In April 2016 I published an article on the myriad of problems in Australian financial services that ASIC had failed to address. The article was written shortly after the announcement that ASIC’s then head, Greg Medcraft, was being given an eighteen-month extension to his initial five-year term. Show More
At this time of year many investors look back on the returns achieved in various asset classes in the previous year and reconsider their asset allocations. In 2018, Australian government bonds (+5.2%) soundly beat the ASX accumulation index (-2.8%). The gains for government bonds were driven by yields falling, with... Show More
Global leading indicators are close to signalling a recession. After a 40 day issuance shutdown, the US high yield bond market came roaring back in January. Greece has issued €2.5 billion of 5 year bonds at a 3.60% yield. Show More
The article below is Narrow Road Capital's submission to the current APRA consultation process on bank capital levels. APRA has rightly recommended that the major Australian banks need to hold more tier 2 capital to ensure that their capital position is unquestionably strong. For the sake of a few basis... Show More
Ten years on from the Global Financial Crisis and the threat of another financial crisis in the medium term is now a solid possibility. There are signs of weakening economic growth in China and the US, with Europe and Japan showing no signs of getting out of their long term... Show More
This time of year I usually take a break from writing articles and instead send through my best articles from the past year. This year I’ve dug back in the archives to the inception of Narrow Road in 2012. The articles chosen are a mix of credit commentary and pieces... Show More
After six weeks of heavy outflows from leveraged loan funds, US loans are having a minor pullback with margins and upfront discounts spiking higher. Global debt has hit $184 trillion. US bond managers track themselves against with an index with a AA+ average rating when they have a BBB average... Show More
The announcement of the Australian Business Securitisation Fund (ABSF) this month has been derided as a political stunt by a few observers. However, if managed correctly it could (i) reduce the cost of borrowing for small and medium businesses and (ii) earn the Federal Government a decent return on its... Show More
Private equity has added zero alpha over the S&P 500 over the last decade. Top quartile private equity funds have very low persistence in their performance. October was the worst month for hedge funds in 7 years; a wave of redemptions is likely to lie ahead. A prominent venture capital... Show More
Rising interest rates, higher oil prices and a stronger dollar are a recipe for lower US earnings. Margin pressures are starting to show up in US industrials. 83% of US IPOs in 2018 are unprofitable companies, higher than the level in the tech bubble. US investors are at their lowest... Show More
The recent debate over austerity has been profoundly one sided. Articles by Paul Krugman, Robert Skidelsky and Ryan Cooper have taken on a victory lap tone for the anti-austerity camp, despite the fact that the race is far from over. Most publications, particularly the economics opinion site Project Syndicate, have... Show More
APRA’s letter to superannuation funds in June this year laid bare a concealed and often ignored risk being taken by some fund managers. Funds that are meant to be invested in low risk, highly liquid securities are being invested in medium and high risk securities with limited liquidity. Here’s the... Show More
Seth Klarman’s 20 lessons from the financial crisis. Jim Grant’s 10 lessons on markets. 15 bullish investment assumptions you should be questioning. It’s time to switch from sexy to boring investments. Howard Marks warns on private debt and the aggressive lending environment. Goldman Sachs’s bull and bear indicator is at... Show More
Global trade is slowing, commodity prices are falling and global liquidity is drying up, pointing to weak GDP growth ahead. S&P 500 earnings growth estimates are well above normal and closing in on the tech bubble peak. The longest bull run ever continues with stretched valuations. Stocks in more indices... Show More
“That which has been is that which will be, and that which has been done is that which will be done. So there is nothing new under the sun.” Ecclesiastes 1:9. Show More
Leveraged loans increasingly have no subordinated debt below them, pushing up the likelihood of principal loss. Private equity is looking very late cycle with the growth in sponsor to sponsor and fund to fund transactions concerning. S&P 500 profit margins are at a record high led by the real estate... Show More
The feedback I often get from readers of my articles is that I must be an investment bear. That’s understandable given my last two articles were “The Dirty Dozen Sectors of Global Debt” and “The Coming High Yield Downturn will be Big, Long and Ugly”. However, the performance of Narrow... Show More
US CLO issuance is at record pace but credit quality is slipping. US high yield bond covenants are at their worst since records began in 2011, even B and CCC rated bond covenants are weak, but in Europe high yield bond buyers are starting to push back on terms. US... Show More
When considering where the global credit cycle is at, it’s often easy to form a view based on a handful of recent articles, statistics and anecdotes. The most memorable of these tend to be either very positive or negative otherwise they wouldn’t be published or would be quickly forgotten. A... Show More
The US high yield market has grown larger and riskier since the financial crisis. Issuers of debt have the whip hand as buyers compete to gain an allocation in the face of surging demand from CLOs and retail funds. Companies are emboldened to seek ever weaker covenants and are taking... Show More
Thanks Rex - hopefully the rocket from Kenneth Hayne gets ASIC on the right path. If not, someone will need to write that article!
