US investors have been riding Australian rates lower and profiting from that move, but they are a little more worried about the housing market and its impact on banks.
That’s the takeaway from ANZ senior rates strategist Martin Whetton’s latest trip to see US investors.
Whetton says he visited real money as well as leveraged investors in the US and that “Australia has been a core generator of alpha for clients who have held the exposure in cash or synthetic ways for a long time.”
He said he got a sense that some of these positions had been pared back recently but overall “investors remain very interested in a number of aspects of the Australian market.”
Here’s a summary of the key points Whetton highlighted in the note to clients:
- On the economy – “investors shared our view that overall the Australian economy is travelling quite well, with solid growth, moderate levels of unemployment, strength from the consumer, and an economy that is making the transition from the mining sector to a more serviced-based economy”.
- On inflation – Whetton said that there was “some concern that inflation would remain low in Australia”.
- On household debt – he says it’s “never news for anyone visiting US investors” that there are concerns about “the level of household debt in Australia and growth in house prices”. But he added that “concerns were also flagged about the supply of apartments on the east coast”.
- On Australia’s banks – Concerns about apartment oversupply “gave rise to questions about the health of banks and their balance sheets and how the consumer would cope with higher rates if funding costs by banks were to rise in the event of higher market yields or a downgrade of bank ratings”.
Whetton concludes that investors see the Australian dollar’s current valuation as “fair” on the back of the FOMC’s reluctance to tighten rates in the US, as well as the improvement in commodity prices and the above-trend economic growth rate.
But he adds that while the “investors we saw have profited from being long Australia”, it seems “recent valuations and a turnaround in market sentiment more broadly have brought this into question”.
As a result Whetton believes overall position into Australian assets “has been sharply reduced”.
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