Latest / The Money Puzzle / Cash is king again...here's why

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Cash is king again...here's why · The Money Puzzle

• 0:09
  Speaker 1: Hello and welcome to the Australian's Money Puzzle podcast. I'm
• 0:12
  Speaker 1: James Kirby. Welcome aboard, everybody. Now, I imagine if you're
• 0:15
  Speaker 1: an active investor, you probably find each passing month your
• 0:19
  Speaker 1: returns from the share markets, they're literally getting better all
• 0:23
  Speaker 1: the time. But also perhaps these very lucrative returns from
• 0:28
  Speaker 1: share markets are a little alarming. And by that, I
• 0:32
  Speaker 1: mean something has to crack, right? It just can't keep
• 0:34
  Speaker 1: going as good as this. And what has happened is
• 0:37
  Speaker 1: In our own market already, of course, is that property
• 0:40
  Speaker 1: prices have started to fall. But now for enlisted investment markets,
• 0:45
  Speaker 1: we have reached a crucial point. That is the 5%
• 0:50
  Speaker 1: US treasury bond yield rate, the long-term bonds. This is
• 0:54
  Speaker 1: a benchmark for the world. And it means that rates
• 0:57
  Speaker 1: are going to be higher all around the world. And
• 1:01
  Speaker 1: here in our own market, we have local dynamics, but
• 1:04
  Speaker 1: they are the same. We are going to have higher rates.
• 1:08
  Speaker 1: So really, we are looking at a world which is
• 1:11
  Speaker 1: quite different. High rates, high returns. How do you invest
• 1:15
  Speaker 1: in this market? My guest today is Will Hamilton of
• 1:18
  Speaker 1: Hamilton Wealth Partners. How are you, Will?
• 1:20
  Speaker 2: Very well, James. Thank you for having me.
• 1:22
  Speaker 1: We won't go too deep into bonds because basically, I
• 1:25
  Speaker 1: think people actually turn off when they hear the word bonds.
• 1:27
  Speaker 1: And I understand that. But we need to just put
• 1:30
  Speaker 1: it on the table that you would have thought if
• 1:33
  Speaker 1: rates were rising all the time, then... The bond market
• 1:39
  Speaker 1: is not great, right? It just doesn't do well when
• 1:41
  Speaker 1: rates are rising very broadly and rates are rising and
• 1:44
  Speaker 1: rising and bonds are doing badly and badly. It seems
• 1:47
  Speaker 1: to me 3% a year or so. Why would anyone
• 1:49
  Speaker 1: bother with them when you can get 4.5% cash government guaranteed?
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  Speaker 3: When bonds sell off, so the yields go up, the
• 1:58
  Speaker 3: value of a bond decreases.
• 2:00
  Speaker 2: You are right when.
• 2:01
  Speaker 3: You can get 4.5% to 5%. why would you be
• 2:05
  Speaker 3: chasing a bond at these levels? But it's the implications
• 2:08
  Speaker 3: of this sell-off in bonds, which I think is the
• 2:11
  Speaker 3: big thing. So higher bond yields push up borrowing costs.
• 2:15
  Speaker 3: Things like mortgage rates are priced off the 10-year bond,
• 2:19
  Speaker 3: despite the fact that you get the US president wanting
• 2:22
  Speaker 3: the short-term official cash rate to be lower. And he says,
• 2:26
  Speaker 3: because that's going to lead to lower mortgages. The US mortgage,
• 2:29
  Speaker 3: like the Australian mortgage market, are priced off the 10-year bond.
• 2:33
  Speaker 3: So it When bonds sell off or yields go higher,
• 2:37
  Speaker 3: that's what happens when they sell off, borrowing costs for
• 2:40
  Speaker 3: businesses and households therefore increase. It puts more indebted parts
• 2:44
  Speaker 3: of the economy under pressure.
• 2:47
  Speaker 2: So it increases, therefore.
• 2:49
  Speaker 3: The relative attractiveness of bonds as well against equities. But
• 2:53
  Speaker 3: it's to what extent is that baked in and to
• 2:55
  Speaker 3: what extent are you going to see further increased rates
• 2:58
  Speaker 3: at the short end And therefore, what will that do
• 3:01
  Speaker 3: to bonds?
• 3:02
  Speaker 1: And does it increase the attractiveness of cash? It would
• 3:04
  Speaker 1: seem to me if I'm getting 4.5% cash, easy, at call,
• 3:08
  Speaker 1: no risk, then I want a lot more return for
• 3:11
  Speaker 1: my shares.
• 3:12
  Speaker 2: Correct. And to what extent?
• 3:15
  Speaker 3: So like we saw, I think it was eight interest
• 3:18
  Speaker 3: rate increases, wasn't it, beginning of 2022? And the market's
• 3:24
  Speaker 3: factoring in in the U.S., talking about in the U.S.
• 3:26
  Speaker 2: Here, two to three.
• 3:28
  Speaker 3: So they're factoring that in. I'm not that worried about
• 3:30
  Speaker 3: two to three, but what I would be worried about
• 3:34
  Speaker 3: is if you got six.
• 3:35
  Speaker 1: Explain that a little bit more to the listeners, because
• 3:37
  Speaker 1: this is crucial, right? This is the signal to the world.
• 3:39
  Speaker 1: Just explain what you mean.
• 3:40
  Speaker 3: So let's assume each one's 25 basis points. So six
• 3:44
  Speaker 3: is one and a half percent. So one and a
• 3:46
  Speaker 3: half percent increase in US cash rates from here is
• 3:51
  Speaker 3: very significant. The market's saying, Two to three, so half
• 3:56
  Speaker 3: a percent to three quarters of a percent. Yeah, and
• 3:59
  Speaker 3: I think the equity markets have done exceptionally well.
• 4:04
  Speaker 2: You've got US deficit.
• 4:05
  Speaker 3: You've got oil prices as a result of the Iran conflict.
• 4:08
  Speaker 3: You've got AI demand for debt. And don't forget the
• 4:11
  Speaker 3: Ukraine conflict out there as well, just to throw that in.
• 4:14
  Speaker 1: And through it all, their shares keep producing terrific returns.
