Finding certainty in an uncertain market

By Markus Mueller, Co-Founder, Australian Bond Exchange

Global Economic Outlook

Given the unstable economic environment and the uncertainty around the conflict in Europe, it is now more important than ever to diversify your clients’ investment portfolios and move allocations from riskier assets to bonds.

Meanwhile, prices of energy, food and other essential services continue to rise strongly across the world creating enormous challenges for companies and consumers. Clearly, economic growth must slow and according to the IMF’s recent World Economic Outlook, global growth is projected to substantially decrease in 2023.

The Australian economy is expected to slow in 2023 due to rapidly increasing interest rates, contributed to, amongst other factors, declining house prices which negatively impact growth in consumer spending.

With interest rates increasing around the world, bond yields are the highest they have been in years. Not only are bonds looking more attractive, especially when looking at corporate bonds that are currently yielding more than 5%, when 12 months ago, investment grade bonds were returning less than 2%. As fixed-income yields become more attractive, long-term investors looking for opportunities in the bond markets will strongly benefit from adding bonds to their portfolios.

Furthermore, the bond market has already priced in most of the increases in official cash rates and the interest rate risk has fallen substantially over the past couple of months.

With the expected slowdown of economic growth next year, investors should grab the current market weakness and lock in some very attractive rates.

Source: Bloomberg – the graph above shows that 5-year government bonds have stayed in the trading range since May 2022 

Benefits of Investing in Direct OTC Bonds 

1: How to make direct bonds work for you and your clients

You can tailor your client’s portfolio to include a percentage allocated to direct OTC bonds. There used to be an old saying that one should invest their age into bonds to protect their assets, offer certainty later in life, and get certainty of income.

2: How you can use bonds to defend against interest rate and inflation cycles

Direct bonds are an excellent tool to navigate interest rate and inflation cycles. With the volatility in the markets, having investments in direct bonds keeps your returns stable. When your bonds mature, the market value at the time plays no part in the return of your capital as you receive your face value back upon maturity of the bond. There is no need to deal with the volatility in the markets when you can receive your fixed returns and know that you get your capital back upon maturity. The bond portfolio gives you certainty in an uncertain world. 

3: How you can use bonds to keep your clients happy and keep your clients

Investing in bonds help you maintain a long-term professional relationship with your client and will ensure that their money will be protected. Importantly, your client’s income stream will be predictable and certain. As we all know, diversification is a major key and bonds provide your client’s portfolio with a great safety net and a fixed return. Bonds are a predictable investment with contractually obligated income streams and a great substitute for cash. This further enhances the client’s ability to absorb volatility in capital and income from the equities component of their portfolios.

The Australian Bond market- underutilised and limited access

The total addressable market (TAM) in which ABE operates is estimated to be A$8.8 billion in revenue per annum1. With over A$1 trillion in corporate bonds outstanding, less than 2% of corporate bonds are held by self-directed or private investors, compared with 22.3% of corporate bonds being held by private investors in the USA. However, Australia has a burgeoning “Self-Managed Super Funds” (SMSF) sector of over A$800 billion. Additionally, Australian superannuation funds hold only 15.2% of their assets in bonds compared to an average of 44.2% for the OECD2.  This market has historically been inaccessible due to high initial investment as a barrier to access.

Therefore, ABE considers there to be a significant opportunity to provide private investors and superannuation funds with efficient, cost-effective access to bond trading services through its trading and settlement engine. SMSFs, including retirees, will have seamless ability to balance their investment portfolios with Australian Government and Corporate bonds.

This article is general information and does not consider the circumstances of any investor or constitute advice. No fund or stock mentioned in this article constitutes an offer or inducement to enter into any investment activity.