Aus macro

The domestic inflation data is now “joining” the rest of the world, with a strong inflationary pulse starting to show, at all levels of categorisation (headline, and measures of core).

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Higher rates will follow, to combat higher inflation, and to reflect a neutral rate that has likely risen from the floor.

Arguably, the consumer doesn’t seem to be feeling as rosy about the outlook, however, and, to the extent that it can lead/predict equity returns, is a bearish overhang to market.

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As mortgage rates reprice…

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…the debt service ratio will come back into focus, as fuel for the bears.

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We are slightly underweight the financials, at the sectoral level, but that reflects not owning things like Zip Co, or Credit Corp, or the fund managers (having capitulated on our Platinum bet).

We are also underweight the banks, mainly through not owning CBA, which we continue to view as stunningly expensive, however, we have a sizeable exposure nonetheless, predicated on the chance of NIM expansion due to higher rates.

We say chance, because pricing discipline and decent underwriting should mean that interest bearing assets (e.g. loans) reprice quicker than interest bearing liabilities (term deposits, transaction accounts) but there is no certainty that happens. One is implicitly or otherwise, relying somewhat on sensible decisions made by management, and relying on historical correlations that tell you the banks tend to do well when rates go up (which we refer to as positive rates beta).

There is, of course, the negative overhang from higher rates which discourage credit demand, and cause insolvencies to rise, which would eat into banking sector profits, alongside a discount rate that reflects a higher degree of risk aversion.

So, they are not a slam dunk trade by any means.

We also have a sizeable overweight to the insurance companies (SUN, QBE, MPL) which should generate higher returns on float from higher yields, without the rising bad and doubtful debt issue.

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