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Thursday, 26 January 2012 22:26

Australian Shares, what next for 2012

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With memories of 2008 and talk of a lost decade, many investors have questioned their views on long term investing. But earlier generations of investors faced similar worries – and today’s headlines echo the past with stories about government spending, inflation, oil prices, economic stagnation and high unemployment. And as this information aims to show, those investors who were patient prevailed in difficult times.

While not attempting to predict the future, history has had an interesting habit of repeating itself.

We reflect on the Australian Share market which has just endured two consecutive years of negative performance, and note that it has never experienced three consecutive years of negative returns in the last 100 years. Only 4 times in history has the Australian Share Market had negative returns in two consecutive years.

We now highlight those times, and in particular draw attention to the year following those two consecutive years of negative returns.

1929 -3.6%
1930 -28.1%
1931 +20.0%

1951 -3.3%
1952 -11.8%
1953 +14.8%

1973 -23.3%
1974 -26.9%
1975 +62.9%

1981 -12.9%
1982 -13.9%
1983 +66.8%

Information courtesy of AXA Australia – sourced from the All Ordinaries Accumulation Index




Note: Advice contained in this articler is general in nature and does not consider your personal situation or needs. Please do not act on this advice until its appropriateness has been determined by a qualified adviser. While the taxation implications of this strategy have been considered, we are not, nor do we purport to be registered tax agents. We strongly recommend you seek detailed tax advice from an appropriately qualified tax agent before proceeding. The information provided is current as at January 2012.

Saturday, 17 December 2011 00:14

Show leadership and stop “Bank Bashing”

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It is truly disturbing to read daily political statements from our leaders on all sides of politics bashing banks for the sake of political gain.  Even the unions have joined this lunacy recently, but then again, none of these players are necessarily known for their intellectual athleticism.

Michael Chaney, one of Australia’s most respected businessmen has said that our leaders should educate people about the banking system, rather than use it for political mileage.  We agree.

Our political leaders would have you believe that banks are gouging borrowers by not passing on interest rate cuts.  The easiest way to determine if this was the case is to examine the banks net interest margins.  The net interest margin is simply the difference between what the banks pay to obtain funding and the rate charged to customers.

Below is a chart showing the net interest margin of the major and regional banks over the past decade.

This chart shows that margins now are significantly lower than they were 10 years ago and that the major bank margins have only been restored to levels seen before the Global Financial Crisis.  There is no evidence to be seen here of bank gouging.

Yes, bank profits in absolute terms are larger than they were before, but so are their businesses.  Just imagine how absurd it would be to criticise a builder for making more money because he built 10 houses a year, rather than 6.

Let’s also consider some of the benefits of a strong banking system to the community which include:

Finally, the table below, sourced prior to the GFC shows the profitability of Australia’s banks compared to other Western countries.


Australia has not experienced a bank failure in the modern era (banking collapse defined as an event where ordinary depositors lose their money).  Therefore we need to look overseas at how things can go terribly wrong when banking systems become stressed.

We find it interesting that many of the countries in the table above that harboured banks with low profit margins before the GFC find themselves at the centre of the Euro Debt Crisis today, which is likely to result in the lowering of living standards for the general population in those countries for years to come.

Canberra and the union movement should celebrate our strong banking system and the benefits that it brings to our community.  The media should expose those attempting smear the banking system for political gain as “lightweights”.

Note: Advice contained in this article is general in nature and does not consider your personal situation or needs. Please do not act on this advice until its appropriateness has been determined by a qualified adviser. While the taxation implications of this strategy have been considered, we are not, nor do we purport to be registered tax agents. We strongly recommend you seek detailed tax advice from an appropriately qualified tax agent before proceeding. The information provided is current as at December 2011.  The views expressed in this article are personal views of Mark Draper and are not necessarily the views of the dealer group.




Wednesday, 30 November 2011 05:27

The Threat From Europe - How Big

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In late October there seemed to be room for optimism that Europe was going to head off a worst case blow-up and that a “comprehensive” plan would be in place by the November G20 leaders’ forum. However, political blow-ups in Greece and Italy put paid to any respite. The G20 leaders’ forum came up with nothing, and Europe has yet to implement much of what it announced in late October. As a result, the European crisis continues to worsen, with investors now bailing out of core countries. What does it all mean for the global economy and risk assets?

