In a recent webinar covering its outlook for the 2026 financial year, ETF provider Global X said it expects further funds to flow to assets such as private credit and banking credit during FY 2025 as bank hybrids continue to mature.
Global X product and investment strategist Marc Jocum said with over $40 billion in hybrids set to roll off by 2032, many investors have been asking where this money will flow to next.
Late last year, the Australian Prudential Regulation Authority (APRA) confirmed it would phase out the use of Additional Tier 1 (AT1) capital instruments to simplify and improve the effectiveness of bank capital in a crisis.
Jocum noted that there were a few hybrids rolling off in September, including hybrids from Westpac, AMP and Macquarie.
“Naturally, these dollars need to find a new home and there’s a range of alternatives that people can look from,” he said.
“The RBA looks like it’s going to be cutting rates so people may not be too comfortable being in term deposits or cash. Australian dividend yields aren’t paying that great either.”
Jocum expects investors will instead look in areas such enhanced cash, core fixed income and high yielding credit.
Global X has also had a lot of conversations with investors around private credit in particular, said Jocum.
“Even though private credit really came about during the end of the GFC, the private credit landscape has changed dramatically since then,” he said.
“It was previously the domain for institutional investors, heavyweight endowment funds, sovereign wealth funds, billionaire family offices, but it’s now being pitched at everyday investors and advisers.”
Globally the private credit market has expanded to $2.5 trillion in US dollars.
“Even in Australia, which is a smaller market, we’ve seen around $40 billion flow into private credit funds so far over the past couple of years,” said Jocum.
Investors are also looking to Australian banking credit as a new home for their income strategies, according to the ETF provider.
“These debts which are issued by Australia’s largest banks, or any bank which is an authorised deposit taking institution, often offer more than what you can get in term deposits, in some of the big bank shares and even in government bonds,” said Jocum.
Last month, Global X revealed that its Australian bank credit ETF (ASX: BANK) had gathered $95 million in assets under management since launching just a year ago, making it one of the fastest-growing products in the exchange-traded fund (ETF) provider’s line-up.
“For a lot of investors, because that equity risk premium is now close to zero here in Australia, investors might need to ask themselves, ‘Why should I overcompensate and take on more risk than I need to when I can get a really similar yield profile in something that’s exhibited lower historical volatility?’ So we’re seeing a lot of interest within Australian banking credit,” he said.
As hybrids roll off, Jocum said senior bonds and subordinated bonds will become a bigger part of the portfolio.
“At the moment, [they’re] yielding around about 5–5.5 per cent, so really low volatility profile. They could be a really attractive place for investors to park their capital while they look to roll off their hybrids, while also reducing the overall volatility of their portfolio because banking credit tends to have lower drawdowns than the typical equity market,” he said.
