ABX Weekly 17/02/2021

Market Update  

 

The greatest glory in living lies not in never falling, but in rising every time we fall.  Nelson Mandela 

Yield curves across the world have started to steepen, something we have not seen for quite some time. This has certainly caught players off guard and caused some pain across the industry. In last week’s note we mentioned that investors were starting to project into the future knowing that continuous easy money and stimulus is not sustainable, and that rates will need to rise at some point. Central banks have started to worry about possibly overshooting as far as overstimulation and possibly stoking a rebound in inflation which itself, would pose a whole new set of problems. 

With total term deposits approaching $1 trillion in Australia, it’s hard to understand the rationale of people who continufunnelling cash into these almost negligible investments. In fact, given inflation at approx. 1.5% term depositis a loss-making investment. 

The chart below illustrates bank deposit rates for the last 40 years. We are at record lows and it’s expected to stay this way for at least the short to medium term. With a lack of viable investment opportunities, cash reserves across the economy continue to grow at exponential levels creating somewhat of a bubble across risk assets like shares, the question being how big the bubble can get – you certainly don’t want to get caught trying to catch a falling knife when the bubble bursts! 

The bottom line is that the investment landscape has never been more challenging. One cannot help but question our current reality given that just under a year ago (Mar 2020) the world was ending on the back of COVID, we now fast forward a year and that is but a distant memory. Somehow it just doesn’t make sense. Small businesses are continuing to struggle, for lease signs are going up by the dozen and international travel is still very much restricted. However, not to jinx the situationit doesn’t appear that we are completely out of the woods on COVID. The release of the vaccine will certainly go towards calming any current or future fears but, as Warren Buffet always says, be fearful when others are greedy and greedy when others are fearful” and based on our commentary above it certainly feels like greed is the order of the day. 

We believe it’s time people considered alternative investments outside the norm and get out of their comfort zones, with a view to creating steady and secure income streams.