After starting her career in forex and equities, Jenna Labib pivoted to Australia’s fast-growing corporate bond market as it undergoes a period of rapid change.

Australia’s corporate bond market is on the cusp of an exciting period of change, Jenna Labib says.

In short, there’s a shift taking place where investors are getting improved access to fixed income assets in Australia – a market where annuity-style investments have historically been dominated by dividend-paying stocks and real estate.

With 2021 drawing to a close, Stockhead caught up with Labib – a Director of Fixed Income at Income Asset Management (ASX:INY) – to discuss all things bond-related as Australia’s economy emerges from the pandemic.

 

Some (brief) background

In line with the changes in capital markets, Labib’s pivot to bonds is also a more recent development after starting her career in institutional sales at two global investment banks.

That coincided with some big market moves – Labib was on the forex desk at Deutsche Bank during the Brexit vote in 2016 when the UK pound slumped by some 30%, and worked in equities at UBS through the March 2020 COVID-19 crisis.

“Those were unique experiences and what I’d say about that is you never waste a crisis in terms of the training it gives you,” Labib says.

“When you’re managing those large order flows and volatility spikes, huge amounts of money are made or lost.”

In that context, Labib was also executing trades for a global client base of sophisticated investors, which marks something of a contrast to her current role.

“With my role at IAM, I’m servicing private clients as opposed to large corporates and institutions. So my clients are relying on me to be their eyes and ears in the bond market and provide them with the best opportunities,” she said.

“For me personally I found that to be a much more rewarding experience, where I’m able to tangibly help people build stability in their financial future.”

 

Changing landscape

Assets such as investment-grade (IG) corporate bonds haven’t always been the domain of retail investors in Australia, but that’s changing.

Of note, federal lawmakers have taken a direct interest in the sector. Earlier this month, a parliamentary committee tabled 12 recommendations to foster the development of Australia’s bond market through improved accessibility and transparency.

As an example, Labib flagged the percentage of Australian retirement assets currently allocated to bonds, in comparison to other developed markets.

The OECD average is around 44%, and Australia is closer to 15%.

“So compared to the rest of the world, Australia’s bond market is still in its relative infancy and I think there’s a lot of room for growth to increase that weighting – particularly in the current environment,” Labib said.

The post-COVID stimulus response has left markets in “uncharted waters” from a policy standpoint, Labib said.

But if monetary policy tightens, will rates rise enough to warrant a pivot to cash?

Amid that uncertainty, investors are still looking for ways to build diversified portfolios in an era where cash deposits return close to 0%.

Historically, Australian capital markets have been geared towards ‘barbell’ portfolios; zero-risk term deposits on one side and riskier stocks on the other, with nothing in between.

“In that context, I think what the (parliamentary) committee found was that the almost complete absence of bonds to retail investors in Australia has done that segment something of a disservice,” Labib says.

“Because if you take the example of IG corporate debt – that’s a low risk asset that yields higher than cash.”

“It’s not a substitute for cash – these investments still have their own risks – but I think there’s now a really strong appetite to increase that bond exposure,” Labib said.

 

Portfolio construction

So with interest in the space increasing, where are investors looking?

“In terms of interest I’d say there are two key areas right now, starting with demand for inflation-linked bonds,” Labib said.

“That ties back to what I said before with the pandemic policy response. We’re in a bit of uncharted territory when it comes to inflation and so that’s an attractive option for clients who are close to retirement age, and trying to protect the purchasing power of their nest egg.”

The second area of interest Labib flagged is in ‘green bonds’ – the growing market for corporate bond issuance tied directly to ESG and sustainability initiatives.

Within the past month, NZ-based electricity provider Mercury Ltd (ASX:MCY) and the $10bn real estate investment trust GPT Group (ASX:GPT) have both issued AUD-denominated green bonds.

“Our clients have participated in those and they were strongly bid for in both primary and secondary markets,” Labib said.

“The great thing is we offer access to over 150 corporate bonds so it gives our client choice in how they construct their portfolios. For example you can apply different ethical screens, or pick a sector where you’ve spent your working life so you have a better understanding of risk.”

“Owning bonds directly gives you that control to build a portfolio that you want, with those bespoke features to align it with your specific objectives.”

 

The trade that paid

In constructing its portfolios, IAM places investments across the capital structure within Australia’s corporate bond market, from high-yield debt through to low-risk bond issues from the big banks.

For a more specific view, we also asked Labib for an example of a bond investment in the current market that offers compelling risk-adjusted returns.

“One of my favourite trades at the moment is a bond issued by the Capital Alliance Investment Group, which is a Melbourne-based hotel REIT with development earnings,” Labib said.

CAIG currently has a secured note on issue with a 10% coupon rate, which is maturing in four years.

Among its high-profile projects, Labib flagged the opening this week of the Marriott hotel complex at Melbourne’s Docklands precinct – the first Marriott branded hotel in Australia for 20 years.

“That higher yield of 10% alerts investors to the higher risk. But the way that issuance is structured, they also have strong protection mechanisms in place from the bond covenants,” Labib said.

“And I think that CAIG deal is a great example of companies in a position to benefit from the reopening trade. So that’s one that stands out to me as really good value.”

More broadly though, Labib’s first priority is to maintain a client focus. And in that context, she reiterated that bonds will continue to play an important role in portfolio construction as the global economy emerges from the pandemic.

“It does feel like the world economy is changing and the next few years will be challenging,” Labib says.

When looking ahead, she said a classic Warren Buffett quote often springs to mind – ‘if past history was all there was to the game, the richest people would be librarians’.

“So a lot of our discussions with clients are focused on themes like the reopening trade, and concerns around inflation and interest rates,” Labib said.

“And I think what a lot of people are coming to realise is that even with rates where they are, it’s absolutely possible to get a decent return from bonds, while adding diversification to a portfolio of almost any size.”

 

Income Asset Management (ASX:INY) delivers unparalleled access to a complete income investment service. We aim to provide investors and portfolio managers with the most trustworthy and capable platform to research, execute, and manage their income investments. Our businesses across deposits, bonds, treasury management and asset management are all there to enable investors to compare, choose, and execute, in the most efficient, transparent, and cost-effective way.

This article was developed in collaboration with Income Asset Management, a Stockhead advertiser at the time of publishing.

This article does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.