War creates uncertainty and disrupts markets. Just a few days in, and already, the Trump administration is extending the term of the anticipated conflict. The Middle East war is a huge disruption and will take time for markets to settle. Typically, companies don’t like issuing new bonds in unsettled markets as they are difficult to price. So, I’d expect new supply to slow. It might take a big issuer to come back to the market, for it to be considered settled enough for others to borrow again, and they may have to issue at a premium to make sure it’s successful. Importantly, volatility creates opportunity for active managers.
Domestic inflation already looked high, but the new war and rocketing oil prices look set to see it ratchet up once again. The oil price feeds into almost everything as goods need to be shipped, and higher oil prices lead to higher inflation.
Reserve Bank Governor, Michele Bullock, gave a speech yesterday at the AFR Business Summit and commented,
‘…potential implications for inflation expectations are something we are very alert to. But at the same time, a prolonged impact on energy markets could have adverse effects on global economic activity and result in downward pressure on inflation. It is not obvious how this might play out.’
I agree, it is not obvious how this may play out. My asset preference would be for quality over yield and to keep a mix of fixed and floating securities.
Amundi and Franklin Templeton wrote an excellent paper covering the conflict and anticipated outcomes for all asset classes.
Australia and the US are on different interest rate paths, and Justin Tyler from Daintree Capital argues investors need to focus on the divergence rather than whether interest rates will go up or down.
In yesterday’s AFR, Jonathan Shapiro reported that Realm Investment House is exposed to Market Financial Solutions, a British lender, which has been placed into administration for allegations of fraud. Realm invested in mezzanine financing. Apparently, senior lenders have declared an event of default. According to the article, the exposure represents 2.35% of Realm’s Strategic Income Fund. Default doesn’t necessarily mean complete loss, but the news generally may see a rise in redemption requests.
Jenna Hayes from IAM argues that direct investment into private syndicated bank loans is preferable to pooled private credit funds. This is a fantastic educational article and explains the differences between the two options well.
There’s been some nervousness in credit circles about the rapid devaluation of some software companies and the repercussions for private loans to the sector. Pete Robinson of Challenger Investment Management has responded, explaining challenges and what to look for when investing in private credit generally.
Have a great week!
