Archives: Insights

The Australian credit cycle may be taking a turn for the worse. But before corporate bond investors rush to dump their bond funds, we advise to pause and put things in perspective.

Australian banks dominate the domestic investment landscape. For most investors, this concentration risk has not caused large sustained problems. Should this change, however, a Plan “B” may be highly useful in protecting nest eggs.

Many markets are near panic mode. We believe the reported selling of assets by Sovereign Wealth Funds is contributing to the scale of the plunge. The driver of SWF selling is linked to the collapse in commodity values and in particular oil prices.

The year 2016 looks like being a battle between greed and fear with regards to Australian dollar corporate bonds’ performance. Greed will be driven by investors increasingly frustrated by falling deposit yields. Fear looks most likely to come from abroad.

Australian superannuation investors have largely shunned corporate bonds. This rationale is changing, however. Corporate bonds may be part of the solution for those frustrated with current deposit rates.

Australian bonds as measured by the key indices have generated modest but positive returns over the last month. In contrast, Australian equities have lost around 8% of their value and are down around 13% from their peak this year.

In recent years, strong investment performance in the US has helped buoy asset prices in Australia. A key concern for Spectrum is if US bond yields start to rise this could have a significant negative impact on many Australian investments.

Spreading risk is generally seen as a prudent investment strategy. Recent returns, however, have turned some of this theory on its head. The shift to a low bond yield environment has helped values in many asset classes rise in unison.

Spectrum currently has a preference for floating rates over fixed rate for Australian dollar (AUD) corporate bonds. We foresee the overall floating rate note index delivering low volatility total returns of around 4.5% over the coming year.

Spectrum believes Australian investors will make corporate bonds a larger part of their portfolios as access improves and understanding increases. In this report, we describe corporate bonds and why it can be a relatively safe investment.