Speaking to Investor Daily, BetaShares chief economist David Bassanese said there is a strong case for hybrids following the coalition’s surprise win earlier in the month.
“The hybrid has franking credits, which have always been a big positive for investors,” he said. “The outcome of the election with the Labor party not winning, despite indications that they would, has reduced the risk that people who used to receive franking credit refunds will no longer get them.
“The way is open to investing back into high-yielding investments that offer attractive franking credits and hybrids being one of those.”
Importantly, there was a decent selloff in the market in anticipation of a Labor victory. Mr Bassanese said spreads have come back since the election but still remain wider than they have been in previous years.
“Late last year the hybrid spread widened to 3.75 per cent,” he said. “The biggest selloff came back in early 2018 when Labor first announced their economic policy.
Coolabah Capital fund manager Christopher Joye, the investment manager of the BetaShares Active Audstralian Hybrids Funds (ASX: HBRD), initially predicted that Labor’s franking policy would have little impact on hybrid holders. Morningstar research estimated that only 10 to 20 per cent of investors would be impacted by the policy.
“Our assessment was that as most hybrids would likely end up in the hands of investors who could still continue to fully utilise franking credits, they should suffer no real valuation or price effects over the medium term,” Mr Joye said.
But it seems Labor’s policy impacted more investors than expected. Mr Joye said the hybrids market saw “waves of selling” between March and May 2018 (Labor announced its policy in March last year).
“This pushed the interest rate spread on five-year major bank hybrids over short-term market interest rates, or BBSW, from around 3 per cent to 4 per cent.
“Coming into the May federal election, five-year major bank hybrid credit spreads had once again widened from around 3 per cent above BBSW in January, to 3.55 per cent leading up to the election, reflecting fears that the Labor Party would win and restrict the availability of franking credits.
In the month leading up to the federal election, Coolabah bought an additional $100 million of ASX hybrids across its portfolios and lifted HBRD’s portfolio wright to the sector to close to 90 per cent, Mr Joye said.
“With the LNP election win, the five-year major bank ASX hybrid spread has quickly narrowed back to 3.37 per cent, and our view is that this should compress further towards the January levels around 3.0 per cent, providing further upside potential,” he said.
Following the federal election, BetaShares experienced a surge in average daily net inflows in the week after the election compared to the previous week ($2.1m per day compared to $0.78m per day the week before the election).
“We suspect interest will grow as investors and planners start to re-consider the yield attractions of the sector, especially if the RBA starts cutting rates aggressively,” BetaShares chief economist David Bassanese said.
