14 Apr

Hard assets and tough times

On behalf of the entire Australian Diamond Portfolio team, we hope that you had a lovely and relaxing Easter break with friends, family, and at least one (or maybe more) chocolate Easter bunnies.

From our perspective, it’s hard to believe that we are already almost half way through April, with 2023 almost one-third complete.

What had started as a relatively calm year from an investment point of view has changed dramatically in the last month, with the collapse of several banking institutions across the United States and Europe leading to huge volatility in financial markets, and the beginning of a scramble for hard assets.

Pink diamonds have been a beneficiary of this trend, given their tangibility, scarcity, and history of outperformance through periods of market stress. However,  transaction volumes, both in Australian and overseas, remain somewhat subdued, based both on what we are seeing directly at Australian Diamond Portfolio, and the feedback we are getting from global trade partners.

This is in many ways is to be expected given the broader economic environment, though it’s important to note that prices for pink diamonds remain incredibly strong, which evidences the wealth protection and diversification these assets offer to investors.

We’ve also been pleased to see recent media coverage of the pink diamond market by CNN, in an article looking at ultra-rare pink diamonds set to fetch multiple millions at auction. The article touched on several of the key factors that make a great pink diamond, and developments in the pink diamond market in the last two to three years.

The article even includes a reference to Australian Diamond Portfolio Pink Diamond Index (ADPPDI) and the 30% price growth exhibited by this asset class in the 2020/2021 financial year.

And while we can’t promise returns of 30% each year, we remain optimistic on the outlook for both demand and prices, as investors continue to turn to pink diamonds both as a wealth protector, and profitable opportunity in times of uncertainty.

Below we explore a couple of factors underpinning our faith in the outlook.

Continued challenges facing Australia

In many ways, the Reserve Bank of Australia (RBA) did what was expected in early April, when they decided to keep interest rates on hold at 3.60%.

After the collapse of Silicon Valley Bank triggered a bout of financial contagion the world over, central banks have been a lot more cautious about pushing through more interest rate hikes, given the obvious fragility in the financial system.

While many have cheered on the RBA’s decision, and see it as a bullish sign for the Australian housing market, which has been under major pressure over the last year, with prices down circa 10% in nominal terms (closer to 20% in real terms), we are not so sure.

The main reason for this is that even though the RBA is on hold (for now, they may actually continue to hike rates after pausing for a month or two), as this Macrobusiness article points out: “There are more than 600,000 fixed rate mortgages across the big four banks alone that will expire over the June, September and December quarters,” and that “these borrowers will exit ultra-cheap fixed rate mortgages of around 2% and transition to variable rate mortgages of around 6%.”

End of fixed rate mortgages period, Four majors, 2023-2024

A chart showing the end of fixed rate mortgages from the four majors, 2023-2024.

Source: Four Majors, ABA

Economists predict that the impact of this switch from lower fixed to much higher floating rates will be the equivalent of five interest rate rises, with scheduled mortgage payments set to lift to an all-time high share of household income.

That is some shock on its way to Australia.

The other complicating factor that arises from the RBA’s decision to hold interest rates steady is the outlook for inflation, and the Australian dollar.

All other things being equal, the RBA keeping rates steady puts downward pressure on the Australian dollar, which increases inflation (as everything we need to import now gets more expensive). This is particularly problematic given how high current inflation rates remain.

This makes the outlook for the economy, the local housing and the local share market still susceptible to significant risks and boosts the attractiveness of assets that can hold and even their increase their value in such times.

Pink diamonds, which would get an additional boost from any weakness in the Australian dollar, are one such asset that looks well suited to this environment, with their period of outperformance set to continue in the period ahead.

Don’t forget to download our guide!

Less than a fortnight ago, the team at Australian Diamond Portfolio released our updated Diamond Investment Guide, which is now available for download.

The guide highlights the key reasons why Australians may wish to consider investing in this asset class, looking at both the supply and demand factors that drive the price of pink diamonds, what to look for in a great pink diamond, and how to incorporate these assets into your portfolio.

From our perspective, the events of the last month, and the outlook for the economy and for markets only reinforce why these assets can offer such a profitable opportunity going forward.

 

Download Investment Guide

The 2023 Pink Diamond Investment Guide

As always, we hope you’ve enjoyed this week’s edition of “In the Loupe” and we look forward to any questions or comments you may have.

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