The focal point for the last week for the investment team has been on interest rates and credit spreads. From a credit spread standpoint, we have seen a widening in the rated segment of the market in the last 2 months as banks reengage with funding markets. This is not a spread widening as a result of a deterioration of credit, i.e., increased probabilities of default, this is a spread widening as a result of increased asset supply of financial fixed income instruments.

We have seen bond yields increase for two primary reasons: one, the RBA have backed off bond purchases, thus reducing the demand for government bonds, and two, market expectations of cash rate increases in the short to medium term. In relation to the cash rate, RBA Governor Philip Lowe’s April Statement on Monetary Policy Decision shows a shift in language, suggesting there may be a shift in stance pending further evidence the AHYSME Fund believes will become available in May. Whilst a shift towards a cycle of contractionary monetary policy may have adverse impacts on public assets, the environment could prove favourable for Private Credit.

RBA Monetary Policy Decision ¹  

The Board decided to maintain the cash rate target at 10 basis points for another month. Despite no change at this stage, the RBAs language shifting notably. The consistent commentary around the RBA’s patience was dropped from Governor Lowes statement on the monetary policy decision. Additionally, there was an acknowledgement that actual inflation is sitting at 2.6% in underlying terms and 3.5% in headline terms, comfortably within the RBA’s target band of 2-3%. Now the argument is as to whether inflation will remain sustainably above 2% moving forward. Growth in labour costs is still being referenced as a key factor to provide confidence around the sustainability inflation within the economy.The Board decided to maintain the cash rate target at 10 basis points for another month. Despite no change at this stage, the RBAs language shifting notably. The consistent commentary around the RBA’s patience was dropped from Governor Lowes statement on the monetary policy decision. Additionally, there was an acknowledgement that actual inflation is sitting at 2.6% in underlying terms and 3.5% in headline terms, comfortably within the RBA’s target band of 2-3%. Now the argument is as to whether inflation will remain sustainably above 2% moving forward. Growth in labour costs is still being referenced as a key factor to provide confidence around the sustainability inflation within the economy.

We will receive the CPI data in April; however, we expect more data will be required to spark the upward shift in the cash rate. We believe the board will await a few key pieces of additional information before shifting their stance further. We believe these to be:

• ABS release of the March 2022 Selected Living Cost Indexes, due on May 4;
• ABS release of the March 2022 Wage Price Index, due on May 18; and
• ABS release of the April 2022 Labour Force data, due on May 19.

Subsequently, we are of the view that the next notable shift in stance on Monetary Policy and potential inaugural rate hike of an upward cycle could be announced on Tuesday, June 7th.

Portfolio Management Commentary

As outlined in previous investor communications, we are of the view that the expected inflationary environment and upward rate cycle could have adverse effects on public markets. However, Funds such as the AHYSME Fund could be poised to benefit as total returns increase due to the floating rate nature of the strong majority of deals we enter and investors capital remains stable as exemplified by the Fund’s maintained $1 NAV ex-distribution since inception. As opposed to public assets, there are no mark-market pricing on the securities held in the AHYSME Fund’s portfolio.

1 RBA – April Monetary Policy Decision

This information is for accredited, qualified, institutional, wholesale or sophisticated investors only and is provided by Aura Funds Management Pty Ltd (ABN 96 607 158 814, Authorised Representative No. 1233893 of Aura Capital Pty Ltd AFSL No. 366 230, ABN 48 143 700 887). Aura Funds Management Pty Ltd is the Trustee of all the Funds mentioned and a subsidiary of Aura Group Pty Ltd. 

Any financial product advice given in this report is of a general nature only. The information has been provided without taking into account the investment objectives, financial situation or needs of any particular investor. Therefore, before acting on the information contained in this report you should seek professional advice and consider whether the information is appropriate in light of your objectives, financial situation and needs. Aura does not guarantee the performance of its funds, the repayment of any capital or any rate of return. Investing in any financial product is subject to investment risk including possible loss. Past performance is not a reliable indicator of future performance. Information in this report is based on the information provided to Aura by third parties that may not have been verified. Aura believes that the information is reliable but does not guarantee its accuracy or completeness. Aura is not able to give tax advice and accordingly investors should obtain independent advice from an accountant and/or lawyer before making any decision based on the tax treatment of its investors.

You must read the Fund Fact Sheet or Information Memorandum and seek professional advice before making a decision to invest in any of the funds.