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Pedal to the metal

  • The world economy and in particular the Australian economy are now unquestionably enjoying the benefits of the various arms of Government’s “pedal to the metal” strategy of record monetary and fiscal stimulus.
  • The very strong employment data released this week should also dispel the fear of a “JobKeeper cliff” when the national employment package comes to an end in April.

Chart 1: Record Consumer Saving Rates

  • We are now of the view that the consumer will turbo charge short term growth via spending the unprecedented level of savings accumulated whilst in hibernation over the last year.
  • The Westpac Melbourne Institute Index of Unemployment Expectations is seeing the best readings in nearly a decade, emphasising the level of confidence in the outlook for jobs.
  • As the level of saving (chart 1) begins to normalise, we expect a cash injection into the economy of up to $200billion.

The strong underlying economic activity will continue to support the performance of the Partners Fund by ensuring asset valuations are supported by stronger property tenancy, while also ensuring settlement and repayment risks are kept well in check. At some point the rising bond yields and interest rates associated with economic growth will challenge values but coming from a low economic base we see the pickup in activity as a healthy outcome for our book of loans.

More Office, Agriculture and Hotels and less Apartment Construction

  • Building approvals data continues to reflect a rebound in dwelling approvals, driven by house demand, while approvals for apartments remain subdued at 10-year lows.
  • This is a function of both government support including the HomeBuilder scheme and First Home Owner Grant, as well as the demographic shift to outer suburban and regional growth corridors.
  • In contrast to house sales, off-the-plan sales of apartments are anaemic with only 3500 new apartments permitted in the last month. On an annualised basis this level of apartment development would translate to 100,000 fewer units delivered per year than recent experience.

The consequence of this shift in housing activity for the Partners Fund has been a move to a more diversified portfolio of hard asset private credit opportunities, and we have reduced our exposure to the residential apartment development over the last year, with this now accounting for just 12.8% of portfolio exposure. Our strategy is to explicitly pursue the sub-sectors where there is a scarcity of capital to meet borrower needs. Apartment development funders in general run the risk of being too competitive as too much money chases too few opportunities. We will remain selective in this sub-sector, as the lack of new supply will be positive for balancing the apartment market in the next 2-3yrs, while the returns for lending in the space may be suboptimal if lenders are overly competitive.

Chart 2 below