• 4:17
  Speaker 1: So for most of our listeners, they're active investors. They say, oh,
• 4:21
  Speaker 1: property's not very good. But here's my shares and they're
• 4:24
  Speaker 1: powering along regardless of the news, regardless of oil crisis,
• 4:28
  Speaker 1: regardless of Ukraine. But rates are different, right? This is
• 4:31
  Speaker 1: a different thing. This is a different scenario and it's
• 4:34
  Speaker 1: going to change. So we need higher returns to justify
• 4:37
  Speaker 1: the prices we have on the share market because the
• 4:40
  Speaker 1: rates are higher. Just look just a little bit more
• 4:42
  Speaker 1: on that issue for the everyday investor listening to the show.
• 4:45
  Speaker 1: First of all, are the cash returns better than they
• 4:47
  Speaker 1: used to be? Are we getting more for cash? And
• 4:50
  Speaker 1: what does that mean for the everyday investor?
• 4:53
  Speaker 3: You are, because the base is high, but you're also
• 4:55
  Speaker 3: looking at interest rates increasing both here in Australia and
• 4:58
  Speaker 3: in the United States. So as interest rates, as I said,
• 5:02
  Speaker 3: official cash rates go up, so does your cash return.
• 5:05
  Speaker 1: So it's going to get better. It's good and it's
• 5:07
  Speaker 1: going to get better. Yeah.
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  Speaker 2: Correct.
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  Speaker 1: Yeah. And it's also better than inflation. Now, that's not common,
• 5:13
  Speaker 1: is it? When you actually, in recent years at least,
• 5:17
  Speaker 1: we have a situation where your cash is actually inflation proof.
• 5:21
  Speaker 1: You're actually beating inflation. People go off and buy gold
• 5:24
  Speaker 1: to beat inflation. But sitting back from it, that's what
• 5:27
  Speaker 1: I'm leading to. Is it reasonable to have more cash
• 5:29
  Speaker 1: in your portfolio than you had?
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  Speaker 3: We're slightly overweight cash ourselves, but only slightly. And we
• 5:35
  Speaker 3: are underweight Australian equities. We have been since April 2025.
• 5:38
  Speaker 2: We are.
• 5:40
  Speaker 3: Market weight developed market equities. But I do think that
• 5:44
  Speaker 3: next move it could be down. And if that's the case,
• 5:47
  Speaker 3: it probably will go into cash. But it will only
• 5:50
  Speaker 3: be marginal. We've seen such spectacular returns from US equities
• 5:54
  Speaker 3: in particular. And there is a difference between, as I said,
• 5:58
  Speaker 3: underweight Australian equities when market weight developed market equities. And 60%
• 6:02
  Speaker 3: of that is the United States.
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  Speaker 1: So basically, you've got a lot of money, more than
• 6:07
  Speaker 1: you ever had before in the US markets, just like
• 6:09
  Speaker 1: all the big funds, just like the Future Fund and
• 6:11
  Speaker 1: many of the top Industry funds. Now, folks, here's something
• 6:15
  Speaker 1: I just came across this morning, and I think it
• 6:17
  Speaker 1: really captures what we're talking about here. This is from BlackRock,
• 6:22
  Speaker 1: biggest investor in the world institutionally. And they are talking,
• 6:26
  Speaker 1: they're actually just talking about why they're going back into
• 6:29
  Speaker 1: share markets big time, particularly emerging markets, which in some
• 6:33
  Speaker 1: ways are riskier than what is talked about developed markets
• 6:36
  Speaker 1: being just being basically being the US and Europe. But
• 6:39
  Speaker 1: BlackRock are pushing it a bit further. But here's what
• 6:41
  Speaker 1: they say, Will. Higher global rates are raising the hurdle
• 6:45
  Speaker 1: for returns, but they have not knocked us off our
• 6:50
  Speaker 1: pro-risk stance. Higher rates and strong shares need not be contradictory.
• 6:57
  Speaker 1: What drives yield matters. Now, what they're saying is, and
• 7:01
  Speaker 1: I think this is really interesting. So to be specific,
• 7:05
  Speaker 1: let's go back to what we said at the start
• 7:06
  Speaker 1: of the show. Folks, we are starting to invest in
• 7:08
  Speaker 1: a period of higher rates with higher returns. But we
• 7:13
  Speaker 1: don't actually, it's not necessarily higher rates and higher inflation.
• 7:18
  Speaker 1: So what BlackRock is saying is we know the rates
• 7:22
  Speaker 1: are higher, but we are comfortable that they've gone higher
• 7:26
  Speaker 1: for the right reasons, particularly in the US where there's
• 7:29
  Speaker 1: just incredible investment demand. That would suggest that shares should
• 7:36
  Speaker 1: keep rewarding well and that cash should keep rewarding very broadly.
• 7:42
  Speaker 1: But that Be how you do that.
• 7:44
  Speaker 3: Yeah, look, we're not worried about a large correction, but
• 7:48
  Speaker 3: it's interesting you just said what you mentioned about emerging markets.
• 7:51
  Speaker 3: We're market-weight emerging markets at the moment. We've just been
• 7:54
  Speaker 3: talking about it with a client just only 15 minutes ago,
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  Speaker 3: and one of the reasons why we are positioned as
• 8:01
  Speaker 3: we are in emerging markets is you have a lower valuation,
• 8:05
  Speaker 3: especially against the United States, but you also have a
• 8:07
  Speaker 3: superior growth rate. So emerging markets have high growth rates.
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  Speaker 3: And you have seen some, like for instance, Korea went
• 8:15
  Speaker 3: off to the races.
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  Speaker 2: But it also corrected heavily.
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  Speaker 1: But ultimately, what's driving them is the same thing that's
• 8:21
  Speaker 1: driving the big global markets. It's AI, right? And the
• 8:24
  Speaker 1: big players in your emerging markets are Taiwan Semiconductor, et cetera,
• 8:29
  Speaker 1: and Hynix, et cetera. Okay, we'll just leave that there
• 8:31
  Speaker 1: for one moment. So let's take it that our listeners
• 8:34
  Speaker 1: are comfortable with our assumptions on the show this morning,
• 8:38
  Speaker 1: that we're into higher rates. The higher rates are justified.
