Best investment class for 2023?

Could this be the best investment class for 2023? In this episode, Tom Gleeson and Stefan Angelini talk Private Credit. A somewhat secure income stream with great returns now that the RBA have increased the cash rate. With a stormy and unsure outlook for property and equity markets, there has been a huge demand for this investment class.

Tom Gleeson

Good day, everyone. Stefan and Tom here from Angel Advisory. Welcome to the Real Wealth Podcast. That's enough of an intro, let's get into it. We're here today to talk about a private credit and whether or not that's going to be the best performer within fixed income for 2023.

Stefan Angelini

Finally, the unsexiest asset class has become the sexiest.

Tom Gleeson

True.

Stefan Angelini

So while I put it.

Tom Gleeson

Fair enough.

Stefan Angelini

Yeah, it is. Fixed income in general is the most boring thing in one of the hardest things to get your head around. Private credit is a bit easier. And that's the reason we love it at the moment is because generally, if the Reserve Bank is putting up its interest rates or the cash rate, then your return on this private credit is also increasing because it trades off a margin.

Tom Gleeson

Right.

Stefan Angelini

There's things like hybrids and things like that which we'll go through before we get into it. I'm going to give the disclaimer because I like being fun guy. Anything you hear in this podcast or recording is just general information. Please. They consider as personal advice. And if you want to consider any personal advice, please go and consult your licensed financial planner. That's it.

Tom Gleeson

That's it. That's the official stuff done.

Stefan Angelini

That's it.

Tom Gleeson

Cool. Right? So let's talk about the sexiest asset class for 2023.

Stefan Angelini

So what I think because everyone talks about doom and gloom, there's a lot of wording around recession in 2023, not knowing where asset classes are going and looking. We're recording this at the start of Feb. January has been a dollar month, but people are still scared. They're still skeptical about where the world is going to go.

Tom Gleeson

Yeah.

Stefan Angelini

And obviously, property is starting to get impacted because interest rates are increasing, share markets are traded off future expectations and they're getting better. But people still are unsure what's going to happen in that asset class. But if we look at fixed income or some of that, more defensive in nature, made up of 2 components, right? Two components being one, government bonds, long term lending to secure organizations, and then there's more. We call it the riskier. It is a bit riskier. Private credit

Tom Gleeson

Yes.

Stefan Angelini

Or things that like bank hybrids, anything to do with lending people money. Lending people or companies money. That's what I think is going to be the sexiest and one of the best anyway, like, with in terms of what you can expect from the markets.

Tom Gleeson

Yeah.

Stefan Angelini

More stable returner for 2023.

Tom Gleeson

Yeah. So with fixed income and specifically private credit, as you've mentioned, do you consider that to have been boring in 2022 or it's always been boring and it's about to have its moment in the sun?

Stefan Angelini

It's always been boring. It still is boring. It's boring but sexy. So 2022, it sucked. It wasn't good.

Tom Gleeson

Yeah.

Stefan Angelini

So this is why a lot of people went up going out buying shares, buying, say, commercial properties. Because if you are looking for an income return, then when the Reserve Bank's cash rate is low, then you're not going to make a great return off things like term deposits or any of these private credit or lending money because it's all pegged against it's a margin on top of the Reserve Bank's cash rate. Easiest way to value it. So in 2022, when the Reserve Bank, the Reserve Bank's cash rate in Australia was at .1% yeah, you weren't making any money, whereas Australian equities were paying out 7% income returns. And if they're fully franked and you're making 9 or 10, you go into the commercial property market, you're making 6% income and you got uplift coming over there. But now, over 2022, the Reserve Bank has gone from .1%, we're in February 3.1%. That's their cash rate and it's going to keep increasing. Now, if it keeps increasing, these investments also keep returning more as the Reserve Bank keeps kicking up its interest rate or its cash rate. Which is why if you've got uncertainty in the market, everyone's pretty confident that interest rates are going to continue to rise and therefore you can continue to make higher returns.

Tom Gleeson

Right.

Stefan Angelini

These kinds of investments, but they are investments.

Tom Gleeson

Yeah.

Stefan Angelini

So you're anticipating for this year that there will be a shift from the focus on securities from last year heading towards fixed income, towards private credit, because of those trends that you mentioned.

Tom Gleeson

Incomes, the income are so good. So if you, for instance, if you want to double your money every 10 years, then you need to make 7% per year annual return. Now, some of these things, you're getting a 7% income return on some of these debt items, you're getting up to 9, 10% on some of them. It all depends on how much risk you want to take. So for the less risky stuff, let's say you borrow money to a bank. Banks are pretty you'd say a bank is fairly reputable, most likely going to pay you back. Banks issue this kind of debt over what's called a hybrid. So they go to the market, say, we want you to borrow money from us, we'll give you the Reserve Bank cash rate plus like a 2% buffer.

