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Globally integrated markets

May 2017

By Antares Fixed Income

Back in 1997, the Asian Financial Crisis showed how integrated the developed and emerging markets had become. A rising US dollar stressed the foreign denominated debt of the highly-indebted Asian nations. It resulted in collapsing currencies, failing economies, defaulting corporations and global contagion. It showed how highly integrated and interdependent global financial markets had become; be it in equities, currencies or fixed income. Investors would face ever-increasing systemic macro event risk.

Investing in Australia is investing internationally

When you are investing in Australia you are also investing globally. Australia might be a big island but with the globalisation of trade, rise of the multinationals, free flow of information and the contagious impact of offshore events and economic developments, local investments are rarely just local. This is no more pronounced than in fixed income. There are equity investments that may have returns tightly linked to specific developments in the domestic market but when you invest in fixed income you always need to use a global lens to make your investment decisions.

Take the case of Trump’s election. Bond yields rose rapidly in the United States with 10-year US Treasury yields rising from 1.8% pre-election to 2.3% within days of the election result.1 What has since been dubbed the ‘global-reflation trade’ had begun. 10-year Australian government bond yields rose from 2.2% to 2.6% over the same period.1 The global linkage was strong. In the period post Trump we have also seen US equity markets rally strongly, with the S&P 500 Index up 13% as of late February.1 The S&P/ASX 200 Index was also up 12% over the same period.1,2 Although the sector returns are vastly different, it is hard to ignore the global linkage.

Investing through a global lens

Antares Fixed Income is an Australian based investment management firm and although the majority of our investments are in Australian dollar denominated assets our investment strategies and insights are global in nature. Additionally many of the Australian dollar denominated assets invested into are issued by offshore or global companies. While domestic economic fundamentals drive monetary policy settings that impact short-term interest rates, global developments often have a large impact on Australia’s longer-term yields as well as our credit market and the risks of individual bond issuers.

Over the last couple of decades there has been significant growth in the number of foreign companies issuing Australian dollar denominated bonds to source funding for their businesses. These bonds are bought not only by Australians but also by investors from all over the world including Japan, Asia, US and Europe. The Australian dollar denominated bond market currently has around A$255 billion of outstanding debt from corporates, many of them multinationals or based offshore.3 Issuers include Apple, Intel, BP, Hyundai, John Deere and Rabobank, to name a few. It’s impossible to invest in the Australian dollar denominated corporate bond market without having a global macro view. 

Taking a global view – In practise

For the Antares Income Fund4 we bought Credit Default Swap (CDS) protection last year on France. It was very cheap at the time. This CDS contract trades in line with French government risk and as such we anticipate that it will perform strongly should upcoming European elections (in France and Germany in 2017 plus Italy in 2018) lead to a rise of European Union (EU) breakup risk.5 If this occurs there would no doubt be some extreme volatility in asset prices. There may be a flight to quality reminiscent of the EU crisis of 2012 which would see equities catch a cold and credit spreads widen. In such an environment a cheap protection position may be a worthy hedge. The Antares Income Fund is an Australian fixed income fund marketed to domestic retail investors but is managed with a global perspective. If EU breakup risks abate or central banks save the day for investors (again), then the cost has been minimal with only a small premium paid for the option to help protect the fund’s capital from a potentially extreme global event.

1. Bloomberg and Antares Fixed Income, March 2017. 

2. Past performance is not a reliable indicator of future performance. The value of an investment may rise or fall with the changes in the market. 

3. Bloomberg AusBond Index, March 2017.

4. No investment is free from risk. Antares Capital Partners Ltd (ABN 85 066 081 114, AFSL 234483) is the issuer of Antares Income Fund. You should obtain a Product Disclosure Statement (‘PDS’) relating to the financial products mentioned in this communication and consider it before making any decision about the product. A copy of the PDS is available upon request by contacting our call centre on 1300 738 355 or on our website nabam.com.au. 

5. Any projection or other forward looking statement (‘Projection’) in this document is provided for information purposes only. No representation is made as to the accuracy of any such Projection or that it will be met. Actual events may vary materially.
 

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Important information

This publication is provided by Antares Capital Partners Limited (ABN 85 066 081 114, AFSL 234483) (ACP) as Responsible Entity of the Antares Income Fund (Fund). ACP is a member of the group of companies comprised National Australia Bank Limited (ABN 12 004 044 937, AFSL 230686), its related companies, associated entities and any officer, employee, agent, adviser or contractor therefore (‘NAB Group’). Any references to “we” include members of the NAB Group. An investment in any product or service referred to in this publication does not represent a deposit or liability of, and is not guaranteed by NAB or any other member of the NAB Group.

This information may constitute general advice. It has been prepared without taking account your objectives, financial situation or needs and because of that you should, before acting on the advice, consider the appropriateness of the advice having regard to your personal objectives, financial situation and needs.

You should obtain a Product Disclosure Statement (PDS) relating to the Antares Income Fund mentioned in this communication issued by Antares Capital Partners, and consider it before making any decision about whether to acquire or continue to hold the Antares Income Fund. A copy of the PDS is available upon request by phoning 1300 738 355 or on our website at nabam.com.au.

Past performance is not a reliable indicator of future performance. The value of an investment may rise or fall with the changes in the market. Any projection or other forward looking statement in this publication is provided for information purposes only. No representation is made as to the accuracy of any such projection or that it will be met. Actual events may vary materially.

Any opinions expressed in publication constitute our judgement at the time of issue and are subject to change. Neither ACP nor any member of the NAB Group, nor their employees or directors give any warranty of accuracy, not accept any responsibility for errors or omissions in this publication.

Bloomberg Finance L.P. and its affiliates (collectively, “Bloomberg”) do not approve or endorse any information included in this material and disclaim all liability for any loss or damage of any kind arising out of the use of all or any part of this material.

This information is directed to and prepared for Australian residents only.