• 8:42
  Speaker 1: because we basically have pumping investment markets and very strong
• 8:48
  Speaker 1: investments going into the economy this period where you don't
• 8:51
  Speaker 1: get that sort of investments. It's mostly linked with AI.
• 8:54
  Speaker 1: But if shares are really strong all around the world,
• 8:57
  Speaker 1: from EM markets right through across Wall Street and back
• 9:00
  Speaker 1: to us, and if cash is damn good in the
• 9:02
  Speaker 1: context of historical return, real returns, what does it tell
• 9:09
  Speaker 1: us about everything else? What are the parts of the
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  Speaker 1: market that you would be heading towards now, do you think?
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  Speaker 1: And where should you keep away from? Let's just talk
• 9:16
  Speaker 1: before we end this segment on what should go well
• 9:19
  Speaker 1: under these conditions and what does history tell us?
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  Speaker 2: Well, the other thing which a lot of people are
• 9:24
  Speaker 2: looking at is infrastructure. And we are overweight infrastructure.
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  Speaker 3: Infrastructure, a lot of it is inflation hedged. So basically, therefore,
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  Speaker 3: as inflation, their revenue increases by the rate of inflation.
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  Speaker 1: Yeah. So if the share or the fund has a
• 9:40
  Speaker 1: bunch of bridges or whatever, the toes can rise. They're
• 9:43
  Speaker 1: allowed rise because inflation's up.
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  Speaker 2: Correct.
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  Speaker 3: The interesting thing we've seen, we've just been monitoring, though,
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  Speaker 3: some of the liquid funds in infrastructure that trade in
• 9:53
  Speaker 3: listed securities, and especially global listed securities. And as bonds
• 9:57
  Speaker 3: sell off, and therefore duration... comes into account, so duration
• 10:02
  Speaker 3: being the average of the bonds that have been issued,
• 10:05
  Speaker 3: and you don't want to be exposed to be long
• 10:07
  Speaker 3: that average, or actually you don't want to be longer
• 10:10
  Speaker 3: than a year when bonds sell off, so yields go up.
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  Speaker 3: We've noticed that the duration sell off has affected some
• 10:16
  Speaker 3: of the infrastructure, list infrastructure companies. We have noticed that
• 10:19
  Speaker 3: a little bit. So that's just something we're monitoring closely.
• 10:22
  Speaker 1: But would you be broadly comfortable with infrastructure stocks and
• 10:25
  Speaker 1: infrastructure funds in this atmosphere?
• 10:27
  Speaker 3: Yes.
• 10:27
  Speaker 1: Yeah, because they have that ability to raft up as
• 10:32
  Speaker 1: rates raft up and inflation. So it's there, but it's
• 10:35
  Speaker 1: not the primary concern, as BlackRock says. It's the rates
• 10:37
  Speaker 1: going up for the right reason. Okay, so that's infrastructure
• 10:41
  Speaker 1: looking positive in this light. All shares basically looking positive,
• 10:45
  Speaker 1: but let's cut down a little bit further. All the
• 10:48
  Speaker 1: AI shares, we must talk about it. And firmness, we
• 10:50
  Speaker 1: must simply talk about it. It seems to me, looking
• 10:53
  Speaker 1: at the AI story so far on the ASX, it's
• 10:56
  Speaker 1: actually a complete, there's nothing doing. NextDC is our biggest
• 10:59
  Speaker 1: data center stock. It's the same price that it was
• 11:01
  Speaker 1: two years ago. Many of the other proxies are selling
• 11:05
  Speaker 1: at a discount. Seems to me, Will, in terms of
• 11:08
  Speaker 1: the ASX, data centers is a non-story. Now we have
• 11:13
  Speaker 1: a global data center group. It's a neocloud group, and
• 11:17
  Speaker 1: I'll take it that's different to conventional data centers. And
• 11:21
  Speaker 1: they're coming in at a different angle, slightly different services,
• 11:24
  Speaker 1: more emphasis on clean energy and that sort of thing.
• 11:26
  Speaker 1: But they're coming into the ASX all the same. So
• 11:28
  Speaker 1: we're talking about the ASX now, where nothing's been happening
• 11:30
  Speaker 1: on data centers compared to overseas. Biggest listing since Telstra
• 11:36
  Speaker 1: in 1997. We don't know the final numbers, but they're
• 11:39
  Speaker 1: going to raise perhaps 7 billion or more.
• 11:42
  Speaker 3: Mm-hmm, mm-hmm.
• 11:43
  Speaker 1: That seems like a long, looking at the bare facts,
• 11:45
  Speaker 1: that looks like a long shot.
• 11:49
  Speaker 2: I think that they'll get support.
• 11:51
  Speaker 3: One of the reasons they'll get support is the lack
• 11:54
  Speaker 3: of choice that you just explained. But you've got to
• 11:57
  Speaker 3: take into account lots of reasons why they are.
• 12:01
  Speaker 2: You just took that next step into stages before.
• 12:04
  Speaker 3: It's about underlying growth in our economy. And look, Firmus
• 12:10
  Speaker 3: will get supported. Firmus will raise the money they need.
• 12:14
  Speaker 3: it's going to be interesting to see to what extent
• 12:16
  Speaker 3: the market absorbs $ 7 billion on a raising. I think
• 12:19
  Speaker 3: you've got to take that into account like you've had
• 12:21
  Speaker 3: to take into account multi-billions that have been raised, in
• 12:25
  Speaker 3: many cases offshore with SpaceX and Anthropic to come, et cetera,
• 12:30
  Speaker 3: as well. But I think that what you've got, the
• 12:35
  Speaker 3: US market has underlying economic growth. It's got GDP 2.1%.
• 12:40
  Speaker 3: where it's been on average for the last few years.
