- Corporate bonds giving better risk-adjusted returns than peers
- Global volatility has increased amid Brexit, Fed policy risks
Corporate debt in Australia is providing one of the best refuges from global financial market volatility this quarter.
Adjusting for the magnitude of price swings, a Bank of America Merrill Lynch gauge of Aussie corporate notes delivered a 1.1 percent gain since March 31, surpassing similar indexes for the U.S., Canada, U.K., Japan and the euro area, according to data compiled as of June 17. It’s also beating indexes for developed market sovereign debt and the MSCI World Index of equities.
“Looking at the market on a whole, it’s a reasonably high-rated market which brings an element of comfort and provides less volatility as a result,” said Gavin Goodhand, who helps oversee about $490 million in fixed-income assets at Altius Asset Management in Sydney.
Measures of global volatility have spiked in recent weeks as the U.K. referendum on European Union membership approaches on June 23, while a dialing back of bets on U.S. interest-rate increases is also causing disquiet. The gauge of stock market turbulence known as the VIX last week saw its biggest one-day lurch upward for 2016, while Group-of-Seven currency volatility climbed to levels unseen since 2011 and expected one-week price swings for the pound surged to a record.
Goodhand said that Australia’s banks, the mainstay of the local credit market, performed well compared to global peers even during the 2008 crisis, while some of the largest domestic issuers such as Telstra Corp. and BHP Billiton Ltd. are strongly rated. He also noted the relatively defensive nature of Australian property trust issuers, and that even companies issuing Down Under with ratings in the BBB area have tended to be stable infrastructure operators.
The relative strength of the nation’s economy is also supportive of the Aussie credit market, with the country having avoided recession for a quarter century. While the specter of disinflation and the end of a mining boom have prompted the central bank to cut interest rates to a record low, annual growth accelerated to 3.1 percent in the first quarter and the unemployment rate is holding at 5.7 percent, the lowest since 2013.
A lack of issuance by non-financial corporate borrowers has helped keep Australian credit spreads in check, according to Raymond Lee, a Sydney-based money manager at Kapstream Capital, which oversees about $7.4 billion. Transactions this month by Apple Inc. and Coca-Cola Co. were the largest such deals following a very quiet opening to 2016.
Australian corporate notes have delivered a total return of 2.3 percent this quarter, with volatility of 2.1, based on Bank of America data compiled by Bloomberg. While the total returns on U.S., Canadian and U.K. securities have been higher, they’ve also exhibited bigger price swings, the data show. Conversely, lesser volatility on debt in Japan and Europe hasn’t been sufficient to make up for lower total returns. The average composite ratings for the U.S., European and U.K. indexes are all a step lower than for Australia, while Japan’s and Canada’s are similar to the South Pacific nation’s.
Aussie credit has also provided the strongest returns over a much longer time horizon. Investors in Bank of America’s Australian corporate bond index would have doubled their money over the past decade on a total return basis, and in risk-adjusted terms the return has been 36 percent, according to data compiled by Bloomberg. The next best performance has been from European debt, which has gained 24 percent once the size of price movements are taken into account.
“When I look at Australian companies with bonds outstanding , most are of high quality,” said Kapstream’s Lee. “Company leverage and earnings have been reasonable, helping them to navigate the volatile environment.”