The 2020 US Election result is done. A clear example of a government (or really a President) losing an election rather than an opposition winning government. Donald Trump did have some achievements in his four years as President. He actioned what he said he would do from when elected in 2016. His election theme of ‘Make America Great Again’ was working for him and the country broadly but, in the end, his style, his polarising character, some parts of his pre-Presidency history, his defiance sometimes in the face of reality were personal reasons for his downfall. Come the trade wars, racial protests and, of course, the grim impact of the Covid-19 virus on the citizens eventually brought him down. The media will certainly miss his bizarre, headline making character, but I do not think many people will miss him.
 
Joe Biden was, shall we say, in the right place at the right time, to get elected. It will be up to the Biden regime to make decisions that will keep the US economy in the relatively strong position that it still is in despite the impact of the virus on the US and all other world economies. Challenges remain ahead but there is the feeling that tailwinds will increase momentum in 2021!  

After completing my university degree and accounting qualifications, as well as five years working as a professional accountant, I moved from Canberra to the big smoke of Sydney in late 1986 to try something very different. I always had an interest in finance and investing.

I successfully applied for a role as a Trainee Bond Broker. Bonds ruled the world, we were told! Bonds were (and still are) a major cog in financial machinations for governments, central banks, and corporations in funding themselves and in moving interest rates. My role evolved over the ensuing years to that of a Senior Bond Trader with a global investment bank. This involved me trading government, semi-government, and corporate bonds in local currency and in many other currencies (pre-Euro). You certainly learn about the markets doing this! It also involved trading bonds with coupons/interest rates well in double-digit figures. Ah, those high interest rate days, attractive for investors. Bonds formed a core part of many investors’ portfolios. Of course, inflation, which is a catalyst for higher interest rates, was higher in those days.  

So, to point, comparing now and then. In 1990, thirty years ago, in Australia, the official RBA Cash Rate was at 14.00% and the benchmark 10yr Australian Commonwealth Government Bond (ACGB) was trading at a yield of near 16.00%. In the US, the official Federal Reserve’s Cash Rate was at about 8.00% and the benchmark US 10yr Government Bond (Treasury) was at near 9.00%. High rates indeed. Interest rates have fallen over the years since then, but not in a straight line, of course.  

Now, in 2020, the official cash rates for both countries are at virtually at 0.00%, and the yields for both countries 10yr bonds is not much better at 0.70%!  In Europe, interest rates and bond yields are effectively even lower than this. Interest rates, and hence income from interest earning sources, around the world are at historic lows. And, this global situation does not appear to be changing any time soon, as the RBA Board announced in its monthly monetary statement only last week that “it is not expecting to increase the cash rate for at least three years”. This official cash rate now is a bare 0.1%! If you had $100,000 cash invested at this rate, you would earn $100 in annual interest. Ouch. And the good old bank 12-monthTerm Deposit in Australia is offering only about 0.50% these days.  

If what the RBA has stated becomes the reality here, and similarly also overseas, it is very fair to say that future investment returns for investors holding cash, term deposits and bonds will be very limited, if anything at all. With the Australian annual CPI (Inflation rate) at around 1.00%, this implies we are in negative interest rate territory when holding cash and certainly shorter and mid-dated fixed interest investments including bonds.  

Cash and bonds are traditionally classed as defensive assets, and have produced returns as yields have fallen (i.e. prices up), but now, being in such assets, beyond what may be deemed as only absolutely necessary to have, is questionable given the very negligible net income deliverable on this area. So, where else can investors earn the better income that used to be possible, to varying degrees, in the defensive sector? Investors, and certainly retirees, do need liveable income in their non-working lives. This is where earning income from shares has now even taken on extra significance.

The Investment Director with the well-established fund manager, Investors Mutual, Anton Tagliaferro, provided his insight to this question in a recently published article. On this matter, he firstly states that “The truth is that no-one has the answers to this dilemma (as these are unprecedented times). What I do know from my 35 years in investment markets is that a diversified portfolio of quality industrial shares, able to pay reliable and consistent dividends, is still likely to provide the best long-term outcome for the majority of investors, including a reliable income”. I would also add here to Anton’s comments that many such quality shares in Australia come with the added benefit of franking credits.  

Anton continues, “The key question is what we mean by quality….it means (carefully selected) companies that have a sustainable competitive advantage, such as a good franchise; recurring earnings underpinned by a strong balance sheet; and which are run by competent and experienced management”. He adds, “What we do not like are companies which are heavily reliant on strength in the economic cycle to grow earnings, or speculative companies which are often loss-making, as investors bet on a ‘hockey stick-style’ surge in profitability in the future. Stocks that…seemingly have many investors (er, and speculators) infatuated are the ‘buy now pay later’ stocks, technology companies which trade at huge valuations despite little or no earning, or cryptocurrencies – the parade of so-called investment ‘opportunities’ is endless”. I would agree, and this approach does make good sense for true investors that by having a “portfolio of well-managed, established companies with real earning can generate reliable and consistent dividends and long-term capital growth for investors…”particularly given the current highly uncertain economic environment”.

There are good companies to invest in, whether that be via directly listed or through an appropriate fund manager, and which still deliver 4% plus in annual dividends. But what if the markets become volatile and if prices fall, we hear? Well, that is simply part of the investing cycle. However, if you do not need to sell a quality share portfolio, and you take the view that such a portfolio will grow over time, as I certainly do, then you benefit from the tax effective income stream that is regularly delivered! Having invested this way for many years has tangibly reinforced this message with me and, hopefully, with our clients too.  

Property too is similarly asset class that is invested in for income returns and long-term growth returns. Interest rates being so low now should be attractive for property investors. However, the issue at the present time with commercial and retail property, and certain residential property investments, is the fact that rental returns have fallen, and vacancies are up because of the Covid-19 impact on demand. Also, because of the swift advancement and acceptance about the ‘new norm’ now of online shopping and of working from home for many people. As such, the demand for commercial and retail space has diminished.  

In addition, foreign students studying ‘here’ via Zoom now in their home countries rather than physically living and renting in the cities here, has seen demand for inner city accommodation drop notably.  

In saying all the above, it must be also remembered that an important benefit, and the rationale in having such orchestrated low interest rates, and abundant cash and credit liquidity in these times we are in, is to fuel the kick-start of the recovery in growth of economies that have been put into effectively enforced hibernation by governments because of the Covid-19 pandemic. As the Australian States re-open their borders (finally!), the country, as a whole, is re-opening for business and internal travel. Activity is what the economy needs. Hopefully, we will see similar improvements across the globe as conditions get better, but this will understandably take more time.
The vaccine is around the corner we are told!  

Let’s hope that 2021 is the ‘Year of the Rebound’!  

As always, should you have any queries or wish to have a discussion, please do not hesitate to contact us.