Housing finance

The credit cycle is all that matters.

To avoid saying the worn out cliché of “this doesn’t end well”, we’ll go with another. “The chickens are coming home to roost”.

Because that second series is the original, and there’s enormous volatility in both the underlying trajectory of credit demand given mortgage rate repricing, as well as the normal impacts of what Dec-Jan do for really any time series, we’ll just go with “overshoot to downside likely”.

But it is really really hard to believe that this doesn’t or won’t have meaningful macroeconomic ramifications.

And we are set to hike the rates a whole bunch of times more.

The RBA is between a rock and a hard place.

From an asset allocation perspective, we are underweight Australian shares, and within Australian equities, we are positioned in quality defensives.

If we are wrong, and the economy muddles through, well, Aussie shares will probably do quite well, and perhaps better than our overweights to international equity (where we see the risks and rewards as much better balanced). But it would hardly be disastrous. 

If it really is a meaningful harbinger for a much worse outcome, then we will be pleased with our efforts to diversify away from the local market.

Similarly, if we are wrong, and the economy muddles through, well, our defensive equities within Australian shares (think healthcare, telecos, to a lesser degree some of the insurance companies) will probably underperform the pointer parts of the market, like domestic cyclicals (think builders, retailers, discretionary, the 2nd tier banks), and although we think our defensives will do fine in an absolute sense, they’d clearly lag behind the riskier names if the risks don’t actually materialise. 

If it really is a meaningful harbinger for a much worse outcome, then we will be pleased with our efforts to diversify into lower beta, defensive, quality names.

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Please note that past performance is not a reliable indicator of future performance.

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