Perhaps I should read the article but I just saw the headline in today’s investor daily that margin calls have declined. I hope noone got paid to do a report on this phenomenon as I believe the fact that markets are at 10month highs really says it all.
I guess when you throw in the bad publicity margin loans got during the GFC, several providers pulled the pin and the remainders tightened their lending criteria I would have thought the only newsworthy item re:margin lending was if there actually was a margin call in recent times!
Anyway what I haven’t seen written about margin lending is the fact that the lenders are looking to shift the risks around this product to advisers. This is mostly due to the actions resulting from the Storm Financial debacle. One of the AFSLs I work under refused to sign the dealer group contract with the lender due to some inappropriate clauses. When we pointed them out to the lender their response was, “everyone else has signed up”. That doesn’t make it right and it’s not our fault other dealer groups don’t read their margin lending contracts or are prepared to take unnecessary risks.
I noticed a piece in the paper today about insurers not insuring anyone at the moment. Just thought I’d share my personal experience…my girlfriend and I purchased a property last week (so I guess the property market is now set for a significant fall) and even though the contract is not unconditional yet we are still liable so insurance is required.
The property was unaffected by the floods but when i called my employer to request insurance they asked me the postcode and then replied, ‘No, we are not insuring properties in that postcode given the floods’.
Now perhaps I’m a little harsh but given half of this postcode is on the side of Mt Cootha it appears a little narrow minded and easy business is being lost. Anyway, I called a competitor and they said ‘yes but you’re not covered for flood’…’no problem’, I replied.
Fascinating that St George and Westpac, supposedly the same company now, have differing opinions on what the RBA is going to do tomorrow. Clearly, there’s no economic department merger yet!
Reuters Consensus / Forecasts
Economist - RBA Rate ( % )
AMP - 4.00
ANZ - 4.00
Barclays - 4.00
Citi - 3.75
CBA - 4.00
Deutsche - 3.75
4Cast - 4.00
GSJBW - 4.00
ICAP - 4.00
JP Morgan - 3.75
Macquarie - 4.00
NAB - 3.75
Nomura - 3.75
RBS - 4.00
St George - 3.75
TDSec - 4.00
UBS - 4.00
Westpac - 4.00
———- —–
Low - 3.75
High - 4.00
Average - 4.00
Median - 4.00
———- —–
My latest draft article submitted for publication in IFA can be found here. In an nutshell, one of the problems with asset allocation portfolio construction in recent years is the increase in the number of asset classes promising diversification benefits…hasn’t quite turned out that way. Secondly, we’ve seen equity-like risk creeping into the fixed interest and even cash asset classes which have created a few problems in recent times. Thirdly, dealing with rising inflation in retail investment portfolios has traditionally been dealt with via an equities exposure…this is prone to failure as equities can be a very poor hedge to inflation…inflation linked bonds and real assets (not stapled property securities) have proven to be the best inflation hedge.
Understanding total portfolio risks is essential to good portfolio construction and knowing how much market risk (including the possibly hidden equity-like risks) and liquidity risks to name a couple will remove more of the hidden surprises while all markets continue to be volatile.
On Friday the Future Fund published its asset allocation as at 31 December 2009. Before we jump to any conclusions about its make-up its important to understand what the investment objectives are…
CPI plus 4.5% to 5.5%pa over a rolling ten year period with an acceptance of short term underperformance whilst the Strategic Asset Allocation is being developed
The asset allocation of the future fund as at 31 December 2009 is…
- Australian Shares – 12.7%
- Global Shares (developed) - 24.0%
- Global Shares (emerging) – 3.6%
- Private Equity – 2.3%
- Property – 2.9%
- Infrastructure – 2.4%
- Debt Securities – 25.4%
- Alternative Assets – 11.4%
- Cash – 15.5%
- plus Telstra
One can only assume that given the return benchmark, the allocation to cash will continue to diminish (it went from 32% to 15% in one quarter) and the ultimate fund will be relatively aggressive. What any investor can learn from this current asset allocation is the level of diversification across asset class…certainly high.
Australian Government Bond Yields – 29 Jan 2010
Source: Bloomberg
The RBA Cash rate is currently at 3.75% and with government backed 30 day bank bills at 4.12% and the recent tender of 23 March 2010 Treasury Notes fetching a yield of ~3.96% the financial markets are pretty much expecting a 25bps increase.
Whilst the sharemarkets have had the jitters whereby the ASX200 has dropped in excess of 6% this year, it is only government bond with a maturity greater than 1 year whose yields have dropped. The shorter term rates haven’t dropped much at all as the market continue to believe that 2010 will be a year of rising RBA rates.
As for the chart above…it doesn’t really reflect too much of what I’ve said and actually contradicts the 3 month rates I quoted earlier…my only comment is…what’s going on with Bloomberg such that it quotes 3 month Treasury Notes at 3.75%??? Might be best to double check rates from different sources before accepting them.
The above chart shows the 10 year performance of the S&P500 (blue bars) versus the 10 year average annual inflation (red bars) versus the Shiller PE Ratio at the start of each decade (green bars). There are several notable observations…
- The worst performance was during the 1930s when the US experienced a deflationary environment and PE ratio started very high
- The second worse performance occurred 2000-2009 when PE Ratios started through the roof (> 40) and contracted
- Other poor performances typically related to high inflation (1913-1919; 1970-1979) and/or PE ratio contraction (1940-1949)
So what do we start 2010-2019 with? A very high Shiller PE Ratio (~20.1), third highest to the start of the Great Depression and Tech Wreck/GFC decades. And, an outlook for inflation that is relatively low due to the very high unemployment that is expected to stay around for some time. The US economy has just seen an economic bounce largely on the back of inventories that are being built back up but this is not a sustainable growth driver and certainly from a sharemarket perspective not a justification for a high PE.
Whislt the US Economy recivers for decent sharemarket returns there needs to be some stronger growth drivers and what these drivers will be is a little unclear.
I just read that the Henry Review is likely to suggest that superannuation can be exchanged for guaranteed lifetime income like lifetime annuities. Strangely, it can be done already by purchasing a lifetime annuity with superannuation money. The problem with the current situation is that there are no lifetime annuities left on the market….Comminsure and not much else.
Hopefully this initiative re-opens competition for this outstanding product, except, instead of the current situation, hopefully the new products are priced appropriately. Yields for lifetime and long term anunities have a long way to go to be attractive.
