“Folks this government isn’t too big to fail, it’s too big to succeed”. Sarah Palin
With more commentary pointing to an ever-strengthening domestic economy people must be feeling a whole lot better about the future than they did this time last year. That said, there are plenty of businesses that are still struggling to get back on their feet suggesting that the recovery is very much centred around certain businesses. CBA CEO, Matt Comyn, has described Australia’s economic recovery as miraculous. Australia’s economy is growing so strongly now because of massive amounts of government spending (fiscal policy) and exceptionally low interest rates (monetary policy). However, we are still not out of the woods. There are still 778,100 people officially unemployed. Universities, small businesses, the arts sector, and parts of the tourism sector have a long way to go before they can say they have fully recovered.
The property market, something close to everyone’s chest, is proving to be a more than resilient asset class with a very bright future. The CEOs of the 4 largest banks met in Canberra recently to discuss the property market. They said the current surge in property prices was different from the last cycle because some of the biggest gains in prices were occurring in regional areas and places where prices were subdued in the last cycle. CBA thinks property prices will grow by 10 per cent this year which is great news given 32% of Aussies are homeowners.
For the next few weeks, we are going to be looking at a few themes that investors tend to consider before making any sort of investment decision. Below is graph that may be familiar to a few people. It illustrates the risk-return paradigm investors face when building any portfolio and how best to optimise that portfolio? The bottom line is that for each increment in return then is a corresponding increment in risk. Government bonds are considered as close to risk free as you can get. That said they also have the lowest return. The 3-year Aust Govt Bond is currently yielding 33bps. At the other end of the spectrum, we have emerging market equities with the highest returns but also the highest risk.
At the Australian Bond Exchange we believe one can compromise and achieve a balance by investing in high yield corporate bonds which are slightly riskier than Govt Bonds but pay a much better return in the order of 4-5%. Similarly certain high quality private debt issues are paying close to 7%. These are not shown below but using the same line of thinking they are of course riskier.
The key message here is diversification. Never put all your eggs in one basket and you certainly cannot survive on yields of 33bps. By having a mix of all asset classes ensures you have enough income to live on and enough exposure to growth assets.