As Sydney comes out of lockdown and Melbourne sees some restrictions lifted, there are some reopening trades in the Australian credit market which investors should consider as part of their fixed income portfolios.
Supported by an increasing vaccination rate across Australia, the outlook for the Australian economy is looking increasingly more optimistic, with consumers and businesses starting to see light at the end of the tunnel.
Investors should consider opportunities coming from bonds in sectors hit hard by lockdowns that are trading relatively cheap compared to their valuations based on a normalised operating environment. The main sectors include travel, shopping centres, gaming, airports, hotels, and distressed credit players.
If these bonds are trading relatively cheap, then there is incremental alpha to be made as the bonds migrate towards their fair value as the Australian economy normalises. Provided a company’s prospects have not been permanently impaired from COVID-19 (that is, idiosyncratic risk remains quite low for the credit), then we suggest focusing on companies which are high-quality, have good balance sheets, and are industry leaders. These will benefit the most from the reopening as COVID-19 becomes less of a threat. Buying when news is bad – but with a light at the end of the tunnel – is a good strategy.
Chart 1. Economic Activity During Peak Covid Era
Chart 2. Covid-related Hospitalisations, Cases, and Deaths in Australia
Source: AMP Capital, covid19data.com.au
The AMP Capital Australian Economic Activity Tracker rose strongly over the last week as the Australian reopening gathered pace. All components within that tracker rose, with the key ones being restaurant bookings, transactions, and mobility. The tracker will likely move higher as reopening continues apace. The main risk in Australia remains a resurgence in new cases in NSW, the ACT, and Victoria after reopening — not unlike what has been seen in the UK, Israel, and more recently Singapore. In our view, this is a low-risk event, and we do not see this event playing out at this stage.
In the investment-grade space our top ideas are:
Qantas: QANAU 5.25% 09/09/2030 (YTM of around 4%)
The outlook for Qantas has improved significantly following recent updates to the long-anticipated travel restart. This has seen the intended take-off date for international travel brought forward originally from 1 December to 15 November, to (more recently) 1 November 2021.
Overall, increasing vaccination rates across Australia, along with the relaxation of border and quarantine policies, have lessened the risks for the airline, giving us conviction in the company’s earnings will rebound with free cash flows (FCF).
Scentre Group: SCGAU 5.125% 24/09/2080 (callable 24/06/2030, with YTM of around 4%)
Scentre Group is supported by a portfolio of high-grade retail assets that have traditionally been very high performers. While Australian retail property centres were impacted by COVID-19, rents picked up in H1 2021 and are likely to start ramping up over H2 2021 as restrictions continue lifting — making this a good ‘reopening trade’.
Scentre Group is a world-class owner, manager, and developer of retail assets. Asset values have started to stabilise and the company’s net operating income (NOI) appears to be rebasing to a level higher than expected.
Sydney Airport: SYDAU 3.12% 20/11/2030 (inflation-linked bonds, real yield of around 3-4% depending on your inflation assumption)
With interest rates as they are and the whole world nodding in agreement that the unprecedented COVID-19 economic stimulus will create ongoing inflationary pressures, it is imprudent to not have some form of inflation-linked bonds in your portfolio.
Supported by increasing vaccination rates across Australia, we’re getting closer to a normalised operating environment, and that can only be good news for airports, hotels, and tourism/travel in general.
In the high-yield space our top ideas are:
Capital Alliance Investment Group (CAIG): CAPAAU 10% 21/10/2025 (YTM of around 10%)
There are several key credit milestones on the horizon for CAIG, starting with the opening of the Marriott in late October, which should coincide with the 80% vaccination threshold in Melbourne. CAIG also has plenty of cash on hand from the Marriott residence sales and residual stock facilities — which will be received by the end of this year. By the start of 2022, there will be three operational hotels that will be ramping up occupancy and cashflows following the completion of AC Hotels (Normanby).
Pioneer Credit: PIOCRE 0 22/03/23 MTN (YTM of around 9%)
As the major banks relinquish their COVID-19 goodwill, releasing more purchased debt portfolio’s (PDPs) to market, Pioneer Credit is well-positioned to acquire the assets at attractive discounts. Concurrently, improving employment conditions for underlying borrowers will drive up recovery values. At this time, Pioneer Credit strikes us as a truly unique proposition, leveraged to a COVID-19 exit that the market has largely overlooked to date.
Crown Resorts: CWNAU 0 23/04/2075 (YTM of around 10%)
With Sydney coming out of lockdown and Melbourne’s restrictions slowly lifting, there’s an opportunity to buy into the Crown ASX hybrids at a cheap entry point. Despite the regulatory risk that comes with casinos and negative public sentiment on account of The Star’s recent problems, it’s hard not to anticipate that casinos will roar back to life once lockdown restrictions are lifted. Crown is well positioned for a rebound, given its flagship casinos, as well as the fact that The Star (its key competitor) is now facing several issues.
For now, we maintain a constructive stance on corporate credit due to favourable fundamentals and supply/demand dynamics, and suggest investors position themselves for a reopening trade.
We favour certain cyclical sectors, including travel, shopping centres, gaming, airports, hotels, and distressed credit players — complemented by a higher-quality bias in less cyclical sectors that provide defensive characteristics to portfolios.
Should we see a resurgence of market fear that leads to a material widening in credit spreads and yields, then we would be looking to add to these cyclical sectors which offer high income and total return potential.
About Matthew Macreadie
Matthew’s current responsibilities include providing credit commentary/views on the bond market and specific issuers, with the aim of aiding investors to make better risk-return decisions.
Prior to joining Income Asset Management, Matthew spent eight years working as a Credit Portfolio Manager at Aberdeen Standard, where he was responsible for the credit portfolio construction and security selection across a wide range of financial and non-financial sectors.
Matthew began his career at KPMG working in Auditing and Assurance within the consumer and industrials group. Matthew holds a Masters of Applied Finance from Macquarie University and a Bachelor of Commerce from UNSW.
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