Home / Funds and managers increasing credit exposures

(Pictured: James Hayes)

Australia’s 15 largest asset owners and managers of credit portfolios are expecting to invest more in local credit markets this year, according to a study by BNP Paribas. But, no surprise, sovereign debt is their least favoured sub-class at the moment.

The 15 big credit investors make up more than half of the Australian-sourced market for credit and most of them expect their flows into credit funds to increase this calendar year. Only 16 per cent are expecting a decrease.

Even allowing for the usual optimism of investors talking about their own asset class, the survey results are interesting given the consensus view that interest rates are expected to rise in the medium term. Other key findings of the study were:

> A preference for asset-backed securities and structured products (66 per cent)

> Sovereign debt was the least-favoured credit class

> Credit duration is viewed as the most efficient way to add value

> The best risk-return is seen to be on the intermediate part of the curve

> Half of respondents have less than 10% of their credit allocated offshore

> The majority expect Australian official interest rates to rise in the second half of next year (50 per cent). A third of respondents expect them to increase sooner, later this year or early next year

> Credit managers are kept awake at night by concerns that a ‘black swan’ event could occur in China or re-occur in Europe or that the US Federal Reserve Bank could rapidly unwind quantitative easing (QE), leading to a sudden rise in rates.

James Hayes, head of fixed income at BNP Paribas, said: “In terms of credit demand, our survey found a preference for asset-backed securities (ABS) and structured products, with two thirds believing these offer the best value.

“This was followed by a third favouring Australian corporate and senior financial credit. There was little interest in covered bonds, Kangaroo corporates or sovereign bonds and sovereign debt was the least-favoured credit class according to our analysis… Investors see a focus on credit duration as the most efficient way to add value above benchmarks. They see the best risk-return on the intermediate part of the curve,” Hayes said.

Interestingly, half of respondents have less than 10 per cent of their credit allocated in offshore credit markets, while a third have more than 20 per cent invested in overseas credit.