Tom Gleeson

Yes.

Stefan Angelini

So if you think the RBA cash rate is at 3%, it buffers 2% and they might pay a 5% income return, but that's publicly traded, so you've got the equity risk there. As the rba cash rate increases, so let's say it goes to 4%, then you're not making 5%, you're making 6%. Just not bad. Then you got the riskier nature, which is out there, say, lending money to institutions that then lend to individuals or that lend to business owners. And that's where you start getting that margin that I spoke about, that 3% plus 2%, you can go up to 3%,4%, 5%, 6% but as you go up, it starts getting riskier and less diversified.

Tom Gleeson

Yeah.

Stefan Angelini

I want to talk about diversity. When normally people think about diversification, they think about, right, I'm going to invest in a lot of different things, but in this private credit market it's in how many loans are there, how diverse is the loan? Because let's say you've got 20,000 lenders. If you've got 1,000 of those that don't end up paying back, well, that's only 5% that don't end up paying back. But if you've only got 5,000 and a thousand of them don't pay back, that's 20%. You don't want that because that puts your money at severe risk. So you've got diversity. Less diversity will get you more.

Tom Gleeson

Yeap.

Stefan Angelini

Obviously, and then the security of the borrowing. So for example, if you're lending money to an institution that then lends money out for say real estate. Real estate is pretty secure. They might have a loan to value ratio. They do their assessment under the responsible lending guidelines. If they're, if they're under that framework, then you're pretty secure that you're pretty confident that the money will get repaid.

Tom Gleeson

Right?

Stefan Angelini

But then you can go down the track and say, well, what if this institution lends money to individuals as personal loans or they lend money to business owners to buy cars? That's riskier.

Tom Gleeson

Yeah. Okay.

Stefan Angelini

There's a lot of likely that this might not go too well.

Tom Gleeson

Yeah.

Stefan Angelini

So then you do this, but you get a better income return. So it's riskier in nature, but you get rewarded by a better income.

Tom Gleeson

Yeah.

Stefan Angelini

So it's really important to do your assessment on the lender, the criteria, who money goes to, and what happens if people don't repay the money.

Tom Gleeson

So there's a bit of a scale that exists there where in terms of, I mean, correct me if I'm wrong, but the low risk, low reward, you're looking at government bonds as an institution. That's safe.

Stefan Angelini

Government is going to give you the money back.

Tom Gleeson

Medium tier would be banks, the major banks.

Stefan Angelini

You've got even another pretty secure way of getting your money back is say term deposits.

Tom Gleeson

Yeah.

Stefan Angelini

Lending to a bank. They do what with it.

Tom Gleeson

Yeah.

Stefan Angelini

But they give you the money back at the end of the point and the government guarantees that money up to $250,000.

Tom Gleeson

Yes.

Stefan Angelini

So that's another pretty secure way to earn good return.

Tom Gleeson

And then beyond that, moving into property, what you mentioned, it could be a safe investment, it might not be, which is why it's important to do your research. Then you're looking at higher risk, higher reward.

Stefan Angelini

That's it like with anything.

Tom Gleeson

Yeah.

Stefan Angelini

The more you move up the risk curve, the better your return should be getting. So it's about doing your assessment, do you want to take on that risk? Don't want that extra income return, how actually safe is it? But that's normally the trade off. The more return you want, the more risk you end up taking.

Tom Gleeson

For sure.

Stefan Angelini

But in times of uncertainty like we're in, no one really knows what's going to happen in 2023. A lot of people want security of their money and that's what we're seeing. A lot of people move towards this private credit because if you can get 6%, we're taking a minimal risk compared to the equity risk you'll be taking or the property risk you're taking. If you're not seeing the property market going anywhere anytime soon, or even in the short term, we're seeing a lot of people love this stuff, and especially people that are sitting on cash not knowing what to invest into.

Tom Gleeson

Yeap.

Stefan Angelini

Just because 2023 is an uncertain year. Uncertain.

Tom Gleeson

Or if you can get 6%, plus the peace of mind. I mean, that's invaluable what we've learned from our clients. That peace of mind is priceless. Like the security of that investment.

Stefan Angelini

Yeah, that's right. Financial security, comfort all play a part in making your investment decision, especially as you get more money.

Tom Gleeson

Yeah.

Stefan Angelini

Over time. Over time.

Tom Gleeson

Very good. All right, well, we might wrap that one up here. Thanks very much for your insights on the fixed income in general, but also specifically looking to the private credit.

Stefan Angelini

Thanks for chatting. Thank you.

Tom Gleeson

Looking forward to a sexy 2023 as well. That's what it's going to be.

Stefan Angelini

Thanks. Listening.

Tom Gleeson

Cheers.

Stefan Angelini

Bye.