• 12:42
  Speaker 3: So it's done very well. You don't have the same
• 12:44
  Speaker 3: economic growth in Australia. The only other thing is, yes,
• 12:48
  Speaker 3: data centres have become a big debate, not just in
• 12:51
  Speaker 3: the US, but also in Australia. Not in my backyard,
• 12:54
  Speaker 3: the whole NIMBY thing. So there's a political consequence around
• 12:57
  Speaker 3: these things as well. But will they get this thing away?
• 12:59
  Speaker 2: Yes. Will it be a major listing for our exchange? Yes.
• 13:05
  Speaker 3: And to be honest, I actually think that's reasonably positive.
• 13:08
  Speaker 3: We have missed out on a lot of things that
• 13:10
  Speaker 3: have gone offshore, as the UK has suffered from that
• 13:14
  Speaker 3: as well. So I think that's the first thing. And secondly,
• 13:17
  Speaker 3: when you look at the delistings that occurred, our listed
• 13:19
  Speaker 3: market shrunk.
• 13:20
  Speaker 1: It shrunk, yes. Okay, that's a good way to look
• 13:23
  Speaker 1: at it, actually. And I hadn't actually seen it in
• 13:24
  Speaker 1: that light. Interesting that, and it is widely seen that
• 13:29
  Speaker 1: it will go, folks, that it will float, and they
• 13:32
  Speaker 1: will raise what they want to raise. And perhaps, I
• 13:34
  Speaker 1: don't know, no one knows, right? But we think about SpaceX,
• 13:37
  Speaker 1: which did not list, obviously, on our market, but unusually
• 13:40
  Speaker 1: had a window open to local investors, and maybe 40,000
• 13:43
  Speaker 1: to 50,000 investors went directly into the float of SpaceX.
• 13:47
  Speaker 1: And it did get away, it did float. And then
• 13:49
  Speaker 1: it fell below its IPO price considerably, but it has
• 13:52
  Speaker 1: actually found its natural level now. And it floated around
• 13:55
  Speaker 1: 135 and it's currently trading at about 145. That is
• 14:00
  Speaker 1: not what's going to happen to farmers. We don't know
• 14:01
  Speaker 1: what's going to happen to farmers. But it's a proxy
• 14:04
  Speaker 1: and we haven't had many in this market. So to
• 14:06
  Speaker 1: some extent, it's the unknown. Okay, we're going to take
• 14:08
  Speaker 1: a look at, if you're investing now in high rate
• 14:12
  Speaker 1: markets and we know the rates are going to go higher,
• 14:15
  Speaker 1: We know that the returns on shares are powerful, lucrative
• 14:19
  Speaker 1: for many years now. Then the issue is what to
• 14:23
  Speaker 1: keep away from. Back in a minute. Hello, welcome back
• 14:35
  Speaker 1: to the Australian's Money Puzzle podcast. It's James Kirby here
• 14:38
  Speaker 1: with Will Hamilton, regular on the show of Hamilton Wealth Partners.
• 14:41
  Speaker 1: Will is a wealth financial advisor, but also a veteran
• 14:45
  Speaker 1: in the best possible meaning of that word of markets
• 14:50
  Speaker 1: and been in the markets for quite some time, often
• 14:52
  Speaker 1: right smack on trading desks at one stage in his career.
• 14:56
  Speaker 1: So he's very tuned into markets. Will, we talked about
• 15:01
  Speaker 1: in the first segment how Broad shares, basically, particularly offshore
• 15:05
  Speaker 1: shares looking good here. EM, emerging markets, perhaps worth a
• 15:09
  Speaker 1: punt for investors who haven't been in there before. They
• 15:12
  Speaker 1: did not do much for a long time. They are
• 15:14
  Speaker 1: really steaming of recent times. Then looking more across the market,
• 15:19
  Speaker 1: we have obviously the AI boom. That is largely offshore
• 15:24
  Speaker 1: so far. It is not onshore. It is not reflected
• 15:27
  Speaker 1: in any convincing way on the ASX. The big test
• 15:30
  Speaker 1: will be the firmest float, folks. Biggest floats since Telstra.
• 15:35
  Speaker 1: You'll hear a lot more about it soon. They're going
• 15:37
  Speaker 1: to float mid-October, they say. They're doing roadshows just now.
• 15:42
  Speaker 1: We also look briefly at global infrastructure. That is an
• 15:45
  Speaker 1: obvious play or investment for you in a period of
• 15:50
  Speaker 1: high rates and rising rates. So what doesn't work well? Obviously,
• 15:54
  Speaker 1: property on the ground, property prices are falling, residential real
• 15:58
  Speaker 1: estate is falling. Property trusts are struggling too, aren't they?
• 16:01
  Speaker 1: High rates... are hard for them. They've been in the
• 16:04
  Speaker 1: doghouse for some time and they've actually had some improved results.
• 16:07
  Speaker 1: Where would be the parts of the market, traditionally, when
• 16:11
  Speaker 1: you have very high rates, or high rates, that will struggle?
• 16:16
  Speaker 3: The area I've been worried about is, and we've been
• 16:18
  Speaker 3: worried about it for a year, is property-related private credit.
• 16:23
  Speaker 3: And that's been an area that we've been concerned about.
• 16:25
  Speaker 3: We exited probably too early. The return you were getting
• 16:31
  Speaker 3: for the.
• 16:33
  Speaker 3: Risk you were taking, we believe there was a mismatch.
• 16:35
  Speaker 3: So you take too much risk for too little return.
• 16:38
  Speaker 3: One of the big reasons was we noticed there were
• 16:40
  Speaker 3: so many people starting to offer us solutions in this space.
• 16:44
  Speaker 3: So that money had to go somewhere and we believe
• 16:46
  Speaker 3: therefore lending stands were potentially being thrown.
• 16:50
  Speaker 2: Out the door a little bit.
• 16:52
  Speaker 3: And also because of that chase, you saw credit spreads
• 16:55
  Speaker 3: in that space really narrow. So which is part of
• 16:59
  Speaker 3: that whole return risk return scenario. So we think that, yes,
• 17:05
  Speaker 3: you've seen Bethlehem and Metrix has made some headlines here
• 17:09
  Speaker 3: and there as well. There could be some other accidents
• 17:11
  Speaker 3: in that space. One of the reasons being you've got
• 17:14
  Speaker 3: interest rates going up and therefore the underlying securities, which this.