Thanks for the question Andrew. The Australian Government Bond Index has a duration of around 6.5 years. If we extrapolate a 1% cut in the cash rate, that would lead to a roughly 6.5% increase in bond index, plus say another 2% for running yield. That's a total of 8.5% over 12 months. It looks much better than equities would, but for a typical balanced fund running around 80% in equity like assets and very little in government bonds, it won't help much. It's also a one in seven to ten year event, with substantial under performance likely in the rest of the years. The example also shows the volatility that comes with long duration government bonds. If the RBA was to normalize the cash rate over a year, the government bond allocation could be staring down a 15-20% loss. Unlisted infrastructure and property could be getting belted as well.
Thanks for your comments Jeff. Industry super funds do make it very easy to switch between asset classes which is good for the individual but potentially bad if it happens to illiquid assets en masse. Australian Super recently gave itself the power to freeze investments in its property fund, other may follow this. I agree with the late cycle positioning you have suggested, but put forward some low risk alternatives that deliver better returns in the article. I'd rather earn 4% preserving my capital than 2%.
Thanks Michael - you are right, this isn't a new issue. Complexity is a killer with cash investments. I think this issue is popping up again as super funds are increasingly taking management of cash and vanilla debt in-house, perhaps without the expertise that is assumed.
A good summary of the economic and financial outlook Scott
Hi Mr T. Last cycle Aussie hybrids say their prices drop 30-40%, peak to trough, so that should be a starting assumption for buyers today of what can happen. In Europe several banks have zeroed their hybrids so there is certainly precedent for this to happen. Difficult to say whether that will happen here in the future, but easy to say that there is better value elsewhere in the Aussie debt markets. Some of the new issue Aussie high yield bonds are turnaround stories that need to "grow into" their debt loads. It is inevitable that some will not perform. Some Aussie infrastructure debt is about as risky as it was before the crisis, and there was a good batch of defaults last time from Babcocks, Allco, toll roads and others. Be wary of assets dependent upon Chinese demand for commodities, whether that be mines, mining services or ports.
Thank for reading and commenting Emanuel. We are just starting to see a weakening of the long held position that student loans remain after bankruptcy. See this WSJ article for instance. https://www.wsj.com/articles/judges-wouldnt-consider-forgiving-crippling-student-loans-until-now-1528974001 Student loans are typically wiped after 20-25 years of qualifying payments. One way or another, US taxpayers are going to see a lot of this "asset" go uncollected.
Hi Ross, in the second last paragraph I've written what I'm doing for my clients which could be a 5-10% allocation across a diversified portfolio.
Thanks James. Europe, Asia and Emerging Markets have all seen a decline in lending standards since 2009. Cov lite lending in Europe is not far behind the US. In Asia, many markets remain overbanked and China continues to be on a borrowing and malinvestment binge. Venezuela, Argentina and Turkey are EMs in tricky situations.
Thanks Ron, it is late stage for credit globally and a time to be careful with all asset classes. If credit markets do suffer a downturn, highly leveraged equities will follow soon after. Centro, Allco, Babcock and Brown, Rams are some examples from last time.
Thank you all for the comments. I share the sentiment that politicians are not acting in the interests of all Australians and are not spending our taxes efficiently.