As financial repression bites, portfolio managers in the United States are being advised to protect clients’ principal by investing in hard assets, but Australian investors are somewhat protected by dividend franking and hybrids.
PIMCO senior vice president Jeff Helsing said in the US protection against “financial repression by governments” could be achieved through investing in forms of credit and commodities.
However, Bell Potter Securities head of retail fixed income Barry Ziegler said the situation for retail investors in Australia had been somewhat different, with local investors having the benefits of dividend franking and an incredibly active and fast-growing listed debt and hybrid sector.
“So far this year, we’ve seen some $6 billion in new issues of listed debt and hybrids from large industrials and financials, and that is where many retail investors have focused as they try to improve on the yield they are being offered on bank term deposits. Such products are also far more accessible for smaller retail clients than unlisted corporate debt,” Ziegler said.
Helsing said “in avoiding financial repressions, hard assets are most suited. For instance, securitised assets, where the asset coverage on recovery is extremely high”.
For example, in the US, airlines’ double enhanced equipment trust certificates were securitised assets where the asset recovery was extremely high.
Other US sectors where asset recovery could be high were within resources – by example, exploration and pipeline companies.
Helsing said these examples aligned with PIMCO’s broader cyclical and secular outlooks, and offered good yield returns with mitigated risk on the downside.
“Capital structure is extremely relevant in the investment process,” he said.
“Capital structure is defined as going from secured assets down to unsecured and finally down to equities. Credit spreads on average – looking at the global universe – offer twice the income of equity dividends.”
Other things to consider, he said, were that “coupons on corporate bonds are contractual, unlike equity dividends, which are discretionary, and corporate bonds are senior claim, which means in the event of default they are much higher in the capital structure and actually have a claim on the assets of the company”.
“In relation to the risk and reward across asset classes, you need to be aware of the expectations for growth both on the upside and on the downside. And finally, looking at return experiences, credit markets have offered similar returns to equities with much lower levels of volatility,” he said.
Ziegler said wholesale markets had supported the debt markets vigorously, “leading us to believe that credit spreads on listed markets must contract”.
“Therefore, prices of the recently listed securities are expected to increase in price as investors arbitrage the differential,” he said.
“The [Australian] government’s bank deposit guarantee has also meant that we have seen more cautious investors sticking to deposits as they have gained more peace of mind from the guarantee than securitised assets can provide.”
With government bonds trading under 2 per cent a year for a three-year security and sub 3 per cent a year for a 10-year bond, investors were flocking to the listed space in search of yield.
“Similarly to the overseas experience, we have seen less volatility in debt markets compared to equities as well as higher returns,” Ziegler said.
