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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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Going back to June 2019, investors would have questioned the logic of diversifying away from outperforming growth assets. But when markets feel at their best, it is paramount to keep a perspective on long-term goals.
Do you think investors can only lose heavily on bonds if the credit defaults? When bondholders accept 0.88% for 100 years, there is great potential for serious pain somewhere along the journey.
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.
Government bonds do not feature in most retail portfolios, but they carry defensive qualities with income to offset the higher risks in other asset allocations. Are they always worth including?
Government bonds produced good returns last year, but at the current starting position of lower rates, the cost of defensiveness is probably a limited payoff.
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.
Argentina's economic history shows there's no room for complacency, as the markets often lose their ability to judge risks in the wild search for performance.
A sign that the strong credit cycle is ending is the funding of some emerging market governments that are more than likely to default, but demand is driven by desire for yield regardless of risk.
It is widely believed that rising bond yields should be bad for share prices. But is this true in real life? The relationship between government bond yields and the price of shares is more complex than it first seems.
Investing into bonds when you know you will lose money sounds crazy, but aside from interest rates, there’s deflation, economic stability, safety and currency issues to consider.
Infrastructure is sometimes seen as an alternative to low risk defensive assets like cash and bonds. But what are the implications for infrastructure investors of the low level of base or risk free interest rates?
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.