ABE Weekly 23/09/2020

Market Update  

“If you’re not confused you don’t know what’s going on” – Jack Welch 

There could never be a more appropriate statement to describe the current global situation as it relates to economics, politics, and most of all what the post COVID world will look like. It is hard to keep positive in the current environment, but we need to. For the past few months, we have been saturated with news of doom and gloom which I cannot help but feel is as much fact as it is to sell newspapers.  From an investment viewpoint as people near retirement risk assets are not as appealing and more turning to the security of fixed income or bonds.

Why would you invest in a term deposit at less than 1% – they pull people in by advertising introductory rates of 1.4% – when you can invest in a range of solid credit bonds at yields of 3-5%.

In other news, the markets did not like Fed Chair Jerome Powell’s speech after the FOMC meeting on Wednesday. Powell once again focussed on the need for Government’s fiscal support multiple times and pointed the finger at Washington and the risks posed for the economic recovery. Powell weighed in on the fiscal question, saying at a news conference that while the recovery has been faster than expected in the past 60 days, “there’s certainly a risk the economy could slow without more stimulus.” With a bunch of people still out of work, small business on its knees there are not a lot of options!

In other words, just keep kicking the can down the road and pumping that cash out ad infinitum and cross your fingers the answer lies just around the corner.

On a brighter note, the Australian housing market has performed much better than anticipated. Westpac came out this week forecasting a 15% surge in house prices post COVID. The bank expects house prices to dip just 5% between April 2020 and June next year, versus a prior forecast of a 10% fall. But Westpac sees the property market bouncing back strongly in 2022/3, underpinned by ultra-low interest rates, and a broader economic recovery. 

As an aside the chart below highlights the reality and practical aspects of investing – more risk = more return.

The blue line essentially describes the needle in the haystack – a low risk bond with high return – and only really happens on the rare occasion when someone probably makes a mistake!

The red line is more appropriate and realistic – the more risk you assume the more return you are likely to receive and these risks can be broken down into – interest rate, credit and liquidity – meaning that in the case of a fixed rate bond if rates rise you are worse of, the credit of a company can change over the course of the bond and liquidity can also change.

We have still been very active in NEXTDC Jun 2021 6.25% Fixed Rate bonds with YTM of 5% and we have previously mentioned our new issue  First Mortgage Pallas Trust Bond 7.5% Fixed Rate 4-year Note. Any interest on these or several other options please call us. 

 

Risk vs Return

 

The above chart essentially summarises the base case investment scenario for bonds as for any investment really – more risk equals more return.

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