CHRIS BURRELL ’ S BLOG
V-shaped Economic Recovery gathers Momentum
The past six weeks have seen a number of developments , broadly supportive of the themes set out in blogs over recent months . These include :
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Central bank monetary authorities continue to espouse loose monetary policy for a number of years and to actively manipulate interest rates to 0.1 % for 1-3 years . At the same time there has been increasing concern on two points :
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That if the major economies are in a V-shaped recovery , then surely interest rates must also v at some point . There is an increasing consensus that this will likely be 2023 . The 10-year bond rates have increased from below 1 % pre-Christmas to around 1.6 % in both Australia and the USA . It is the 10-year bond rate which is the basis of valuing all assets , together with a risk premium for the particular asset class and investment .
The low interest rates are supported by stimulatory government fiscal policy including in Australia Jobkeeper , Homemaker , low interest rate loans to the banks and various government infrastructurespending initiatives . In the USA , President Biden has been successful in passing one bill with over $ US 1 trillion stimulus and has a second infrastructure bill under consideration . There is concern that a third bill of similar size for social infrastructure will indeed trigger a weaker US dollar and concern about debt levels . Despite all this stimulus , the central banks appear blind to the asset bubbles being formed in housing markets and technology stock markets , with in some instances the central banks suggesting the retail banks should ensure tight lending standards . Amazing but true .
� Dividend yields are being restored as companies revert towards pre-COVID dividend levels . The Australian banks have recovered a further $ 5 in market price as it became clear that dividend policies would revert to more ‘ normal ’ levels over time . With term deposit rates under 0.5 % for 12 months , Australian bank dividend yields in excess of 4 % fully franked are attractive . It is quite plausible that the Australian banking sector , fuelled by increased mortgage lending and loose monetary policy will see bank share prices trade above what might be regarded as fair value ( FVE ). The Burrell consensus is that the 10-year bond rates in both Australia and the USA will be in the range 2-2.5 % by calendar year 2021 end .
Stop press : NAB “ The Forward View , Australia April 2021 ” 10-year bond forecast 2021 2.25 %, 2022 3.0 %.
� Technology stocks have shown inverse sensitivity to increases in the 10-year bond rate i . e . whenever the 10 year bond rate increases , technology stocks tend to lose some of their ( over ) valuation . The reason for this is that instead of discounting growth earnings long into the future at low rates , using a higher cost of capital lowers the FVE of technology stocks .
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On the 1st of March 2021 , Warren Buffet warned of a bleak future for debt investors . There are two aspects to this . Firstly , the short-term rates are low , preferring other asset classes . Secondly , capital losses of 3-5 % are showing on longer dated bonds , meaning that such longer dated debt instruments including hybrids should be reviewed for sale to realise the premium and switched to shorter-term instruments around the 3-4 year time horizon .
COVID continues to absorb large amounts of time on the airwaves . The speed of vaccine roll-outs in different countries has seen a strong pace in the USA , Australia has delayed and then fallen foul of a small number of vaccine patients suffering blood-clot symptoms , the 3rd or 4th wave of COVID based on the UK and south American variants has increased numbers widely over the past month and the galloping COVID problems in third world countries likely mean that international air travel will not be restored until 2024 . Commodities demand continues to be strong based in part in the stimulatory income spending and home ordering leading to high levels of goods expenditure in developing world countries . This has seen the Chinese GDP recover strongly and flow through to commodities prices , including iron-ore and copper .
Similarly , a cold winter and resumption of more normal levels of activity in Asia resulted in strong Asian LNG demand , recovering from the COVID lows . The lagged recovery in the LNG sector remains an opportunity for Australian investors . The continuing recovery in the US stock market and in some of the growth sectors of the Australian market have led to a range of views as to whether there is a technology bubble reminiscent of the 2000 tech bubble . In the bear camp is Andrew Clifford of Platinum who is quoted on 1st April : “ When you hear people say , it ’ s not like the 2000 tech bubble , I must say , I agree . This is a much bigger bubble .”
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