Eureka Correspondence

The outlook for bonds

I read Doug Turek’s recent article (A dozen ideas for this odd market, September 24) and I see, again, comments about how bonds will not perform in the future. I hear the same from the people at Clime. I have been receiving good capital and income returns from bonds of late, but perhaps you could comment on these claims/allegations about the merits of bonds.

Nick O’Connor

Doug Turek’s response: I agree bonds of all types have been a great source of past return and am pleased having recommended them to Eureka Report readers. Bonds bought a few years ago enjoyed a generous yield. Depending on the benchmark and bond type, this was i) a spread over deposits of about 1% (floating type), ii) a yield of about 6% locked in for five years (fixed type) or iii) a 4% premium over inflation for up to 10 years (inflation linked). With the rally in bond prices, yields for these three types of bonds have now fallen to about deposit yield less 1%, about 3% fixed and inflation plus 2%. This offers a one-off capital gain of about 3%, 10% and 15% if an investor chose to sell their earlier investments today.

Looking forward, investors buying bonds today earn this very low starting yield and could find their bonds would be sellable at a 3%, 10% and 15% discount in 2-3 years if bond prices revert to the “old normal”. Mathematically bonds are poised to underperform having outperformed – the question is only will the pain be short and sharp or prolonged and blunt. Today only by lending to less credit-worthy companies can new bond investors match returns from the past … and that probably won’t end well the next time we have a recession.

I still like inflation linked bonds for their important inflation protection and I disappointedly think deposits offer better return for risk than floating and fixed rate bonds of which I am still a fan. Don’t worry, this will change, and perhaps in a year’s time local bonds will be better priced for new investors.

September market summary poem

Overseas stocks - and nothing Australian
That's our plan - now A dollar's a-sailin’
Down to such lows - not seen since October
It seems our market - has just fallen over
The team at Eureka - good blokes - they did warn us
Buy heaps overseas - they told us - last August
But did it sink in - and did we act quickly
Or were we too slow - and feeling quite sickly
Don't panic right now - and don't feel faint hearted
But their leaving so fast - you'd think someone farted
We hope that the Yanks - can hold all the world up
By gosh if they can't - we're totally stuffed up.

Jeff Jamieson

How to invest overseas

You have had many recent articles about investing in international equities (especially from Clay Carter, great articles) but how in practice is this done for an Australian resident?

Mark

Editor’s response: Thanks for your question. Our article, Buying overseas stocks: A Eureka guide, may be of interest.

Facebook’s dominance questioned

I noticed that Alan Kohler described Facebook as the “sole winner in social media” (Kohler's Week, September 27). I work as a teacher and thought he might be interested to know the surprising phenomenon we have found is that Facebook use is surprisingly low with teenagers currently. (Approximately 90% of students at our school in Years 7 and 8 don't even have a Facebook account). The vast majority are moving away from Facebook and using other social media platforms to communicate, particularly Instagram and Snapchat. It will be interesting to see if these teenagers adopt Facebook as they get older. However, I think to view Facebook as a (virtual) monopoly player is something that carries a fair degree of risk.

Alex