Lisa Pennell delves into the world of fixed interest and finds there’s a strong case for bonds as a defence against plummeting sharemarkets.
Forecasting has become such a big business that it’s now almost an industry unto itself. Virtually every financial institution has its own team of economists who, until recently, would confidently and loudly espouse their views on precisely where markets and interest rates were heading. They’ve not always been right of course, but lately the game appears to have moved to another level entirely. The forecasters’ opinions have become consistently inconsistent, sometimes changing radically and often without warning. And it’s making investors nervous.
This nervousness is only adding fuel to a lemming-like stampede – which began around the time of the global financial crisis (GFC) – towards the investment tools that are perceived to be the safest: cash and term deposits (TDs). It’s true that cash and TD returns have been attractive, but used alone they may not be the best way to create a comprehensive long-term defensive strategy.
To understand the present, we need to look more closely at the past. Since the mid-80s, developed nations have been enjoying stable economic growth, predictable economic policies and low inflation – a period now known as “The Great Moderation”. Some analysts have argued that this greater predictability caused companies to be more relaxed about their liquidity and investors to be less concerned about risk. Certainly when the GFC hit, many Australians were caught with superannuation funds that were highly exposed to equities, and portfolios were subsequently decimated.
A Government guarantee was introduced to secure the deposit base of banks, but caused problems for products like mortgage funds, which were not included in the guarantee. The volume of withdrawals from such funds caused many to freeze or to severely limit redemptions.
With their fingers burned by bad experiences with equity markets and frozen funds, Australians suddenly became more conservative than ever. Households began saving more of their disposable income than they had in 20 years, putting it where they believed it was safest – the bank. According to the Australian Bankers’ Association, this has resulted in almost $500 billion sitting in bank accounts at the end of May 2011, up a staggering 59 per cent since the beginning of the GFC in August 2007.
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