Safe haven moves

That dreaded word, volatility, has crept back into market commentary and investors are once again starting to think about how best to protect their portfolios should we see another sharp correction.

Equity market volatility has doubled in the past month, with several days of falls of more than 1 per cent in the past two weeks alone.  Nervousness about economic growth, sparked by an unexpected decline in US retail sales and very poor industrial data out of Germany, has sent bond yields lower and prices higher as investors seek safe haven in lower risk bonds. 

If you are an SMSF, how do you best insulate your portfolio in markets like this?

Chair of the US Federal Reserve, Janet Yellen stepped in tell markets to stay calm.  That’s good advice.  In Australia, a Reserve Bank Assistant Governor warned that we have become complacent about risk and that “exits tend to get jammed unexpectedly and rapidly”, meaning those attempting to pick the right time to exit can easily miss.  More good advice – calmly head for the exits when you are ready, not after everyone else has.

The most interesting comments though came from Christine Lagarde of the International Monetary Fund.  She calls the new world economy, post the financial crisis, “the new mediocre”.  Growth won’t be high, but nor will it be very low.  It will be mediocre.

For a start, if you hold enough diverse investments and don’t need to be a forced seller, you can simply hold onto your assets and wait for deposits and bonds to mature and the sharemarket to correct.  Institutions sometimes have to be forced sellers, as do investors that use margin lending.  But ordinary SMSF investors can outperform these investors by just staying calm.

Secondly, have a think about what “the new mediocre” means for your portfolio.  Mediocre is not good for shares as they need earnings growth to perform, particularly low dividend shares.  They will also be the most volatile when markets get nervous, as we’ve seen recently. 

On the other hand, bonds like mediocre.  Bonds like boring, low growth markets.  The higher yielding Investment Grade corporate bonds’ returns over the past decade have been around the same as equities, regardless of whether that is in the equities boom years of 2004-2006 or 2011-2013, or the volatile years in between.  Year in, year out, 5-8 per cent per annum income. 

With the EU in the doldrums, China slowing but very gradually. Australia is trying to reinvent its economy after the mining boom and it is only the US that is performing.  That’s the IMF’s outlook for much of the next decade – the new mediocre. Perfect conditions for corporate bonds.

Copyright The contents of this document are copyright. Other than under the Copyright Act 1968 (Cth), no part of it may be reproduced or distributed to a third party without FIIG’s prior written permission other than to the recipient’s accountants, tax advisors and lawyers for the purpose of the recipient obtaining advice prior to making any investment decision. FIIG asserts all of its intellectual property rights in relation to this document and reserves its rights to prosecute for breaches of those rights.

Disclaimer Certain statements contained in the information may be statements of future expectations and other forward-looking statements. These statements involve subjective judgement and analysis and may be based on third party sources and are subject to significant known and unknown uncertainties, risks and contingencies outside the control of the company which may cause actual results to vary materially from those expressed or implied by these forward looking statements. Forward-looking statements contained in the information regarding past trends or activities should not be taken as a representation that such trends or activities will continue in the future. You should not place undue reliance on forward-looking statements, which speak only as of the date of this report. Opinions expressed are present opinions only and are subject to change without further notice.

No representation or warranty is given as to the accuracy or completeness of the information contained herein. There is no obligation to update, modify or amend the information or to otherwise notify the recipient if information, opinion, projection, forward-looking statement, forecast or estimate set forth herein, changes or subsequently becomes inaccurate.

FIIG shall not have any liability, contingent or otherwise, to any user of the information or to third parties, or any responsibility whatsoever, for the correctness, quality, accuracy, timeliness, pricing, reliability, performance or completeness of the information. In no event will FIIG be liable for any special, indirect, incidental or consequential damages which may be incurred or experienced on account of the user using information even if it has been advised of the possibility of such damages.

FIIG provides general financial product advice only. As a result, this document, and any information or advice, has been provided by FIIG without taking account of your objectives, financial situation and needs. Because of this, you should, before acting on any advice from FIIG, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If this document, or any advice, relates to the acquisition, or possible acquisition, of a particular financial product, you should obtain a product disclosure statement relating to the product and consider the statement before making any decision about whether to acquire the product. Neither FIIG, nor any of its directors, authorised representatives, employees, or agents, makes any representation or warranty as to the reliability, accuracy, or completeness, of this document or any advice. Nor do they accept any liability or responsibility arising in any way (including negligence) for errors in, or omissions from, this document or advice. Any reference to credit ratings of companies, entities or financial products must only be relied upon by a ‘wholesale client’ as that term is defined in section 761G of the Corporations Act 2001 (Cth). FIIG strongly recommends that you seek independent accounting, financial, taxation, and legal advice, tailored to your specific objectives, financial situation or needs, prior to making any investment decision. FIIG does not make a market in the securities or products that may be referred to in this document. A copy of FIIG’s current Financial Services Guide is available at www.fiig.com.au/fsg.

An investment in notes or corporate bonds should not be compared to a bank deposit. Notes and corporate bonds have a greater risk of loss of some or all of an investor’s capital when compared to bank deposits. Past performance of any product described on any communication from FIIG is not a reliable indication of future performance. Forecasts contained in this document are predictive in character and based on assumptions such as a 2.5% p.a. assumed rate of inflation, foreign exchange rates or forward interest rate curves generally available at the time and no reliance should be placed on the accuracy of any forecast information. The actual results may differ substantially from the forecasts and are subject to change without further notice. FIIG is not licensed to provide foreign exchange hedging or deal in foreign exchange contracts services. The information in this document is strictly confidential. If you are not the intended recipient of the information contained in this document, you may not disclose or use the information in any way. No liability is accepted for any unauthorised use of the information contained in this document. FIIG is the owner of the copyright material in this document unless otherwise specified.

The FIIG research analyst certifies that any views expressed in this document accurately reflect their views about the companies and financial products referred to in this document and that their remuneration is not directly or indirectly related to the views of the research analyst. This document is not available for distribution outside Australia and New Zealand and may not be passed on to any third party without the prior written consent of FIIG. FIIG, its directors and employees and related parties may have an interest in the company and any securities issued by the company and earn fees or revenue in relation to dealing in those securities.