• 17:18
  Speaker 2: Credit is against.
• 17:21
  Speaker 3: And yes, there's some really good operators in property credit,
• 17:25
  Speaker 3: but there's some that decided to come into this space
• 17:28
  Speaker 3: because the ducks were quacking, so to speak.
• 17:30
  Speaker 1: Yeah. And it's not rocket science, right? I mean, if
• 17:33
  Speaker 1: rates go up, it's harder for property. And we've had
• 17:37
  Speaker 1: the first big housing developer collapse.
• 17:40
  Speaker 2: Yep.
• 17:41
  Speaker 1: Perhaps in a cycle of them. It's called Bath Live.
• 17:43
  Speaker 1: You've missed it, folks. B-A-T-H-L-A, mostly low-cost housing in Sydney.
• 17:48
  Speaker 1: And they are, it's interesting, okay? The housing collapse is interesting,
• 17:53
  Speaker 1: always is. And there's creditors and people, the houses left unbuilt.
• 17:55
  Speaker 1: But what's really interesting is This is the first in
• 17:58
  Speaker 1: the period of post-private credit boom, you might say. And
• 18:02
  Speaker 1: all the big names, Balmain and Latrobe and PAG Capital
• 18:07
  Speaker 1: and Metrix, they are all in there and they are
• 18:09
  Speaker 1: all exposed in various ways. Even the Future Fund, it seems,
• 18:15
  Speaker 1: it turns out, had an exposure to PAG Capital and
• 18:18
  Speaker 1: wanted to know what was their exposure to Bathla. And
• 18:21
  Speaker 1: we've mentioned Balmain on the show more than once as
• 18:23
  Speaker 1: perhaps a stepping stone into private credit for people because
• 18:27
  Speaker 1: it was seen as one of the lower risk ways in,
• 18:30
  Speaker 1: you know, the secured mortgages, you knew what the property was.
• 18:33
  Speaker 1: It wasn't collateralized or anything like that. So you've been
• 18:37
  Speaker 1: worried about the space. Here it comes. You say you
• 18:39
  Speaker 1: pulled out a bit early, but you're probably happy to
• 18:41
  Speaker 1: be out now. Where does it go from here, do
• 18:44
  Speaker 1: you think? Will we see private credit funds freezing their redemptions?
• 18:49
  Speaker 2: They already have. Some of them have, but I don't know.
• 18:54
  Speaker 2: To be honest, we're out of the space. It's really interesting.
• 18:56
  Speaker 2: One of the funds that.
• 18:58
  Speaker 3: Has been affected by Bathwater got a little bit annoyed
• 19:00
  Speaker 3: with us when we withdrew. And we said, look, we'll
• 19:02
  Speaker 3: be back. And we will be back at some point.
• 19:05
  Speaker 3: But we just, it got back. We didn't like, we
• 19:09
  Speaker 3: felt risk had been elevated and returns had decreased.
• 19:12
  Speaker 2: Simple.
• 19:13
  Speaker 3: Therefore, on listed credits, we could get a little bit
• 19:18
  Speaker 3: less without the risk. And that's what we decided to
• 19:20
  Speaker 3: expose our portfolios to. And as I said, therefore, when
• 19:24
  Speaker 3: too much money chases one space, therefore the credit spreads
• 19:28
  Speaker 3: come in. And so I think you're going to see
• 19:30
  Speaker 3: now these better funds are going to say, we want more,
• 19:34
  Speaker 3: we want a higher return for our investors for lending
• 19:37
  Speaker 3: to you. And therefore you'll see credit spreads move out,
• 19:40
  Speaker 3: which they should. And I think that you'll find those
• 19:44
  Speaker 3: that are.
• 19:44
  Speaker 2: Good at doing this. And look, even the really good ones,
• 19:47
  Speaker 2: that you.
• 19:48
  Speaker 3: Just mentioned, unfortunately had some exposure, but you're going to
• 19:51
  Speaker 3: find who comes through and that there will be less
• 19:53
  Speaker 3: players in 12 months time.
• 19:55
  Speaker 2: Yeah, there will be. There were too many players in
• 19:57
  Speaker 2: the space.
• 19:58
  Speaker 1: No bad thing. We've been very sceptical about it all
• 20:00
  Speaker 1: the way. And I know to some extent, perhaps some
• 20:02
  Speaker 1: of our listeners might have missed some opportunities, but we've
• 20:05
  Speaker 1: been extremely sceptical about it. because I believed all through
• 20:09
  Speaker 1: this private credit boom that the everyday investor was at
• 20:13
  Speaker 1: the back of the queue and they were actually coming
• 20:15
  Speaker 1: in late and they were getting the worst material and
• 20:17
  Speaker 1: the worst funds. I hope that our listeners are defended
• 20:21
  Speaker 1: from that risk. Okay, just one last thing on that area.
• 20:23
  Speaker 1: Then what about traditional property trusts, REITs, as we call
• 20:27
  Speaker 1: them on the ASX? In the area of higher returns
• 20:31
  Speaker 1: but higher rates, do they continue to struggle, do you think?
• 20:35
  Speaker 3: One of the big problems with AREITs or Australian Real
• 20:39
  Speaker 3: Estate Investment Trusts, there's one big player that dominates and
• 20:44
  Speaker 3: is a very high, it's over 50% being Goodman Group
• 20:47
  Speaker 3: and you've got DEXIS in there as well. So these guys,
• 20:52
  Speaker 3: they're not just pure real estate investment trusts, they're development
• 20:56
  Speaker 3: companies as well. There's a development element in there. So
• 21:00
  Speaker 3: we've never been that keen on Australian Real Estate Investment
• 21:04
  Speaker 3: Trusts for that reason. Are they They're not like real
• 21:07
  Speaker 3: estate investment trusts as you get on what's known as GREPS,
• 21:11
  Speaker 3: so Global Real Estate Investment Trust, as these two big,
• 21:15
  Speaker 3: in particular, one big monster, but yeah, there's two big
• 21:17
  Speaker 3: ones out there, yeah.
