With only two more rate cuts likely over the next six months, it’s time for a sensible, solid approach to credit investing, says Perpetual’s Greg Stock.
- Lower rates ease pressure on borrowers, increasing credit quality
- A good time to focus on sensible, solid fixed-income returns
- Find out about Perpetual Pure Credit Alpha Fund
- Browse Perpetual’s Credit and Fixed Income funds
The Reserve Bank is expected to cut interest rates twice in the next six months, taking the cash rate close to 3 per cent by early next year.
But persistent inflationary pressures and the economy’s ongoing productivity challenges mean we’re not likely to see further rate cuts below that level for some time, says Perpetual’s Greg Stock.
What does that mean for fixed-income investors, particularly those looking to floating-rate credit for improved returns?
It’s true that floating‑rate funds tied to the cash rate will naturally deliver lower returns as the RBA eases.
But falling rates also generally mean an increase in quality for credit securities, points out Stock, who heads up credit research at Perpetual and manages a number of fixed-income funds.
That’s because falling rates reduce financial strain among households and businesses – which means they’re less likely to default on loans.
That increases the quality (the likelihood that a borrower will repay a loan) of the assets underpinning credit portfolios.
Against that backdrop, the outlook for credit is improving, argues Stock.
“We often see people being very bullish or very bearish in credit. But often the outlook is just benign – and in those circumstances just being sensible and solid in this asset class actually delivers a better risk-adjusted result for investors,” he says.
“Everyone wants to go game fishing – but investing in fixed income is not about that. Riskier asset classes sometimes pay off, but in environments like this it’s better to do sensible little things.
“A less-positive return is better than a negative return.”
Understand what’s driving monetary policy
As rates fall, it’s important for investors to pause and consider why the RBA is easing, rather than just reflexively seek out higher-yielding alternatives, cautions Stock.
“Offshore – in New Zealand, America and Great Britain – rates were raised much higher, which induced more unemployment and a deeper downturn, driving inflation lower.
About Greg Stock
Greg Stock is a Senior Portfolio Manager and Head of Credit Research with Perpetual’s Credit and Fixed Income team.
Greg has more than 30 years of investing experience, including 20 at Perpetual. He has researched and analysed credit markets on the buy side and sell side for more than a decade, through multiple cycles.
Greg is a senior portfolio manager responsible for Perpetual Active Fixed Income Fund, which offers diversification and risk management via exposure to a hand-picked selection of mainly corporate and government bonds.
He is also portfolio manager for Perpetual Dynamic Fixed Income Fund, an absolute return fund that seeks to provide investors with a regular income and consistent returns.
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