ABEWeekly 25-02-22

“Life is like photography. You use the negatives to develop.”

  • Ziad K. Abdelnour

Australia

Profit reporting season shows that local corporate balance sheets are overall in excellent shape.

Businesses also have a record amount of cash on their balance sheets. As Westpac Chief Economist Bill Evans said this week: “The cash buffers now available to both households and business may blunt the impact of rate hikes, particularly in the early stages of the cycle.”

Healthy corporate balance sheets are good news for bond investors, as they mean reduced credit risk.

Business confidence, as measured by the National Australia Bank business conditions survey, has also improved. The jobs market is also resilient – unemployment in January (4.2%) was at a near 50-year low. This should maintain demand for products and services and support corporate profits and balance sheets.

Australian Bureau of Statistics (ABS) wages data released this week showed annual wages growth 2.3% higher than a year earlier.

Wages growth is one of the key factors the Reserve Bank of Australia (RBA) considers in managing monetary policy and setting its policy cash rate, which flows through to market interest rates.

Although stronger, wages growth is still well short of the 3%-plus the Reserve Bank has indicated it wants to see before lifting the cash rate from its ultra-low 0.1%.

Markets are focused on higher inflation and the strength of the economic recovery from the COVID-19 pandemic. Bond market futures are currently pricing in June 2022 for the first of a series of rate rises.

Markets may however be getting ahead of the Reserve Bank.

The minutes of the Reserve Bank Board’s most recent monetary policy meeting suggest that the Board believes it’s likely to be some time before the rate of wages growth is consistent with inflation being maintained in the 2-3% target.

Laminar Capital’s Stephen Roberts recently argued that “the RBA, like many of its international peers over recent years, has become reactive setting monetary policy[,] refusing to hike unusually low official interest rates until it is proven in wage and inflation data that sustainably higher inflation has arrived”.

It’s therefore possible that the first rate hike may not take place for some time yet.

And as Westpac’s Bill Evans reminded us this week, many ultra-low fixed rate home loans will mature over the course of the coming year and have to be rolled over to higher rates. This will weigh heavily on many households. Awareness of this is also likely to be factored into the Reserve Bank’s decision-making.

Global

The eyes of the world are currently on events in eastern Europe. The flow of news by the hour has prompted a ‘flight to safety’ of buying government bonds, and riskier assets such as shares and cryptocurrencies are volatile.

However, the more fundamental underlying influences on economic growth and corporate profitability lie elsewhere.

U.S. inflation has increased at its fastest rate in 40 years, driven by surging energy costs. This continues to exert pressure on the U.S. Federal Reserve (and similarly on other central banks) to increase their policy cash rates, ending the COVID-19 era of ultra-easy money.

The minutes of the Federal Open Markets Committee’s January meeting support an expectation of a near-term increase in the U.S. federal funds rate. The Committee stated that current conditions warrant a “faster pace” of tightening.

Markets now expect an increase in the federal funds rate in March, with the possibility of an 0.5% hike, rather than just 0.25%.

The European Central Bank’s recent pronouncements have also been less dovish than previously. New Zealand’s central bank also raised its cash rate this week to 1%.

The challenge for central banks is to strike the right balance between taming what could be a short-term inflationary spike, and jamming on the brakes too hard and damaging the recovery from the COVID-19 pandemic.

While interest rates look almost certain to move up over the course of the coming year, they will nevertheless remain extremely low by historical standards. So will the income available from term deposits and related investments.

Investors seeking higher yields and regular, reliable income would therefore benefit from considering investment in carefully selected corporate debt securities.

Current Investment Opportunities

FHIM Trade Logistics

This is a new Australian dollar-denominated note linked to a shipping and trade finance fund from TradeFlow Capital Management. The note was created by ABE and investment manager Ferguson Hyams Investment Management.

TradeFlow is a fintech-powered commodity investment strategy and business which enables physical commodity trading for small and medium-sized firms. The company uses a proprietary digital trade services platform to manage and monitor cargoes globally, now possible because of the advent of Internet of Things (IoT) devices, artificial intelligence, and lower technology costs.

This senior unsecured unsubordinated note will pay a 5.50% fixed rate quarterly, maturing in October 2025. All coupons and any final value will be in Australian dollars. The note is available on the IRESS platform to improve secondary market liquidity. The bond is suitable for sophisticated/wholesale investors and has an A$10,000 minimum investment.

Full documentation for this offering is available here.

Xerox

You can still invest in an Australian dollar fixed coupon credit-linked note over Xerox Holdings Corporation, a 6.5-year note offering a 4.50% per annum fixed rate with coupons paid half-yearly.

This is an opportunity to invest in debt linked to a Fortune 500 corporation which provides digital document products and services in more than 160 countries and pioneered office technology.

You’ll find full documentation for this offering here.

Pallas Capital

You can also still invest in the 7.5% fixed rate senior secured note issued by real estate financier Pallas Capital (wholesale investors only).

Contact us if you have any questions or would like any assistance.