Australian Bond Exchange


Market Update

“Tell me and I forget, teach me and I may remember, involve me and I learn.” – B. Franklin

2021 has started on a relatively subdued note. There doesn’t seem to be any controversial themes arising thus far on the global stage. The main event this week was the inauguration of President Jo Biden and, despite fears of another outbreak of violence by pro Trump supporters, the whole ceremony went off without a hitch. We are still a little bemused by the performance of global equity markets which continue to push higher. It seems that the trials and tribulations of the past year are but a distant memory. But as Warren Buffet once said: “Be fearful when others are greedy, and greedy when others are fearful”. Most people agree that the equity market is somewhat of a bubble, the question is, how much additional air can it withstand.

The chart below illustrates the performance of bonds v stocks over the last 20 years. The main takeaway from this is the relative outperformance of bonds vs equities on a risk-adjusted basis. Whilst equites may have outperformed bonds marginally over the 20 years, there were some serious corrections one had to contend with – the tech wreck, the GFC and not to forget the recent pandemic. It would have taken a brave investor to hang on to equity positions during these very testy times, yet bonds would have provided a stable and income-generating investment.

Source: Financial Samurai

The chart below is also very relevant as it illustrates the benefits of diversification over the last 90 years, and the importance for investors of having a balanced portfolio. A quick glance at the table below shows that a portfolio of 30% equities and 70% bonds had the greatest average annual return. This is very relevant to the current state of retail portfolios in Australia where the average investor holds a mere 10% of assets in fixed income, a statistic we feel will revert to the OECD average of 40% in years to come.

We are still very supportive of the enhanced yield space and at the risk of sounding repetitive, we would still encourage investors to consider this space. Despite the slightly higher risk profile, we believe market adoption of this asset class will grow exponentially in the years to come.