“Rough winds do shake the darling buds of May” (William Shakespeare)
A lot can happen in a month! Since this time last month, the RBA has cut the cash rate to 1.25% ending the longest (32 months) run of stability in the cash rate that Australia has ever seen, a largely unforeseen election outcome has resulted in a Coalition majority and Ash Barty has won the French Open, becoming the first Australian in 46 years to triumph on the clay courts of Roland Garros.
The RBA decision to cut cash rates was on the whole anticipated, citing employment market conditions, a desire to achieve its inflation target over the medium term and following downward revisions to GDP economic growth forecasts (reduced in May from a prior RBA target of 3% to 2.75%) and consumption indices. Many economists are forecasting more cuts and some the possibility of formal quantitative easing.
Policymakers are hoping that this provides a fillip to the economy and boosts consumption – which has recently come under increasing pressure through a number of factors including weak wage growth, falling house prices and high household indebtedness – rather than being squirreled away in savings. There are some positive signs – the election results appear to have generated a confidence boost to housing market sentiment given the threat of revised capital gains tax and cessation of negative gearing has receded; moreover upcoming Federal income tax cuts are anticipated eagerly by many. Additionally, there do appear to be early signs of reversal away from the recent contraction in credit availability; explicit political overtures to banks to lend to consumers and business, Government stimuli (eg in the form of the Australian Business Securitisation Fund with its mandate to improve access to capital for SME lenders) and other similar initiatives approaching deployment, APRA’s move away from the minimum interest rate used for assessing loan serviceability and the impending reduction to risk weighting of mortgages held by regional banks may all contribute in their own way to easing credit availability, which will be welcomed.
So what does this mean for Australian private debt? In our view the supply/demand credit imbalance still persists and we are seeing significant potential opportunities for investment in quality Australian private debt assets. Although there are signs of slowing economic growth, asset performance continues to be largely very robust and in line with expectations, albeit with small but increasing performance differentiation as a function of lender quality.
With volatility in global markets fuelled by continued trade war brinkmanship, broader geopolitical challenges and distortionary monetary policy offshore (perhaps the ‘rough winds’ as contemplated by Shakespeare?) having knock-on effects to equity returns, the case for private debt as a key part of a balanced portfolio in our view remains compelling.