“Yesterday is history, tomorrow is a mystery, today is a gift, that’s why they call it the present.”
Welcome to the Australian Bond Exchanges first weekly for 2021. If nothing else, we hope and expect that 2021 will be better than 2020 and we wish our clients all the best for the New Year. Equities opened the year making record highs, which is no surprise given the backdrop of continued stimulus and the prospect of a COVID vaccine hitting the market. Bond yields remain under pressure and it looks like we may be at the start of another upswing in the property market.
It continues to be a challenging period for investors, considering the likelihood of a COVID comeback. It is quite interesting to compare the reaction of markets to COVID first time around to that of the current reaction. It has long been a theory of ours that markets are quick to absorb and discard market sensitive information. After that, they become desensitized to the same market shock causing a rather benign reaction second time around and of course the roll out of various vaccines around world is providing some hope.
We still believe investors are very much underweight fixed income. A combination of access to, and understanding of, the bond market, has created this phenomenon, but we feel this is changing on the back of a need for more low risk and stable high yield investments.
The chart below really speaks for itself. It highlights the performance of Stocks vs. Bonds in times of extreme volatility like that during the peak of the COVID crisis. You cannot get a starker contrast – the green line shows how the US equity market performed vs. 20+ US Treasury Bond during this period. In other words, fixed income seriously outperformed equities during this time and would have added some much-needed protection to a diversified portfolio.