• 21:19
  Speaker 1: You're just looking for landlords, is that it? And you're
• 21:20
  Speaker 1: saying that these aren't landlords, they're landlords and they're developers,
• 21:23
  Speaker 1: so it's a different risk. What about something like shopping
• 21:26
  Speaker 1: centres of Australia, the old Westfield, which is more a landlord?
• 21:30
  Speaker 3: Yeah, that's more a landlord, yeah. There's some managers out
• 21:32
  Speaker 3: there that have got to focus on income and... They
• 21:37
  Speaker 3: exclude those areas. So the space is more akin to
• 21:40
  Speaker 3: equities than what I would call traditional real estate investment trusts.
• 21:44
  Speaker 1: Okay. Very interesting. And for what it's worth, folks, they're
• 21:47
  Speaker 1: all trading at a discount. Even Goodman, which is the
• 21:50
  Speaker 1: big kahuna of the A-REIT market and should be flying
• 21:54
  Speaker 1: high on the basis that 80%, 80% of its future
• 21:58
  Speaker 1: revenue pipeline is now in data center development. It's trading
• 22:02
  Speaker 1: at a discount to its fair value. NextTC, on the
• 22:05
  Speaker 1: other hand, is trading at about a 45% discount to
• 22:08
  Speaker 1: spare value, which tells us either they're great big fat
• 22:11
  Speaker 1: bargains or those broker consensus price targets are nonsense. How
• 22:16
  Speaker 1: would you like to answer that question, Will?
• 22:18
  Speaker 3: When we look at real estate, when we talk to
• 22:22
  Speaker 3: quite a lot of managers, they always talk about when
• 22:24
  Speaker 3: they're looking at an asset, they look at alternative use.
• 22:27
  Speaker 3: The problem with a data center is it doesn't have
• 22:29
  Speaker 3: too many alternative uses.
• 22:30
  Speaker 1: Oh, yeah.
• 22:32
  Speaker 3: Yeah. So it can be used as a data center
• 22:35
  Speaker 3: or what do you use it as?
• 22:37
  Speaker 1: That's very interesting. So it's very much a conviction bet
• 22:40
  Speaker 1: that if you buy a property trust, exactly, you can
• 22:43
  Speaker 1: remodel a building for whatever purpose, but the data center,
• 22:46
  Speaker 1: you can't. Okay. I've kept some questions for a while.
• 22:49
  Speaker 1: We have some great questions from Luke and Ravi and Jem,
• 22:52
  Speaker 1: who's in Singapore, and Jenny. So we'll take a break.
• 22:54
  Speaker 1: We'll be back in one minute. Hello, welcome back to
• 23:05
  Speaker 1: the Australian's Money Puzzle podcast. James Kirby with Will Hamilton.
• 23:09
  Speaker 1: Let's get into some questions. I've been keeping them for you, Will.
• 23:12
  Speaker 1: This is from Luke. Can you negatively gear into super?
• 23:16
  Speaker 1: Super is an investment. So why not use an investment
• 23:19
  Speaker 1: loan to invest in super and claim a tax deduction
• 23:22
  Speaker 1: on the interest from the loan? OK, just to clarify
• 23:25
  Speaker 1: on Luke's question there, negative gearing, folks, is not gone.
• 23:29
  Speaker 1: Just negative gearing on new homes is gone. I'm sorry,
• 23:32
  Speaker 1: on existing homes is gone. You can only negatively gear
• 23:35
  Speaker 1: now on new homes, or you can continue to negatively
• 23:39
  Speaker 1: gear on shares. And that should be kept in mind.
• 23:42
  Speaker 1: That's the basis of Luke's question. What's your answer, Will?
• 23:47
  Speaker 3: Well, one of the other things was you can no
• 23:49
  Speaker 3: longer invest through super into residential property, direct residential property.
• 23:55
  Speaker 2: But you can't borrow. No, you borrow for that purpose. So,
• 24:00
  Speaker 2: You can on commercial property.
• 24:01
  Speaker 3: So the answer is yes on commercial property, but you
• 24:04
  Speaker 3: can't on residential.
• 24:05
  Speaker 2: That's been removed.
• 24:06
  Speaker 3: And even on commercial, it's about getting the funding.
• 24:11
  Speaker 2: That's very difficult.
• 24:12
  Speaker 3: So when you're negatively geared on an investment property personally,
• 24:15
  Speaker 3: any loss can generally be offset against your salary or
• 24:18
  Speaker 3: other taxable income. So it reduces your tax bill, but
• 24:21
  Speaker 3: not so in a superannuation fund.
• 24:23
  Speaker 2: Remember, it can be against.
• 24:25
  Speaker 3: The other income within the super fund, but it's not
• 24:27
  Speaker 3: as attractive given the tax rates.
• 24:30
  Speaker 1: It's not attractive. Just explain why, Will.
• 24:32
  Speaker 3: Because generally, the deductions only offset income within the super fund,
• 24:35
  Speaker 3: which is generally taxed if you're an accumulation of 15%
• 24:38
  Speaker 3: rather than personal marginal tax rate.
• 24:41
  Speaker 2: That's why it's not as attractive.
• 24:42
  Speaker 1: Yeah. Luke, I'm afraid it's theoretically under ridiculous circumstances possible.
• 24:49
  Speaker 1: But in real life, first of all, even if they'd
• 24:52
  Speaker 1: never changed the rules... It was never as good to
• 24:55
  Speaker 1: negatively gear inside super as outside super because your tax
• 24:58
  Speaker 1: is 15% against 45 or 47 for most people. So
• 25:02
  Speaker 1: there you go. And then on top of that, as
• 25:03
  Speaker 1: Will points out, they're after taking away the ability to borrow,
• 25:06
  Speaker 1: to buy residential property inside super. So you're restricted to commercial.
• 25:11
  Speaker 1: I must say, we don't want to give advice. This
• 25:13
  Speaker 1: is information only, but it would seem you'd be threading
• 25:16
  Speaker 1: a needle. Is that the phrase?
• 25:18
  Speaker 2: Correct.
