.5% – 7.5% with a maturity of 4 years– please call ABE for more detail. 

 

Earlier in the week Reserve Bank Governor Lowe made his biannual address to the House of Representatives Standing Committee on Economics. His dominant theme is the need to support the economy through job creation. His position on borrowing and budget deficits is quite clear: “By borrowing today to support the economy we are avoiding an even bigger loss of output and jobs that would damage our economy and society for years to come, which would put ongoing strain on the budget”. 

 

On some recent corporate news – NAB for once positively surprised the market and provided further cause for optimism in the banking sector, reporting a modest fall in deferred loans in an unexpectedly strong third quarter result. 

 

The banks of course have been caught in the eye of the storm in terms of helping borrowers and the economy generally make it through to the other side of this crisis. The fact that NAB reported a modest 7% fall in cash earnings to $1.55 billion with only slightly weaker margins for the third quarter was therefore a fairly good outcome in context. 

 

On the Virgin saga – The Federal Court has denied Virgin Australia’s rebel bondholder group the opportunity to present its own take-over plan for Virgin Australia at a meeting of the collapsed airline’s creditorsHowever, the court indicated it would not block any alternative proposal to that of presumptive owner Bain Capital being circulated to creditors ahead of that meeting in September. Leading Virgin bondholders, Broad Peak Investment Advisors and Tor Investments, backed by a coterie of fellow investors along with multiple aircraft leasing firms, who together are owed $800 million in total, are seeking to have their debt converted into ownership of Virgin Australia rather than accept as little as 10c in the dollar from Bain as the US firm wipes the slate clean. Virgin’s 10,000 creditors, who are owed some $6.8 billion, are set to vote on Bain’s deed of company arrangement (DOCA) in what to date was largely considered a formality. 

 

The international economic newshighlights was dominated by some sobering figures with Japan reporting its worst drop in GDP on record as the ongoing Covid outbreak dented consumption. The world’s 3rd largest economy shrank 7.8% in the second quarter compared with the previous quarter, the country’s Cabinet Office said on Monday. That translated to an annual rate of decline of 27.8%, the worst since modern records started in 1980 and the third consecutive quarter of contraction. 

 

China, however, returned to growth in the second quarter, meaning the world’s second largest economy dodged a recession following its worst start to the year in decades External demand shaved three percentage points off GDP on the quarter as exports were hammered by the slump in global trade. 

 

In the US recent figures showed that the coronavirus pandemic triggered the sharpest economic contraction in modern American history, the Commerce Department reported on Thursday. Gross domestic product — the broadest measure of economic activity — shrank at an annual rate of 32.9% in the second quarter as restaurants and retailers closed their doors in a desperate effort to slow the spread of the virus, which has killed more than 150,000 people in the U.S. The economic shock in April, May and June was more than three times as sharp as the previous record — 10% in 1958 — and nearly four times the worst quarter during the Great Recession.