In the New York Times yesterday Paul Krugman’s Op-Ed piece suggested we are at the start of the world’s third depression thanks to fiscal tightening from Europe and the likely resultant deflation. I’m not going to do his article any more injustice so please have a read by clicking here…perhaps the stockmarkets of the world read this article over night also given the massive declines!
Source: Credit Suisse Global Investment Returns Yearbook 2010
The above chart shows the gross outperformance of Australian shares (including dividends) versus Australian Bonds and Bills. Over the 110 years to the end of 2009, shares provided an additional return of only 6% to 6.8% versus bonds and bills respectively.
Believe it or not, there is no other country in the world that has produced a greater equity risk premium over bonds and bills than Australia over the last 110 years…the contrarian investor is probably saying that its someone else’s turn but anyway, I digress…
…all I have to say is that given 5 to 12 year government bonds in this country are only yielding between 5% and 5.5% at the time of writing, it is an absolute disgrace that many structured products available to retail investors require the ASX 200 Accumulation Index to return double digits to cover the cost of funding!
Using this simple, but frequently used, measure for forecasting long term equity performance, if we assume the premium is likely to be 6% against bonds, then sharemarket returns will be around 11% to 11.5% over the next 5 or more years. With an expected dividend yield around 4%pa then the ASX200 Share Price Index performance will only be 7%pa…this is less than the cost of funding many of these appalling structured products (keep in mind structured products typically provide exposure to the ASX200 Share Price Index…not the accumulation index).
That’s my rant for the day.
Just found a great little article on the basic characteristics of financial crises by Rick Bookstaber…click here. It all seems so simple…before a crisis, Bookstaber says,
- “Equities are rising
- Volatility is low
- Credit spreads are narrow
- Correlations are low
- The opportunities are in the hinterland of low liquidity
- The yield curve is steep”
Its all true and appears so obvious. However when these market conditions appear good old emotion will stop us from getting on the Bookstaber train and it is the contrarian investor who will handle financial crises the best. Unfortunately for the contrarian…they are more likley to be wrong for a long time…but at least there’s fewer tears in the long run and they will have least one “I told you so” per decade.
I encourage everyone to read the Bookstaber blog…there are some fasinating opinions there on many other issues…gold, municipal bond market, etc
I know I haven’t been posting too much lately and I know with this post I am just repeating myself. My latest article for IFA magazine was published this week and for those who don’t subscribe and are interested in reading it…it can be found here.
More posts with some interesting analysis to follow!