Contagion on steroids

The past few weeks have seen the European crisis enter a more dangerous phase. It has moved beyond peripheral countries and now seriously affecting Italy and Spain, where bond yields are at levels that prompted bailouts in Ireland and Portugal. Furthermore it is now threatening France, Belgium, the Netherlands, Austria and Finland, and even Germany as indicated by a failed bund auction.

Italian and now Spanish bond yields at bailout levels, France catching up

The basic concern relates to high debt levels, but the weighted average 10-year bond yield in Europe is now 5.4%, versus a US 10-year bond yield of just 1.9%, despite the fact US public fi nances are comparably worse. The US 2011 budget defi cit and gross public debt are equal to 10% and 101% of GDP respectively, compared to 4% and 90% in the Eurozone. Clearly something else is at play. Speculative contagion working against non-German Eurozone bonds is a part of this. The unintended consequences of policy action are also playing a role:

  • fi scal austerity, in the absence of monetary easing, is adding to the economic downturn, making investors sceptical that debt will be reduced;

by the US Fed under QE2.
Three scenarios for Europe

Leading indicators are pointing to recession in Europe. The
question is now how deep and fi nancially disruptive it will be.
Business conditions in Europe pointing to recession

Put simply, there are three possible scenarios for Europe.

  • Muddle through: the cycle of ‘revolt, response, and respite’ continues to repeat, with periodic interventions that never go far enough but are enough to avoid a major blow-up. This is what Europe has been going through over the last 18 months, but it’s questionable it can continue this way with core countries now being affected.
  • Blow-up: the crisis comes to a head with a deep recession – Eurozone GDP falling 5-10% in 2012 – and a fi nancial crisis rivalling the GFC. This would be bad for growth assets – shares, commodities, the Australian dollar (A$) and euro.
  • Aggressive ECB monetisation: the ECB fi nally realises the crisis is threatening deep recession and price defl ation and so moves to undertake aggressive quantitative easing to push down bond yields and head off economic calamity. This would probably be too late to head off a mild recession, and there would still be a lot of mopping up to do, but it would at least head off the ‘blow-up’ scenario. This would be positive for growth assets, albeit with the usual bit of base building.

Ultimately, we think the ECB will capitulate and become the ‘lender of last resort’ but it may require more pain in markets beforehand. While we have been expecting a mild Eurozone recession, the risk of a blow-up and deep recession is rising as the crisis spreads into core countries, fi scal austerity intensifi es, economic confi dence continues to slide and social unrest increases. Even Germany appears headed for recession.
Europe and global growth
There are three channels by which the recession in Europe will affect the rest of the world, including Asia and Australia. These are via trade, the global fi nancial system and confi dence. The Eurozone absorbs around 25% of US exports, less than 20% of Chinese exports and less than 10% of Australian exports. Rough estimates suggest a 1% fall in Eurozone GDP would knock just 0.1% off US GDP, 0.4% off OECD growth (including the direct effect of the Eurozone contraction), 0.1% off Chinese growth and less than 0.1% off Australian growth via trade impacts alone.

If the Eurozone contracted 5% in a ‘Blow-up’ scenario, it would knock roughly 0.6% off US growth, 2% off OECD growth, 0.5% off Chinese growth and 0.4% off Australian growth.

  • Eurozone banks appear to be selling bonds in order to meet heightened capital ratio requirements;
  • the haircut on Greek debt has led to a reassessment of the risks of holding all Eurozone government bonds;
  • talk of providing fi rst loss insurance on new bonds has reduced the value of existing bonds; and
  • investors have realised credit default swap insurance on bonds may be of little value if it doesn’t pay out in response to ‘voluntary’ debt restructuring.

