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Thursday, 13 August 2020
Recently trending After 30 years of investing, I prefer to skip this partyAustralian house prices: Part 2, the bigger picture How to handle the riskiest company results in historyAustralian house prices: Part 1, how worried should we be?Welcome to Firstlinks Edition 369
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Many investors are struggling with the idea of negative yields on bonds, but with $17 trillion on issue, it's worth taking a moment to think about what it actually means for your portfolio.
Australian bond rates are now lower than during recessions and depressions of the past, but it's not driven by local fundamentals. The world of interest rates is in a place it's never been before in history.
We like a good debate, and when two opposing views argued about the role of government bonds in a diversified portfolio, a veteran of 30 years in fixed interest stepped in as referee.
Most investors think the relationship between interest rates and prices only applies to fixed rate bonds, but the rate impact on discounting future cash flows applies to all income-producing assets.
Contrary to historical norms, Australian sovereign bond yields are trading below those in the US. What are the implications for hedging and returns from bonds and will the differential be sustained?
Bonds have performed well for most of the last 30 years with a tailwind of easing liquidity, but the current high prices makes them vulnerable to losing their protective qualities.
Many experts expected the Aussie dollar to fall rapidly when US rates rose above Australian rates, but the fall has been modest. What factors are holding it up and what's the outlook?
Market fundamentals are pointing toward an era of high volatility and lower returns, which have not been factored into current prices. Better to wait till there is blood in the streets rather than be fully invested.
With the strongest defensive assets earning close to zero and negative real returns, investors are looking at other ways to shock-proof their portfolios, but it invariably means taking on more risk.
The reality of investing in a bond is that regardless of whether we have experienced a massive bull market, the most a bond is worth at maturity is the face value.
We can expect a long bond yield rise of the magnitude we’ve seen in 2016 on average every three years, but that doesn't ease the pain of capital losses in the last six months.
The yield quoted for a bond can be calculated in many different ways, depending on its characteristics or the investment horizon of the bond holder. Which yield are you buying?
Eventually, prices become so extreme they bear no relationship to reality, and a bubble forms. I believe we are there today, not for all stocks but for many in the technology space.
There is good reason to believe the negatives will continue to outweigh the positives over the next 12 to 18 months. There is more concern about house prices than the short-term indicators suggest.
It is better to miss a results bounce and buy after the company has delivered than it is to step on a landmine. With such uncertainty, avoid FOMO by following these result season investing tips.
Three key indicators are useful for predicting the short-term outlook for house prices, although tighter lockdowns make the outlook gloomier. There is enough doubt to create cause for concern.
Imagine you had perfect foresight about COVID-19 at the start of the year. You correctly foresaw that the global pandemic would kill over 700,000 among 20 million infections by August. In Australia, borders would close, cities would be locked down, most mortgagors would be on income support and companies would be allowed to trade while insolvent. You then had to guess how much the stock market would fall. Would you say about 10%?
Sometimes the simplest ideas are the best. The founders of Afterpay stumbled on the attraction for consumers of paying by instalments, and now retailers must offer the facility or lose business.