• 25:19
  Speaker 1: To get that one off the ground. Can you see
• 25:20
  Speaker 1: the question from Ravi? Do you want to read that one?
• 25:22
  Speaker 2: I can.
• 25:23
  Speaker 3: Has GQG been treated unfairly for being skeptical?
• 25:26
  Speaker 1: GQG Funds Group, that is.
• 25:28
  Speaker 3: Yeah, GQG Funds Group via iBurn. So they made a bet, wow,
• 25:34
  Speaker 3: probably close to 18 months ago, definitely 15 months ago,
• 25:38
  Speaker 3: where they actually sold out of their AI-related investments.
• 25:43
  Speaker 1: GQG being a big fund manager. Yeah, an American fund manager.
• 25:46
  Speaker 2: Yeah. So they missed.
• 25:47
  Speaker 3: For the last 15 months, this run-up. And markets are
• 25:49
  Speaker 3: pretty ruthless with fund managers who are early, even if
• 25:52
  Speaker 3: they ultimately prove right. Now, if they're early, this has
• 25:56
  Speaker 3: been 15 to 18 months of.
• 25:58
  Speaker 2: Early, so you.
• 26:01
  Speaker 3: Rajiv Jain, who is a very high-profile, and he's the
• 26:04
  Speaker 3: founder of GQG, a high-profile fund manager, he was a
• 26:08
  Speaker 3: vocal critic of AI-related valuations. And it is interesting to
• 26:12
  Speaker 3: see that the valuations, where they are because of the
• 26:14
  Speaker 3: earnings growth that you've seen in these companies... They're cheaper
• 26:18
  Speaker 3: today than they were 15 months ago, which is one
• 26:19
  Speaker 3: of the reasons why I think GQG has now gone
• 26:21
  Speaker 3: and looked selectively at re-exposing itself to AI-related investments.
• 26:28
  Speaker 1: So that's fascinating, isn't it? You might just explain to
• 26:30
  Speaker 1: listeners what that really means. So if I understand you,
• 26:32
  Speaker 1: this fund manager, GQG folks, American fund manager listed on
• 26:36
  Speaker 1: the ASX, and that fund manager stock has fallen through
• 26:39
  Speaker 1: the floor because these guys, they said, we're out of AI, basically,
• 26:45
  Speaker 1: 15 months ago, which is an incredibly... plucky thing to do.
• 26:49
  Speaker 1: But they were conservative investors and they didn't like what
• 26:52
  Speaker 1: they saw. And they weren't unusual there. Michael Burry, the
• 26:56
  Speaker 1: famous big short guy, he also did a big short
• 26:59
  Speaker 1: on AI, which also failed in recent times. But as
• 27:03
  Speaker 1: Will says, I suppose the killer point for them that
• 27:06
  Speaker 1: shows that they were wrong so far. They may be
• 27:11
  Speaker 1: right tomorrow, but they are wrong so far. And the
• 27:14
  Speaker 1: killer point that you make, Will, is that In fact,
• 27:17
  Speaker 1: the PE ratio, if you like, on these companies is
• 27:21
  Speaker 1: not crazy because the earnings part has actually just mushroomed, right?
• 27:26
  Speaker 1: The second earnings bubble, some say, but it's there.
• 27:29
  Speaker 2: Yeah.
• 27:30
  Speaker 3: So those businesses 20 times-ish is not cheap, but it's
• 27:37
  Speaker 3: a lot cheaper than it was 12 months ago.
• 27:40
  Speaker 2: And that's because of the earnings growth.
• 27:41
  Speaker 1: And it's cheaper because their profits are even bigger than... Correct,
• 27:45
  Speaker 1: the earnings growth. I knew when I expected. That's amazing stuff,
• 27:47
  Speaker 1: isn't it, really?
• 27:48
  Speaker 2: They fund managed jobs to outperform.
• 27:49
  Speaker 3: Investors have the right to be frustrated when they don't.
• 27:53
  Speaker 1: Yeah, cut to the chase. They made a big bet
• 27:55
  Speaker 1: and they got it wrong. And you can be right,
• 27:57
  Speaker 1: but that's not much consideration if you're wrong for so long.
• 28:00
  Speaker 1: The opportunity cost of that is substantial. Okay, this is
• 28:04
  Speaker 1: a letter. This is a letter. We'll get letters. This
• 28:08
  Speaker 1: is a piece of correspondence from Jem, J-E-M, who lives
• 28:12
  Speaker 1: in Singapore. And it's very interesting. As HSBC, that is
• 28:16
  Speaker 1: the once upon a time Hong Kong and Shanghai banking corporation,
• 28:20
  Speaker 1: has announced its withdrawal from Australia. This is amazing stuff,
• 28:24
  Speaker 1: by the way. HSBC comes into Australia, builds up a brand,
• 28:27
  Speaker 1: has branches, advertises all over the place, the whole thing.
• 28:31
  Speaker 1: And then it announces we're out. We're leaving. And JEM
• 28:34
  Speaker 1: says they are simply shutting down their credit card operations
• 28:38
  Speaker 1: without assisting customers onto any other bank credit card offering. Now,
• 28:43
  Speaker 1: there's no banks left in Australia which will offer credit
• 28:46
  Speaker 1: cards based on income outside of Australia. My wife and
• 28:49
  Speaker 1: two daughters are at university in Australia, and there's now
• 28:53
  Speaker 1: no way for them to operate in Australia other than
• 28:56
  Speaker 1: through debit cards, which are, of course, much riskier. I
• 28:59
  Speaker 1: can be a private banking client in Singapore, but I
• 29:05
  Speaker 1: can't borrow a dollar on a credit card in Australia
• 29:08
  Speaker 1: unless I live there. Australian banks simply don't think it's
• 29:12
  Speaker 1: possible to earn any income beyond Darwin, says Jim. It's
• 29:16
  Speaker 1: a great piece and it tells us a lot. I mean, HSBC,
• 29:20
  Speaker 1: it's so unimpressive. You come into Australia, you build it up,
• 29:22
  Speaker 1: you leave Australia, and you know what? In 10 years' time,
• 29:24
  Speaker 1: they'll come back because some other CEO won't even remember
• 29:27
  Speaker 1: that they pulled out and they'll try all over again.
