Weekly Insights BY THE CURVE TEAM –

Weekly Insights: Investing Evolution

30th of August, 2021

Key Updates

  • Monday – Company Operating Profits (GDP Partial) & Inventories (GDP Partial)
  • Tuesday – Weekly Consumer sentiment survey, Building Approvals, Private Sector Credit Balance of Payments (GDP Partial) and Next Exports (GDP Partial)
  • Wednesday – GDP, Monthly House prices and Commodity Index
  • Thursday – Trade balance and New lending data
  • Friday – Services PMI

Investing Evolution

Liquidity cycles can vary in length and intensity. However, after spending some time at one extreme, for example where the demand for money is greater than supply, we usually see it swing back into equilibrium briefly before going in the other direction. This means we see periods where many banks want money but most investors are fully invested. Whereas other times we see periods where banks are adequately funded and investors are sitting on surplus funds that need a place to invest.

We have highlighted recently that we could be in a new paradigm where low rates and high levels of liquidity could be here to stay. It means we could spend an unusually long period in this part of the liquidity cycle where banks are adequately funded and there is excess surplus funds still looking for a home.

Over the past few weeks we have been highlighting strategies that can be utilised in order to place surplus funds when faced with the current environment of adequate funding for banks and surplus funds needing to be placed. These have included the barbell strategy of investing some funds long term while keeping the rest short, laddering your portfolio and diversifying across counter-parties and products where possible.

While theoretically all of these strategies help guide through the current environment, they are only useful if investment policies have the flexibility to allow you to take advantage of them.

When the pandemic first hit, many investors found themselves caught out where their investment policy prohibited them from hitting their strategic objectives, such was the sudden shift in the operating environment. While the TFF has ended, its legacy along with the ongoing Quantitative Easing program from the RBA continues to suppress interest rates and leave the banking system awash with surplus liquidity.

The longer this economic environment continues the more crucial it will become to ensure that your investment policy is fit for purpose. That could mean:

  • Adding new approved counter-parties, either domestic or branch banks operating in Australia to increase diversification.
  • Investing in different products such as fixed income securities or notice account.
  • Reviewing ratings, counter-party or term limits to ensure adequate flexibility.

Over the past 18 months since the pandemic started we have seen a surge in the number of clients doing a health check on their investment policy to ensure it is fit for purpose. If you would like to discuss your policy and what changes you could make to operate in the current environment please get in touch with your Curve representative.

David Flanagan

Head of Money Markets