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7 February 2015
Investor dilemma as search for yield heats up in a hot market
Vesna Poljak
Record low interest rates in Australia is punishing news for savers and many investors, forcing a rethink of
how personal portfolios should be positioned and, critically, a willingness to take greater risk.
There is no better evidence of this than a record share price for Commonwealth Bank of Australia
this week of $93.96, a level that would have been unthinkable six years ago but not today. That's because
yield is king and the big four banks are royalty in the eyes of investors.
With term deposits offering almost nothing, equities have emerged as a natural home for billions of
dollars of investment money seeking income. Property can be prohibitive at current prices in some
markets, and bonds cannot match the yields on offer in the sharemarket. As the Reserve Bank of Australia
admitted on Friday, "sovereign bond yields in the major markets have fallen significantly, particularly at
longer maturities, although the size of the decline in yields is difficult to explain".
"I think there's too narrow a perception of what risk means," says Catherine Robson, who is the
chief executive of boutique wealth adviser Affinity Private. "As investors you can fool yourself into
thinking if you're 100 per cent invested in cash that that's risk free. But you can't hide out in cash forever
and expect that you will have your needs met." The trade-off for certainty of returns from cash in the
short term is not compelling enough, she argues. "If you have an exclusively cash-based investment
strategy, you have certainty of returns now but high rates of uncertainty for the long term."
Investors can be forgiven for thinking they have missed the party in equities in light of multi-year
highs for blue-chip stocks. But the S&P/ASX 200 Index is still significantly lower than its all-time high in 2007
and some sectors –notably energy and mining –are priced at crisis levels having not recovered from the
plunge in commodity prices that occurred in 2014. For some, that could signal value.
It's important to maintain perspective
and consider what has led to this confluence of
events in shaping investment choices. Global
growth is anaemic and consumer prices have
been decimated by energy-led deflation,
forcing global central banks to make
extraordinary decisions in January. The
European Central Bank has taken the lead in
monetary stimulus by revealing it will pump
€1.1 trillion into the eurozone which has left
sovereign bond yields smashed and some in negative territory. China last Wednesday followed the RBA on
Tuesday in easing policy and New Zealand has abandoned rate hikes for now.
Doubts over US rate rises
In the meantime, doubts are mounting that the United States –said to be the single engine of global growth
this year –will be able to raise interest rates in the second half as planned because the global economy
might not be ready to handle such a seismic shift.
"Given likely continued low inflation and ample spare capacity in the global economy, the major
positive for risk markets is that central bankers can afford to leave policy settings quite accommodative in
2015," comments David Bassanese, chief economist at BetaShares. "At least in Australia, the yield chase in
the equity market may continue, irrespective of how resource stocks perform."
Financial planners watching the rush of buying in the sharemarket are not surprised. "The challenge
at the moment is getting some clarity on what the next kind of international growth trends are going to be
and particularly in the current economic climate in Australia," says Patrick Canion, chief executive of
financial adviser ipac Western Australia.
"I think people have adjusted to lower absolute rates overall, but it's still about getting value for
money. So take CBA as an example –$92 sounds expensive in absolute terms but in relative terms that's still
pretty good value. Because if I look at the dividend yield it has come down, so you might say 'that doesn't
look as good as it was two months ago', but relatively if you have to invest that's still good value," Canion
explains, emphasising some people have to be earning income to live on. The dividend yield on CBA is just
under 5 per cent before tax.
"If it's someone that is a retiree, for example, what we're looking for is income certainty so if we
have capital to invest from a retiree's perspective who cares if it's $93 or $73 –you're going to get your
regular dividends. In term deposits we have wonderful capital certainty but you have no idea what the
[income] outcome's going to be."
Canion advocates doing the research to capitalise on sectors that look intriguing –such as what is
on offer in the mining space. "The boring premise that Benjamin Graham [considered by some to be the
father of value investing] used to make [is] that the best returns come from the areas where you apply the
most personal investment effort."
Copper stocks fit this narrative. "As a broader principle, be countercyclical. For me, it's the very fact
that it has fallen so far and yet it's an essential ingredient in our infrastructure that can't be replaced. You
look at the impact on oil and other metals like aluminium and nickel, look at that and the great thing is if
you're an investor there's so much historical data that you can get a really good perspective of the present
in the context of the past."
'Never a perfect time'
Affinity's Robson says the reality is there is never a perfect time to buy shares."I myself started my
investing journey back in the 1990s. The tech boom was going crazy –as a younger investor you feel like
you missed the boat. You've just got to start somewhere," she says. With respect to the prices that highquality companies with defensive earnings demand, she adds: "The idea that great companies of the
world are never going to go up in value ever again is an Armageddon view.
"There's the wide universe of asset classes available to you as alternatives. I don't think anything
out there looks like a no-brainer. If you're looking for something that is higher yielding, by definition it
will be something higher risk." Robson does view some assets with caution, one of these being bank
hybrid securities. "What we saw in the [global financial crisis] is hybrids can become quite illiquid at
points and can become much more like equity."
Property, she agrees, is expensive. Crucial to any investment decision is the ability of the
borrower to repay the principle and meet an interest repayment schedule if interest rates do start to
rise. "We feel nervous about property valuations," she says. But she adds but the asset class can still be a
suitable complement to a diversified portfolio for investors who are not already overweight property and
do not need to unlock value from the asset for at least 10 years. "There is the risk that you predicate [a
decision on] rates being this low forever but they will not be this low forever."
The temptation to capitalise on low interest rates on mortgage lending comes with its own catch:
"I think you need to look at it in the context of nothing happens in isolation – an economy that's having
significant interest rate cuts is an economy that is cooling and needs significant stimulation." Robson
points to basic questions borrowers need to be able to answer in light of the fact that the unemployment
rate is on the rise and consumer confidence is tracking at low levels: "Will I have a job in 12 months'
time? If I have a business, will my customers still be buying my products in 12 months' time?"