Key takeaways:
- Geopolitical risk and private credit concerns are colliding with elevated asset valuations, with the biggest impact showing up in rates, inflation expectations, and bond yields rather than risk assets.
- Dislocations are creating opportunities in liquid, high-quality fixed income and government-linked sectors, alongside selective relative value trades.
- With yields at decade highs, investors can prioritise higher-quality assets, take “safer risks,” and use liquidity and portfolio protection strategically.
Marketing communication. Not for onward distribution. For professional investors only. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.
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Hello, I’m Jay Sivapalan, Head of Australian Fixed Interest at Janus Henderson. Thank you for joining.
There are a number of tectonic shifts that have been occurring around the world that we’ve been discussing over the last year or two. Two in particular, are very worthy of discussion for today, especially around what’s happening in markets. The first one, being all things oil price related and the conflict in the Middle East. And the second one, everything around the concerns relating to private credit. If we think about those two events, they’re really colliding with near perfect valuations, whether it’s other risk markets, such as share markets, property, infrastructure, and indeed, even in credit.
So the market reaction to date has been quite muted on the risk asset side, but it’s been quite pronounced when you’re thinking about cash rate expectations, and what the central banks, including the Reserve Bank of Australia, might do, as well as inflation expectations and bond yields.
So when we think about these events, and the dislocations in markets, and in certain areas, the lack of dislocations which you would normally expect, we have to take a much more nuanced approach to investing in defensive portfolios.
Now, the immediate opportunities presented themselves in the highly liquid parts of the bond market. Think about state government bonds, which have sold off during March, and now are starting to provide compelling opportunities through April, and the pockets of the credit market that are either government guaranteed, government owned, or highly regulated. Think of entities, such as National Broadband Network, or NBN, who issued debt very recently, and an arm of the Australian government. And then on the other side, for our part, we’ve been really thinking through how we take advantage of the current melee, especially around being opportunistic. Whether on the oil price side, we target airlines versus airports, or in the case of private credit, the epicenter being business development companies, or BDCs, or the insurers who have exposure to them, like the US insurers or the US banks.
And then there’s a great deal of opportunity that comes through the AI thematic. Now, from a domestic perspective and from a defensive perspective, one of the really interesting value accretive and safer way to play that part of the market, is actually through the energy producers, i.e. distribution and transmission. And we’re doing a body of work, and investing, and corner stoning deals there.
The upshot of all of this is we haven’t had yields in our products, and indeed, the market as high as it is today over the last 10 years. Bond yields have risen quite substantially, as have some spread sectors. And so what that means is that when we’re thinking about navigating a near perfect valuation framework, we can actually take safer risks, and bigger risks, and safer things, as opposed to necessarily pursuing lower quality credit at this moment in time. Also, portfolio protection, or insurance, is relatively cheap through the credit default swap market. And one thing that we always emphasize is not to forget liquidity. Liquidity is always there until you need it.
And I guess with that, thank you very much for listening.
