Australian debt investors now fear central bankers more than housing

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The pending withdrawal of monetary stimulus by global central banks is now the main risk factor that keeps Australia’s fixed-income investors up at night.

That’s one of the findings from a quarterly survey carried out by credit ratings agency Fitch, which also show that Australian housing is no longer the primary concern.

The US Federal Reserve kept interest rates on hold in a range between 1.5% and 1.75% on Wednesday night.

But markets are currently pricing in between two and three additional rate hikes this year, as the Fed also moves to reduce its bond purchase program.

And while the European Central Bank is behind the Fed in terms of removing stimulus, it too has flagged the end of its bond-purchasing program.

So the prospect of a coordinated unwind is now the primary focus among 44% of respondents.

At the same time, fears around a hard landing for housing have eased somewhat from this time last year, when almost half (47%) of those surveyed flagged it as the highest risk. That’s now dropped to 29%.

And concerns around frothy house prices in May 2017 were probably warranted, given that values peaked a few months later before commencing an extended decline in September.

Still, respondents said that when it comes to the outlook for Australian banks, housing — and the associated risks to credit quality — still poses the biggest risk.

Last week, Fitch ran a stress-test on Australia’s big four banks in a “worst-case” housing scenario, which found that the majors would most likely be able to withstand a crisis.

The ratings agency added that the sheer amount of regulatory oversight — led by the ongoing Royal Commission — will limit the ability of banks to relax their underwriting standards.

“Any weakening of standards may place downward pressure on our view of risk appetite and ultimately, bank ratings,” Fitch said.

Rounding out the top three fears was the risk of a hard landing, although investors are now more confident that Chinese authorities will be able to reign in excessive leverage without causing a significant slowdown in the economy.

“The number of investors ranking a China hard landing as a high risk fell to 29% in our 2Q18 survey, much lower than the 42% recorded in 4Q17,” Fitch said.

And casting a slightly negative light on the outlook for capital investment in Australia, respondents were asked about their expectations for Australian companies.

Most said that Australia’s listed corporates would use extra cash to return funds to shareholders — while capex fell to the bottom of the list.

The survey was carried out from March 12 to March 27 2018, with views from 42 respondents who oversee more than $500 billion of fixed-income assets under management.

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