• 29:29
  Speaker 1: But meanwhile, people are left high and dry. I just
• 29:31
  Speaker 1: want to ask you, Will, not so much about HSBC,
• 29:34
  Speaker 1: but we have this curious situation where we're a globalised economy.
• 29:40
  Speaker 1: but the banking sectors, like all the big banks are
• 29:45
  Speaker 1: exceptionally localised, right? In fact, they have no ambitions beyond
• 29:48
  Speaker 1: their shores. And when they did have ambitions, they failed
• 29:51
  Speaker 1: very badly, even ANZ. So they're all domestically focused. And
• 29:55
  Speaker 1: now HSBC is pulled out of Australia. Is there anyone
• 30:00
  Speaker 1: I wonder, will the answer here be for people like
• 30:03
  Speaker 1: Jim that everyone ends up on something like Revolut, that
• 30:05
  Speaker 1: the traditional banking system is no good?
• 30:08
  Speaker 2: I have a Revolut card.
• 30:09
  Speaker 1: So have I.
• 30:10
  Speaker 2: It's an incredible one.
• 30:12
  Speaker 3: And the other thing is I had to go to
• 30:13
  Speaker 3: an Australian bank the other day to prove my identity
• 30:17
  Speaker 3: for my mother's account.
• 30:18
  Speaker 1: Yes, of course.
• 30:19
  Speaker 2: She's in aged care.
• 30:20
  Speaker 3: And it took me 45 minutes sitting there, whereas what.
• 30:22
  Speaker 2: Did it take you to open a Revolut account? 20 minutes?
• 30:25
  Speaker 1: I know, yeah.
• 30:26
  Speaker 2: It's incredible when you do it online.
• 30:28
  Speaker 3: Look, Australian banks, they have to, there are responsible lending
• 30:32
  Speaker 3: standards and a credit card is a process of a line.
• 30:36
  Speaker 3: So there's credit assessment processes and they have tightened over
• 30:40
  Speaker 3: the last 10 years. Lenders now want income that is easy,
• 30:44
  Speaker 3: what they need to have income that is easy to
• 30:46
  Speaker 3: verify under Australian standards. and denominated, therefore, in the AUD
• 30:52
  Speaker 3: and tax systems as well that back that up.
• 30:55
  Speaker 2: That's the biggest issue.
• 30:57
  Speaker 1: Yeah. And this is not, by the way, this is
• 31:00
  Speaker 1: not a plug for Revolut, folks. It is an imperfect organization.
• 31:04
  Speaker 1: And I've written on it in the past, in the Australian,
• 31:06
  Speaker 1: but it has recently got a banking license for what
• 31:08
  Speaker 1: it's worth. So it is a bank. So all the
• 31:10
  Speaker 1: big banks, they pulled out from being global banks. National
• 31:13
  Speaker 1: Australia Bank tried to be a global bank one time.
• 31:14
  Speaker 1: So did ANZ. HSBC has pulled out of Australia. Are
• 31:18
  Speaker 1: there banks that serve everyday investors that aren't private banks? No.
• 31:24
  Speaker 1: There you go.
• 31:24
  Speaker 3: The only other one that comes to mind is Citi,
• 31:26
  Speaker 3: but they're just after a certain demographic only.
• 31:30
  Speaker 1: Jim, thank you for bringing up that issue. And I
• 31:33
  Speaker 1: think it's pretty clear what we're saying here in terms
• 31:35
  Speaker 1: of what's available, in terms of being able to move
• 31:38
  Speaker 1: money around the world for the everyday investor as opposed
• 31:41
  Speaker 1: to the private bank client. Okay. Final questions from Jenny.
• 31:45
  Speaker 1: Do you want to read that one, Will, if you
• 31:47
  Speaker 1: can see it? Yeah.
• 31:48
  Speaker 3: How would capital gains tax, CGT, work with a 10%
• 31:51
  Speaker 3: deposit now and a settlement in three to five years?
• 31:55
  Speaker 1: Yes, this is for situation, again, it's information not advice,
• 31:59
  Speaker 1: but someone's selling a property and they've been offered a
• 32:02
  Speaker 1: sort of an elongated deal.
• 32:03
  Speaker 3: So for CGT purposes or capital gains tax purposes, the
• 32:07
  Speaker 3: CGT event generally occurs when the contract is signed. This
• 32:12
  Speaker 3: is generally, so you need to get your own tax advice.
• 32:16
  Speaker 3: not when settlement takes place. But I think that's the
• 32:19
  Speaker 3: important thing to take into account.
• 32:21
  Speaker 1: Interesting. Yeah, that's what you need to know, Jenny. When
• 32:24
  Speaker 1: contracts are signed, that's the date that matters. And in fact,
• 32:28
  Speaker 1: in all the attempts to clean up the CGT tax reforms,
• 32:31
  Speaker 1: they all hinge on that as well, if you've been
• 32:33
  Speaker 1: reading the policy side of this. Terrific. Thank you very much, Will.
• 32:37
  Speaker 2: No, thank you for having me, James. Really enjoyed it.
• 32:39
  Speaker 1: That was Will Hamilton of Hamilton Wealth Partners. And best
• 32:44
  Speaker 1: of luck folks in investing in an era of high
• 32:47
  Speaker 1: and higher interest rates. I think today's show taught us
• 32:50
  Speaker 1: a couple of things that are really crucial. And to me,
• 32:53
  Speaker 1: the main message from today's show was that cash, we've
• 32:55
  Speaker 1: underestimated it. It's going to get even better. It's beating inflation.
• 33:00
  Speaker 1: And what that means is your investments that aren't cash,
• 33:05
  Speaker 1: they're going to have to do better again because the
• 33:08
  Speaker 1: premium you get for the risk you take has just
• 33:10
  Speaker 1: gone up. Okay. Let's have some more questions. They were
• 33:13
  Speaker 1: great questions. Today, themoneypuzzle at theaustralian.com.au. Today's show was produced
• 33:20
  Speaker 1: by Christian Enyet.