2020 Vision: Business as usual

  • Post category:Wealth

When I sit with clients I routinely talk about the things that have been worrying “the markets” over the last several years (and for that matter the last few weeks and even the last few days).

In 2016 the Brits voted for Brexit and Americans voted for Trump.

Every wobble in the market since 2016 seems to have centered on Brexit, Trump’s tweets and trade wars with China.

Our sharemarket corrected (10% fall) in 2016 and again in late 2018 basically for the same reasons twice: Trump and Brexit.

As I write this not much has changed. Trump is still tweeting “The Art of The Deal”.  And playing with ego and tossing with all of us. Trump’s twit for tat over the weekend was just another noisy day in the markets. Our market is currently down around 6% from its peak at the end of July, around the level it was in May.

“Prices are volatile. Dividends are not”

Tony Bates: 1987….2017, 2018, 2019, 2020

Sometime between October 31 2019 (hard Brexit) and the US elections in November 2020 all of these markets fears of the last 3-4 years will actually play out. Sell on rumour, buy on fact.

Stockbroker law: for a good news mining discovery….”buy on rumour, sell on fact”. Same is true for bad news “sell on rumour, buy on fact.”

I am not a stockbroker, but right now most of the rumours are bad news.

Last week the headlines were all about an inverse “Yield Curve”. It lasted for about 5 minutes. This is supposed to be a signal of a global recession.

It may happen. And it may not. And even if it does, it will likely be 18 months away or more. And when this has happened the sharemarket has usually entered it’s last and most profitable bull phase.

I just cannot yet see enough evidence that we are “late cycle”. A lot of economic indicators still look to me more like mid cycle.

And I think Donald Trump can and will engineer a boom timed for 2020 elections.

Recessions are normal. Corrections are normal.

The one thing that is definitely not normal is that the dividend yield from blue chip Australian shares is way more than 3 times the term deposit rate. BHP’s dividend is more than 6%!

In 2008 to celebrate the Beijing Olympics I organised several clients into 8 year HSBC term deposits at 8%pa. They rolled off in 2016 when interest rates had more than halved. Ouch.

In 2015 I wrote 2015: To Owe One Five. It was a moment in time when the minimum super pension returned to 5% and the cash rate fell below 5%. Ouch.

I had this conversation with a prospective client this week;

Client: “If I took my life’s work retirement savings of $2m and I put it in cash and term deposits I might earn somewhere between $500 per week and $1000 per week. In 2020 based on the Yield Curve, interest rates may be cut even further and we may only collect $250 – $500 per week….

“If I am spending $1500 per week I will be spending my capital.”

Our blue chip end of the share market will today deliver safely more than $2000 per week on that $2m.

If the market corrects or even crashes, as it does from time to time, and we see company profits ease we may see dividends cut from $2000 per week to $1500 per week in a recession, still a lot better than $250 or $500.

Imagine this. Playing safe for the next 5 years and earning $250 per week could destroy more capital than any normal correction or recession.

When the dividend yield on shares is more than 3 times the term deposit rate, I am happy to keep advising clients to keep owning shares.

The truth is the same as it has always been, corrections are normal, recessions are normal. 2020 will be normal. Collect dividends, collect rent, collect interest.

Risk and reward always walk hand in hand.

Choose where you wish to land on the risk reward spectrum. Get advice.

But in 2020 the lowest risk option may cause more damage than ever before to capital than being invested

Tony Bares

Senior Wealth Advisor

General advice warning: Any advice provided is general advice only as, in preparing it we did not take into account your investment objectives, financial situation or particular needs. Before making an investment decision on the basis of this advice, you should consider how appropriate the advice is to your particular investment needs, and objectives. You should also consider the relevant Product Disclosure Statement before making any decision relating to a financial product.