Market Update
“It always seems impossible until its done.”
It has been relatively quiet on the western front over the past week. Domestically there is still a big focus on COVID related issues with State Governments continuously monitoring and updating the public. The US presidential inauguration has attracted quite a bit of attention, particularly in view of the riots and protests by pro-Trump supporters. However, the markets have taken it in their stride and hardly reacted at all.
We have spoken about this multiple times, but it is worth reiterating. Interest rates in Australia and the world will remain flat for quite some time. Governments are so burdened by debt that any increase in interest rates would probably lead to a collapse of the financial system as we know it today.
That said, there is a huge percentage of small to medium sized investors that continue to park money in unsustainably low-rate products like term deposits. People simply cannot live on the income derived from such investments, yet the motivation to seek more viable alternatives seems to allude them. So, what are these viable alternatives. We would love to offer “Unicorn Bonds”. These bonds are not only investment grade but pay a coupon of 10% for as long as you like. The reality is these instruments do not exist, at least not for now.
Alternative products such as Yield Enhanced Securities offer a more than viable option to investors seeking income. These securities have been around for quite some time and have usually been solely available to institutions or very wealthy individuals or corporates. These products can offer returns of between 5-8% p.a. with maturities ranging from 2-4 years. Admittedly these instruments has a slight higher risk profile but that is to be expected if one seeks a better return – again there are no “Unicorn Bonds”
The Australian Bond Exchange (ABE) has partnered with various issuers, most recently Pallas Capital, to provide quality high yield investments, that meet all our credit and listing criteria.
Aside from the key variables – Coupon, Security & Term – ABE, this time through a partnership with IRESS, have added a unique feature to these instruments. Typically, investors in these instruments are locked until the security matures. By establishing an account with ABE, investors will have the ability to transact via our digital platform, thereby adding the benefit of liquidity to this type on investment.
Whilst the market adoption for these products domestically has been slow, we expect this to change dramatically as the reality of an extended low-rate environment sets in. We have witnessed the same phenomenon with other products over the years – Instalment Warrants, Margin Lending and ETF’s – to name a few. Market adoption was initially very low but subsequently exploded as people became more comfortable with them. As an example ETF’s now account for a large percentage of daily turnover across multiple asset classes.