The author has been described by News Ltd as an "iconoclast", "Svengali", a pollie's "economist muse", and "pungently accurate". Fairfax says he is a "Renaissance man" and "one of Australia’s most respected analysts." Stephen Koukoulas concludes that he is "85% right", and "would make a great Opposition leader." Terry McCrann claims the author thinks "‘nuance’ is a trendy village in the south of France", but can be "scintillating" when he thinks "clearly". The ACTU reckons he’s "an enigma wrapped in a Bloomberg terminal, wrapped in some apparently well-honed abs."

Wednesday, June 29, 2011

More on shares vs. fixed-income

This impressive AFR editorial references me and my arguments on the asset-allocation problems faced by Australian consumers...It is quite similar to the feature I wrote a month or so ago on shares vs. fixed-income for Business Spectator.

"Bonds require easier access
Australian Financial Review
PRINT EDITION: 27 June 2011

Retail investors have had to live with some fairly pedestrian returns from the Australian stockmarket over the past couple of years. Since global equities bottomed in March 2009, the S&P/ASX 200 Index has seriously underperformed markets with a similar commodity exposure such as Canada and even those where the economy remains in the doldrums, such as the United States and the United Kingdom.

Including reinvested dividends, the Australian benchmark for stocks has delivered total returns of just under 60 per cent since that time.

That compares with a doubling of Wall Street’s S&P 500 Index, an 80 per cent return for UK shares and an increase of more than 100 per cent for Hong Kong’s Hang Seng Index.

Since the start of this year, the S&P/ASX 200 is already down 4.2 per cent, while the S&P 500 has gained 3 per cent and Germany’s DAX Index has advanced 5.4 per cent.

Even the IBEX 35 Index in Spain, which many investors think could get sucked into the debt crisis that has hit other European economies including Greece, Ireland and neighbouring Portugal, has managed to rise 3.4 per cent in 2011.

Concerns about the relatively poor performance of the Australian equities market have been accentuated by the fact that local investors hold substantially more of their savings in shares than in the US and Europe, where funds are mainly held in bonds. Older workers in Australia have already been forced to delay their retirement plans due to the substantial declines in their superannuation assets that occurred during the global financial crisis.

The Reserve Bank of Australia noted in a research paper released earlier this month that the proportion of workers expecting to retire at age 65 or over jumped to 60 per cent in 2009 from 50 per cent two years earlier. Tepid equity returns since the Australian economy emerged from the global crisis mean it will take even longer for these older workers to rebuild their financial assets.

One solution would be to encourage more retail investment in fixed-income markets.

Christopher Joye, the managing director of funds management and advisory firm Rismark International, reckons it is bizarre that so much investment in Australia goes into risky shares rather than the much safer option of debt. Mum-and-dad investors looking for investment returns of inflation plus 3 to 5 percentage points should only have about 30 per cent of their portfolio in equities, compared with the 60 to 70 per cent of most Australian superannuation funds, according to Rismark.

The former head of the government’s superannuation review, Jeremy Cooper, also recently called for a reduction in the risk exposure of people drawing income from superannuation away from volatile equity market returns.

Yet it remains far more difficult for Australian retail investors to buy government and corporate bonds than in the US and most other developed economies.

Investors can now buy government bonds quoted on the ASX, but it’s a different story for corporate issues.

The problem is that up until recently Australian regulators only allowed purchases of corporate bond parcels of $500,000 or more.

The rules have been relaxed a little and fixed-income brokers can now provide their clients with $50,000 parcels.

That’s a significant improvement, but still has the potential to exclude small investors from the corporate bond market and is a far more onerous restriction than what applies to most share purchases.

The Australian Securities and Investments Commission last year eased other rules to promote the issue of vanilla corporate bonds to retail investors, simplifying some disclosure requirements and allowing companies to issue short-term prospectuses.

But ASIC needs to do more if Australia is to develop the type of deep and liquid corporate bond market that would benefit investors and companies alike. The government-commissioned Johnson report on improving Australia’s role as a regional financial centre, released in November 2009, found there were “strong arguments” in favour of the development of such a market.

These included the desirability of maintaining a diversity of funding sources for local companies and the financing of the substantial long-term infrastructure requirements of the Australian economy.

ASIC’s new rules may go part of the way to overcoming the unhealthy stranglehold that local banks now have on corporate debt raisings, but retail investors and Australian companies seeking to raise capital would both be better off if regulators did more to promote and encourage high-quality corporate bond issuance."