Don’t hope for cuts, prepare for hikes

With markets discounting a hard landing it makes sense to prepare for the worst rather than hope for the best.

As a business owner and mortgage holder, I hope to see a few rate cuts from the RBA. I’m sure many people share those sentiments, with inflation pushing up the cost of living and also impacting business confidence.

In the same breath, however, I’m conscious that there’s a real chance rates could go higher, elevated inflation may persist, and business conditions, whilst improving, remain fragile. While I’m not excited about that scenario (my wife isn’t crazy about camping), I’ve planned for that possibility personally and professionally.

I have observed a more intense focus on RBA policy meetings this year than ever before. It’s almost as if the nation is collectively willing to get confirmation that we’re at the top, hoping that rates will start falling and providing some relief.

However, hope is not a strategy, and according to Coolabah Capital’s Christopher Joye, Challenger IM’s Pete Robinson, and Morgan Stanley’s Simon Mills, there’s a decent risk that the road ahead will have some big bumps.

If you look across markets right now, multiple indicators suggest central banks have successfully orchestrated a soft landing - a feat so rare that it has only been achieved once before, back in the 1990s.

Equities markets have rallied strongly since October 2023, and even on a 12-month basis, you’re looking at 23% returns from a broad index like the S&P 500. I guess that’s only a bit more than double the long-term average.

The VIX, a measure of expected volatility, is currently reading 13.11, which is close to 52-week lows and well below the 10-year average of 18.5.

You can also look at US high-yield credit spreads, which have compressed to within ten basis points of the post-COVID lows, which are the lowest levels in the post-GFC period.

So, what is the market missing and how does it impact opportunities in fixed income?

Time codes

0:00 - Introduction
0:56 - Will resilient economies continue?
5:25 - The tailwinds for private credit
8:03 - Where Coolabah Capital is finding opportunities
10:26 - Where Challenger IM is finding opportunities
13:27 - Public versus private markets
14:21 - Making the most of the opportunity
20:55 - What returns look too good to be true?