“I’m very nervous” – The big risk on Chris Joye’s radar

An even-bet chance of a “hot war” with China poses a grave threat to Australian investors and the economy overall, warns Coolabah Capital’s Christopher Joye.

“We’ve been very worried for the last couple of years about the direction of President Xi’s presidency,” he said during a recent webinar hosted by Pinnacle.

Joye’s sensational assertion is based on several in-depth interviews with key figures from the CIA and ASIO. Heightened concerns stem from China President Xi Jinping’s realisation that “certain game-changing military equipment coming down the pike…will soon make it very hard for China to take Taiwan,” says Joye.

“I think there’s a best-guess 50/50 probability of conflict between China and the US, and that’s a view shared by some of the world’s top China experts.”

If war broke out, the Australia, New Zealand and US (ANZUS) treaty would be triggered, inexorably drawing us into the fray. Aside from the obvious fears over a war on our doorstep, conflict with Australia’s biggest trading partner would instantly end the Asian powerhouse’s consumption of our coal, iron ore and natural gas.

“I’m very nervous and if it happens, would hedge all of my portfolio…because if we get conflict, all bets are off,” says Joye.

New round of government bond-buying

He also discussed less-incendiary topics, including the Reserve Bank of Australia’s recently-announced decision to tip another $100 billion into the economy by buying government. This was announced during the RBA’s first meeting of 2021, alongside its assertion that official rates would stay around 0.1% at least into 2024.

Joye believes QE 2.0, following on from the first $5 billion round of bond-buying in March, is just the tip of the iceberg. He expects QE 3.0 and QE 4.0 will follow in the back-end of 2021.

“The RBA is trying to crush Aussie interest rates because they’re the highest in the world. It hopes this will reduce foreign demand for guvvis and semis ,” he says.

“Because right now, this demand is putting massive upward pressure on the Aussie dollar. Were it not for that, we believe the AUD would be above 80 US cents .”

What's cheap right now?

In credit markets, semi-government bonds with 5- to 12-year duration are among Coolabah’s key focuses right now. The record-highs of Australia’s AA- and AAA-rated credit assets, leading banks to shift more than $120 billion of cash-on-deposit into semis.

Tier-2 bonds issued by the major banks are also benefitting, the BBB-plus rated assets now trading at more than 5-times the spreads of senior bonds, up from historical levels of around 2-times.

Joye also likes major bank-issued all tier-one (AT1) hybrids: “We see a lot of runway in that sector, but for us, it’s about grinding out the day-to-day mispricing opportunities.”

Food-for-thought for cash-strapped investors

Metrics Credit Partners’ Andrew Lockhart, a Pinnacle stable compatriot of Coolabah, also revealed where he sees value in another part of debt markets.

Metrics zeroes in on the most illiquid parts of the debt market for opportunities. The firm operates in a handful of key areas, including the provision of:

• Loans to publicly listed corporations
• Commercial real estate financing, for example, REITs
• Acquisition finance, providing debt funding enabling PE buyouts
• Project & Infrastructure finance.

Major unlisted infrastructure assets such as Transurban’s Eastern Distributor Motorway in Sydney are among some of the unlisted assets Metrics offers exposure to.

“Australia is a bank-dominated market where it’s very difficult for non-bank investors to gain exposure,” says Lockhart.

“For our investors, we seek to manage risk through a properly-structured loan program.”

During the worst of the COVID pandemic, Metrics’ investors also benefited strongly from what the manager avoided.

“We were very fortunate because there is a range of sectors, industries and borrowers that we decline,” says Lockhart. Areas that are completely avoided include:

• Retail shopping centres
• Student accommodation
• Tourism.

Given the natural volatility of these sectors, Lockhart and his team strongly believe the risks of these sectors should be entirely borne by shareholders.

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