Understanding Bank Hybrids: A Safe Bet or a Risky Play?
The world of investments is full of opportunities and risks, and understanding the nuances can be the difference between success and failure. Recently, ABC Radio Melbourne’s Lisa Leon sat down with Remo Greco, a renowned share market specialist, to discuss the latest trends in the financial market. From the appeal of bank hybrids to the future of major stocks like Telstra and Westpac, Remo offered his insights on what’s hot and what’s not in the world of finance.
What’s Hot in the Investment Market?
Bank hybrids are attracting a lot of attention right now, but what exactly are they, and why are they such a hot topic? Remo Greco explains that bank hybrids are a blend of two financial instruments: shares and bonds. They pay fully franked dividends, like shares, but also behave like bonds in the sense that they offer a fixed interest rate and are repaid at a future date.
“Hybrids act like shares in that they provide fully franked dividends, but they also act like debt instruments, offering a margin over the base interest rate,” Remo explains. “Currently, that margin is around 2-2.5%, which, when combined with the base rate, results in about a 7% return.”
However, hybrids carry some risks. In the unlikely event of a bank collapsing, hybrid investors could lose all their money, just like share investors. Despite this, many investors are drawn to hybrids because they offer higher returns than bonds or term deposits while being less volatile than shares.
The Risk Ladder
In the hierarchy of financial products, hybrids fall somewhere in the middle. At the top of the safety ladder are senior bonds and term deposits, which are extremely secure but offer lower returns. Further down are subordinated debt and hybrids, followed by shares, which come with the highest risk but potentially the greatest rewards.
At the moment, bank hybrids are especially attractive because they are paying a solid return of about 7%, and many investors see them as a safer way to earn good returns without the volatility of the stock market. However, as Remo warns, the floating rate nature of hybrids means that their returns can fluctuate along with changes in the Reserve Bank’s interest rates.
Telstra Shares: A Cautious Outlook
One of the key topics discussed was the future of Telstra shares. Remo is cautious about the outlook for Telstra, despite its prominence in the Australian market. He noted that Telstra’s growth has been largely driven by its ability to increase prices on mobile phone bills, which may not be sustainable in the long term.
“I’m a bit concerned about Telstra’s outlook,” Remo says. “Their profit growth is coming from charging customers more for their mobile phone plans, but if the economy slows down, people may not be willing to keep paying higher prices.”
Telstra is also facing challenges in its enterprise business, which services corporate and government clients. This division was once seen as a growth driver for the company, but it has been shrinking in recent years. Additionally, Telstra’s involvement with the NBN and satellite services like Starlink is limited, as they are simply resellers of those services rather than core operators.
For these reasons, Remo advises caution when it comes to investing in Telstra shares, suggesting that above $4, it might be a good time to sell. While Telstra is a blue-chip stock with some stability, its growth prospects are limited, and better opportunities might be found elsewhere.
The Gold Rush: Why Gold is Still a Safe Haven
Gold has long been seen as a safe haven for investors, and according to Remo, it’s still a hot asset in the current market. Despite its reputation as an old-fashioned investment, gold has performed exceptionally well this year, reaching all-time highs.
“A lot of people thought gold was passé, but it’s been one of the best-performing assets this year,” Remo says. “Governments and emerging markets are buying gold as a store of wealth, and with interest rates going down, gold becomes even more attractive.”
The weak US dollar and declining interest rates in the US have also contributed to the rise in gold prices. As a non-yielding asset, gold benefits when interest rates fall, as it becomes a more appealing store of value. Additionally, geopolitical risks and economic uncertainties drive demand for gold as a hedge against market volatility.
For investors looking for a safe and stable investment, gold offers protection and a strong potential for future growth. Some gold enthusiasts even predict that gold prices could reach $8,000 an ounce in the coming decade, making it an asset worth keeping an eye on.
Buying a Home: How to Maximize Your Nest Egg
Caitlin, a listener saving for her first home, called in to ask how she could make the most of her savings while she waits to buy. Remo advises that she keep her money in a high-interest savings account or consider short-term term deposits to maximize returns without taking on too much risk.
“Your primary objective is to buy a house, so the accessibility of your money is really important,” Remo explains. “Term deposit rates are high right now—around 4.5%—so locking in a short-term deposit could be a good way to earn some interest while keeping your money safe.”
For young savers like Caitlin, the key is balancing accessibility with return. While it might be tempting to invest in riskier assets to grow the money faster, Remo cautions that the primary goal should be preserving the savings for the future home purchase.
The Rise of Guzman y Gomez: Is It Worth Investing In?
Another hot topic in the conversation was the IPO of Guzman y Gomez (GYG), the Mexican fast-food chain that has seen rapid growth. One listener wanted to know whether GYG shares were worth investing in.
Remo points out that while GYG has experienced significant growth and is expanding rapidly, it’s essential to approach the investment with caution. “GYG is a high-growth business, and people are excited about its potential to expand globally, much like Domino’s Pizza,” he explains.
However, the risk with high-growth companies is that much of the potential is already priced into the stock at the time of the IPO. Investors could be paying a premium for future growth that may or may not materialize. Remo advises taking a measured approach, perhaps investing a small amount initially and increasing the position over time if the company performs well.
Coal and Infrastructure: Investing in the Supply Chain
Metallurgical coal, used for steel production, is another area of interest for investors, especially as global demand for steel fluctuates. While investing directly in coal mining can be risky due to the cyclical nature of the industry, Remo suggests an alternative approach: investing in infrastructure that supports the coal industry.
“We own a company called Dalrymple Bay, which is the largest coal terminal in the world,” Remo shares. “I like the idea of investing in infrastructure because it’s safer and provides steady returns. Rather than being exposed to the ups and downs of the mining industry, we own the port that exports the coal.”
This strategy allows investors to benefit from the demand for coal without the risks associated with the volatile commodity market.
Conclusion
Investing is all about balancing risk and reward, and as Remo Greco highlights, each investment opportunity comes with its own set of risks and potential rewards. From the relatively safe but lower-yielding bank hybrids to the high-growth potential of GYG shares, investors need to carefully consider their goals, risk tolerance, and the broader market conditions before making any decisions.
Gold continues to be a solid choice for those seeking stability in uncertain times, while infrastructure investments like Dalrymple Bay offer a way to capitalize on industry demand without the direct risks of commodity markets. And for those looking to buy their first home, keeping savings in a high-interest account or term deposit is a safe way to maximize returns while maintaining accessibility.
For more insights from Remo Greco and other financial experts, you can listen to the full segment on ABC Radio Melbourne or read more about our financial podcasts here on our website. Stay informed and make smarter investment decisions with expert advice from the team at Sanlam Private Wealth.
