Volatile year predicted with growth and inflation expectations driving market performance
Tactical trading strategies particularly in the direct securities sector will provide the strongest opportunities for Australian bond investors during the first half of 2017 according to a report released today by BondAdviser, Australia’s only specialist independent fixed income research platform.
The “First Half 2017 Outlook: Where to from here?” report also found the potentially steeper yield curve could make it difficult for Australian bond investors who are using index based methodologies and passive long-only strategies to outperform.
In 2016, gross issuance was limited in the ASX market with ~$7 billion printed across seven transactions and net issuance of $5.6 billion due to the redemptions. Secondary volume improved (up 28%) compared to 2015, but sector diversity remained skewed with bank hybrids continuing to dominate the market.
Geoff Malkin, Managing Director of BondAdviser, commented: “The chase for yield is still on in 2017 with persistently low term deposit rates on the one hand and capital preservation on everyone’s mind in a 'Trump gone mad world’. Access to the widest range of credit and interest rate securities that guarantee regular interest and certainty of maturity will be paramount to ensure stability in investors’ portfolios.”
Other key findings in the Outlook Report include:
- The inflexion point for equal allocation between credit risk and interest rate risk is fast approaching. Investors will have to be diligent and timely in their execution but the steepness of the swap curve should provide sufficient protection against any selloff;
- Demand for yield products could not be stronger and if anything, the lack of net issuance has created illiquidity and/or a scarcity premium;
- The expectation of low official interest rates for longer has not changed. The key now is understanding how international growth policies will affect the domestic yield curve;
- Analysis suggests we are in the final stages of the property cycle. Interest rates are expected to bottom out over the next 2 years and as a result, there will be downward pressure on asset prices. Nearing the apex of the property cycle, prefer low-geared, diversified A-REITs with limited exposure to on-balance sheet developments will be most favourable;
- Regulatory reforms continue to dominate the health care sector where potential earnings volatility for service providers could spark concerns for debt investors;
- The performance of the ASX Listed Debt and Hybrid market in 2016 is unlikely to be repeated in 2017. While we expect demand to remain high valuations are no longer as favourable;
- Credit markets continue to be well-supported by solid fundamentals but political and macroeconomic risks have cast doubt into corporate capital investment and hence net issuance from corporate borrowers has been limited.
The full Report is made available to BondAdviser customers and subscribers. For more details please visit www.bondadviser.com.au
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Note to Editors
The Outlook Report is available for interested media as a reference source. Please contact Pru Quinlan.
About BondAdviser
BondAdviser is Australia’s only specialist independent fixed income research platform providing valuable information and clear investment recommendations for all ASX-listed interest rate securities and a broad range of over-the-counter corporate bonds.
The company is not aligned to any financial services organisation and the executive team brings over 75 years’ combined experience in the fixed income sector. Our highly-experienced team has developed a sophisticated and deep understanding of fixed income markets through long-term experience working in global and local bond markets, building impeccable credit management skills.