Aussie private credit can offer safe haven

Oksana Patron

27 January 2023

Australian private credit will continue to offer investors significant opportunities with expected strong level of deal flow to last despite global economic uncertainties, according to GSFM and its fund manager partners.

Although Australia is well-positioned to cope with an economic slowdown, it is yet to be seen what the full impact of rising interest rates would be and what this flow-on effect would have on household behaviours and consumer spending.

According to GSFM investment strategist Stephen Miller, well-intentioned but potentially flawed changes to the regulatory environment, particularly in relation to the wage-setting framework, could run the risk of entrenching higher inflation in Australia compared to elsewhere.

Also, it is also not clear how far interest rates would need to rise to curtail inflation, but managing director of Tanarra Credit Partners, Graham Lees, believed Australia was relatively well placed compared to other economies.

“In this environment, private credit investments – particularly those with a senior security ranking and that are floating rate – provide protection against both inflation and rising rates and represent a safe haven investment,” he said.

Additionally, private credit across the Asia-Pacific region had still a long growth runway that could be levered over the coming years, given its relative under-penetration against more mature, offshore markets, according to Lees.

On the other hand, a lot would depend on how China would emerge from its post COVID-19 era and only then the markets would get a sense of which of two types of recovery this would be: a strong and broad or a narrow and shallow type of recovery, according to Man GLG Asia Opportunities Fund portfolio manager Andrew Swan.

“We do believe the Chinese economy will recover but we are more in the narrow, shallow recovery camp than the broad, strong recovery camp,” he noted.

“If you look at what has built up in terms of household savings, it’s all gone into long-term term deposits. Normally if you’re making that decision, you’re locking your money up, you’re not really thinking you’re about to spend it anytime soon.”

Tribeca Investment Partners, Jun Bei Liu warned that it would be likely a period of weaker economic and earnings growth before a new upswing could begin.

“At a corporate level, we expect to see meaningful cuts to earnings expectations as the combination of rising costs and weaker demand begins to pressure margins,” she said.

“In the absence of a deep global or domestic economic slowdown, we think earnings downside should be modest with most corporates well positioned to navigate a short-term decline in demand.”