ABE Weekly 29/07/2020

Market Update  

It has been another interesting week in financial markets where despite continuing global increases in COVID cases, risk assets continue to push higher with the US$ gold price increasing strongly towards US$2,000/oz on the back of more upcoming global money printing and a weakening US$.

One example of this of course was the recent successful European agreement on a massive Euro1.8 trillion stimulus package. This package will see the European bloc issue common debt for the first time, which should further tighten the EU’s economic integration. All eyes are now once again back to the US where investors are hoping for a further massive US$1 trillion package to boost the US economy.

A further positive sign of returning investor confidence in our domestic market was the recently launched new tier1 bank hybrid by NAB in the OTC bond market. It raised $600m which however is less than a third of the original $1.95bn accepted earlier this year. Pricing was also much higher at 400 basis points over three-month bank bills compared to 295 basis points back in March.

The earlier raising at the beginning of the year of $1.95bn was withdrawn after the bookbuild while still in the pre-settlement phase. The world changed at that time with COVID-19 spreading, negatively impacting financial markets. Spreads for risks assets blew out and prices for existing securities declined. Had NAB settled the proposed hybrid issue, investors would have been faced with a massive loss at first issue.

The desperate search for yield and safety saw a strong 30% increase in fixed income globally which of course was massively supported by the Fed intervention back in March when markets froze. According to global giant BlackRock fixed income assets under management now account for US$1.3 trillion at the end of June 2020.

Bolstered by recent adoption patterns the belief is that institutional investors will help propel global fixed income ETF assets to $2 trillion by 2024 reflecting the almost insatiable demand for yield given what is likely to be a persistently low interest rate environment.

In a recent report, BlackRock says that 2020 market turbulence has caused asset owners including pension funds and insurance companies to ramp up adoption of fixed income and fixed income ETFs.

The fund sees the growth potential to be huge as ETFs still represent only about one per cent of the $100 trillion global fixed income securities market.

“The versatility and resilience of the largest and most heavily traded fixed income ETFs, especially through market stresses this year, have made them more central to the construction of institutional investors’ portfolios,” said Salim Ramji, Global Head of iShares and Index Investments at BlackRock.

If there are any lessons to be learnt from this, fixed income is here to stay for the foreseeable future, and we continue to feel investment grade higher yield securities offer the greatest opportunity particularly for non-wholesale investors.

“The versatility and resilience of the largest and most heavily traded fixed income ETFs, especially through market stresses this year, have made them more central to the construction of institutional investors’ portfolios,” said Salim Ramji, Global Head of iShares and Index Investments at BlackRock.

We see that accelerated institutional adoption is further recognition that all fixed income securities including ETF and direct access are modernizing the bond markets by increasing overall transparency, improving liquidity, and lowering trading costs.”