International and domestic economic indicators have turned negative in recent months. Major central banks responded to this and the weak financial markets in late 2018. In fact, policy makers pivoted from “tough love” talk to hints of investor friendly intentions. The central bank “put”(1) lives. Global markets rebounded as a... Show More
There appears to be a competition among Australian financial commentators of late about who can give the most bearish outlook on residential property prices. First down 5%, then 10%, 15%, 20% and recently 25%. The truth is no one really knows. What our study of other developed markets suggests, though,... Show More
Small and medium-sized fintechs could struggle to compete with Australia’s large banks. However, the global tech giants could cause major problems for the banks - if they targeted wide spread general commercial banking. Show More
Investment prices keep rising. Valuations are now well beyond long term averages for many asset classes. Pundits are increasingly calling for a big correction. Fears of overvaluation is also found in the corporate bond market. Credit spreads – the extra margin for default risk – are now notably lower than... Show More
The recent collapse of a Spanish bank, two Italian banks, and a missed payment on tier one notes from a German bank reinforced some core beliefs for investing in bank capital. These are:- Show More
Risk management, or the lack of it, is usually the key difference between the fortunes of banks when times get tough. History books are full of evidence of what went wrong after a financial calamity. That’s the easy part. The hard part is to foresee the problems. The high level... Show More
The argument usually comes down to Connery or Craig. Both highly popular James Bonds brought different styles to the big screen. The “best” 007 actor, though, maybe more a case of which one best suited the social environment of the time. For investors, the best bond, similarly, largely depends on... Show More
“The OECD concludes that Australia has the most over-valued housing market, with prices 52% above their ‘correct” level.“ Similar warnings continue as do the related dangers of investing in those financing the market – banks. The problem is the quote above is from December 2005. The point being, just because... Show More
Australia’s RBA has its foot on the accelerator while the global bond markets are tapping on the brakes. Just when Australia’s economy could do with some stimulus it faces some headwinds from abroad. Rising bond yields internationally are spilling over into our bond markets. This hurts fixed rate bond prices.... Show More
Some politicians are bleating Australian bank profits are too high. Some financial commentators are fretting saying they are heading too low. At Spectrum we see bank profits from a credit viewpoint as about just right. Often lost in the commentary is perspective. When benchmarking Australian bank profitability against government bond... Show More
Debt can do economic good - that is, if its proceeds are put to productive use such as infrastructure or education. However, Australia’s debt binge since our last recession has gone largely towards rising home valuations. This debt not only has little long term economic benefit, it has made the... Show More
Brexit means uncertainty. Uncertainty on its impact on the UK economy and uncertainty on whether it sets a precedent for others in the EU. And investment markets do not respond well to spikes in uncertainty. But what does it mean for Australian corporate credit risk? Next to nothing. Earnings and... Show More
The European Central Bank (ECB) has just started buying corporate bonds in Europe. This Show More
Readers of recent financial media are regularly exposed to China Doomsters assuring us that a China economic crash is just around the corner. We agree that the Chinese economy has too much debt that was built up too quickly. This has promoted excess capacity in its economy causing large levels... Show More
Many investors have financial goals. These presume certain returns over defined time frames. To achieve this, most Australian investors rely heavily on the local stock market. This may prove lucrative if you get your stock selection and timing right. As we have seen in recent years, however, equity returns can... Show More
Inflation is subdued in the U.S and there is little to suggest a surge in the near term. That said the risks are skewed to the upside. If inflation starts to rise then US Treasuries could get hammered as yields move towards their historical norms. As for risks of inflation... Show More
We note that currencies are in a relatively ugly contest in the current global environment and at present, the Aussie is looking fairly attractive. Spectrum sees a positive skew to the AUD for the next six months of say 74c to 79c compared to the current 75c. China’s slow-down in... Show More
The Australian credit cycle may be taking a turn for the worse. Local banks have recently reported rising bad debt problems. But before corporate bond investors rush to dump their bond funds, we advise to pause and put things in perspective. Bad debts are currently near zero percentages in Australia.... Show More
When markets are in extreme fear or greed mode, new selling or buying can have an outsized impact on prices. Right now, many markets are near panic mode. We believe the reported selling of assets by Sovereign Wealth Funds (SWFs) is contributing to the scale of the plunge. The driver... Show More
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, namely, prevailing low commodity prices causing rising defaults in the... Show More
Patrick. Good question. I believe the graph is correct from the data I have. The issue is a consistency of presentation of data from the various national authorities. Some will "look through" the what the mutual funds are investing in and disclose this in various asset classes. Others will simply put "mutual funds". The non-disclosed or unclear will go into "other".
Thanks Patrick. On the question on bank deposits, I believe that the higher the level of retail deposits the better it is for banks from a creditworthiness perspective. Historically and across the globe retail bank deposits tend to be the most "sticky" source of funding during times of financial stress. The key reason for this is there is either explicit or implicit support from governments to support retail depositors. In Australia currently there is a guarantee for deposits up to $250k. Conversely foreign wholesale investors tend to be the least stable source of funding. So the less reliant a bank or banking system is on them the better it tends to be from a credit standpoint. While I agree that concentration of funding sources, at face, is an issue I believe that retail Australian deposits are likely to be the most stable source of funding in the event of a banking crisis.