Out of the zone
by Peter Switzer
I learnt years ago that if I was to be an expert on the local stock market, I had to be an expert on Wall Street as well. I am very comfortable outside my Aussie comfort zone and it means I discover stuff that gives me a competitive advantage in the world of money.
In a recent New York Times article by Jeff Sommer, he argued that for cautious or safe investors the year could be challenging.
Those who like the relative safety of money market funds are now lucky if they are averaging around 0.05 per cent annually.
“It’s so low it’s a joke,” said Peter G. Crane, the president of Crane Data of Westborough, Massachusetts. “At that yield, it would take more than 1000 years to double your money.”
This is all due to the GFC and the loose monetary policy the Fed is using to fix the immediate problem. Interest rates close to zero and quantitative easing means they are throwing money at the challenge and while it’s working, the question remains — is there really such a thing as a free lunch?
To be more precise, will the solution cause a bigger problem down the track? And when might that happen? (More on this later.)
Highs and lows
There are good signs that the unorthodox rescue is working. Short rates might be unbelievably low but longer-term rates have been rising since November.
This has created a very steep, positively sloping yield curve, which simply means short rates are low and long-term rates are higher. So what?
Bill Gross, the co-chief investment officer of the Pacific Investment Management Company, or PIMCO, the world’s biggest bond manager, thinks it is historically significant.
This could lead to investors locking into long-term bonds or fixed deposits that might look good now but in two years time, with inflation, could look like a bad investment.
Any rush to long-term bonds or fixed deposits could also hurt the stock market as interest rates of six to seven per cent or so can attract the cautious investor. And remember there’s already a lot of cash on the sidelines, out of stocks, and this will be needed to keep stocks rising this year.
Timing is key
Inflation and rising interest rates can make life tricky for bond funds and timing can be critical. If you get into great fixed rate deposits or bond funds at the top of an interest rate cycle, you can really laugh all the way to the bank.
At home in Australia, interest rates on home loans could rise by another one to two per cent, but as it’s an election year, the Reserve Bank will undoubtedly be in receipt of some ‘advice’ from Messrs Rudd and Swan on not being too Bolshy on rate rises.
In America, I think they will be more cautious as the recovery there is less certain.
Steven C. Huber, manager of the Strategic Income fund at T. Rowe Price, told the New York Times the Fed was unlikely to raise short-term interest rates until the unemployment rate, now 10 per cent, was back in the nine per cent range.
That’s a good indicator to watch on Wall Street. Interestingly, if the Fed raises rates sooner than expected, the market could correct for a time, but then the view would switch to say the rate rise means the US economy is recovering better than expected. That will help share prices.
Back in Oz
In Australia, our fixed rates of interest are sensational.
For safe investors, being diversified is always the starting point and as fixed deposits are so good at six per cent plus for one to two years, there’s no reason not to be. Meanwhile, as the stock market went down so dramatically in 2008 and into early 2009 before the big comeback, there’s good reason to expect a decent return out of quality, dividend-paying shares this year.
Remember, at the height of the boom the S&P/ASX 200 was as high as 6828.7 but it is now only at 4,861. It still has a long way to go to pass the old mark and it should do this over the next few years as the global economy repairs itself.
Play it safe
Despite all of the warnings and naysaying, this could be an easy year to play it safe and still get a decent pay out at the same time! And it means you should be pretty comfortable in the uncomfortable zone of shares.
Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.
The Switzer Super Report is a newsletter and website for self managed super funds. With exclusive commentary from Peter Switzer and Paul Rickard the Switzer Super Report will help you maximise your after tax investment returns and grow your DIY Super. Click here for a free trial or subscribe today.
Published on: Wednesday, January 20, 2010blog comments powered by Disqus