This month has seen a wide mix of data coming in from global markets, such that we’re
starting to see a bit of a divergence between certain economies. In the UK and the US,
recently there’s been a ‘higher for longer’ tone that has seen bond yields continue to drive
higher, and equities sell off. We have struggled to comprehend it and were convinced there
was a lag in data due to other indicators suggesting that the slowdown had begun.
Locally, the RBA has been effective in bringing inflation back under control, and the last set
of employment data showed a significant shift, with unemployment up and participation rates
down.
Australia’s other big concern (as compared to UK/US) is how closely linked our economic
prosperity is to China’s. This is primarily why the A$ has crashed, having breached the lower
end of its recent range……touching 63 US Cents this month, and now barely clinging on to
64. We don’t have the mega tech stocks to keep up with the US and so to a certain extent we
are at the mercy of commodity prices (noting that Iron Ore prices are half what they were 18
months ago).
Of course, a week can be a long time in markets and the ‘higher for longer’ trend finally
broke on Wednesday night, with PMI (purchasing managers index) data reflecting its largest
monthly decline this calendar year.
With these early signs of a shift in the paradigm, it’s important to have an appropriate hedge
in place to protect against a major economic event. This doesn’t mean ‘investment-grade’
assets only, as even some of those will sell off in a risk off environment (especially T1
financials). We are suggesting Senior ‘recession proof’ Infrastructure bonds and now, for the
first time in many years, government bonds. It’s time to take a serious duration position.
To that end, there a variety of longer-dated infrastructure assets trading at deep discounts
and offering yields in the 6s and 7s. Or for a pure bear hedge without credit risk, the NTTC
(Northern Territory Treasury Corp) 2042 bond will outperform in a downturn. This asset has a
4.1% fixed coupon and can be bought in $100K lots at a price of ~86 – making for a running
yield of ~5% p/a, and an overall yield to maturity of ~5.5%.
The underlying price is going to be volatile but a 1% drop in yields should see this bond
move up in price by approximately 12% (and vice versa of course).
Reach out to your IAM Relationship Manager about how to add some quality duration to your
portfolio.