So the crisis has spread from smaller economies with Greece, Portugal and Ireland accounting for only 6% of Eurozone GDP and 8% of its debt, through to Italy and Spain (which account for 28% of its GDP and 32% of its debt), and now to France, which alone accounts for 20% of Eurozone GDP and its debt. Emerging pressure on German bund yields is particularly concerning. See the next table.
Eurozone debt and GDP compared

Much of the current turmoil could have been avoided if the ECB had acted earlier and erected a fi rewall around otherwise solvent countries such as Spain and Italy. This would have involved the ECB threatening to buy unlimited quantities of bonds in threatened countries in order to ward off speculative attacks on bond markets, and running much easier monetary policy (cutting interest rates to near zero and quantitative easing) to provide an offset to fi scal austerity. Despite suggestions to the contrary, there is no legal barrier to the ECB buying bonds or undertaking quantitative easing. The ECB Statute prevents it from buying bonds directly from governments, but there is nothing preventing it from buying them in the secondary market and it has already undertaken quantitative easing during the GFC. Rather, a desire to force economic reforms on troubled countries, avoid moral hazard, misplaced fears about infl ation and political squabbling have brought Europe and the world to a dangerous place. The ECB has been buying bonds, but only on a very limited basis. Since last May it has bought €195 billion (US$263 billion) worth of bonds but this has been sterilised by the sale of short-term debt and compares with a massive US$600 billion worth of debt purchases

However, these fi gures are likely to understate the impact. Firstly, European banks are shrinking their balance sheets in order to strengthen their capital ratios. A lot of this will come out of their foreign operations. The Bank Credit Analyst estimates that a 10% shrinkage of Eurozone banks’ US$25 trillion in loans could pull US$1.2 trillion of debt out of the global economy, equivalent to 2% of world GDP. Of course this doesn’t mean a 2% contraction in global GDP (as corporates can rely on record cash holdings) but the impact is still negative. While Asia and Latin America are self suffi cient in terms of funding (being net global creditors), they will still be affected as Eurozone banks play a big role in trade fi nance.
Secondly, the fi nancial effects of a major Eurozone bank failing, the impact on the cost of funding as credit markets tighten and the loss of wealth associated with share market falls, as well as a fall in the value of the euro, would have a dampening impact on global growth and Eurozone sourced profi ts.
Finally, there is the impact that the ongoing European debt crisis is having on consumer and business confi dence. Confi dence levels are clearly depressed globally, but so far there has been a mixed impact on actual spending – e.g. retail sales have held up in the US, but obviously the impact could rise if the European crisis continues to worsen.

Our overall assessment is a mild recession in Europe would dampen global growth but would not cause a global recession. But a ‘Blow-up’ scenario with a 5-10% Eurozone contraction and signifi cant fi nancial dislocation would threaten a return to global recession.
What about Australia?
While Australia has a small trade exposure to Europe, it’s still vulnerable via the impact on major trading partners in Asia and via fi nancial and confi dence linkages. While a mild recession in Europe would only have a minor impact on Australia and leave it on track for 3% or so growth next year, a deep Eurozone recession would be a big threat. That said, our assessment remains that Australia should be able to avoid a recession under this scenario given plenty of scope to cut interest rates and provide further fi scal stimulus. A lower A$ would provide a buffer, corporate
gearing is low, household saving is high and mining investment is likely to remain strong. In other words, 2012 growth would be confi ned to the 1-2% range, but should avoid recession.


So where does all this leave investors?
Unfortunately the outlook for investment markets remains uncertain in the short term. While there is great long-term value to be found in share markets – with Australian shares offering a higher cash fl ow than bank term deposits – further falls in the short term are likely. So for short-term investors it remains a time to stay cautious.
Watch the ECB – if it announces unlimited bond buying and quantitative easing it would be a very positive sign, particularly with shares cheap and most investors bearish.
Dr Shane Oliver
Head of Investment Strategy and Chief Economist
AMP Capital Investors

Tuesday, 29 November 2011 05:26

Protect Your Biggest Assest: Your Ability To Earn

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Protect your biggest asset: your ability to earn

If your lifestyle is dependent on your ability to work, an extended period of absence through illness or injury could be devastating to you and those who are dependent on you.

Income protection insurance replaces your income up to the insured benefit amount of the policy. Most commonly the maximum cover is 75% of earnings (after business expenses, but before tax)

The waiting period can vary; it can be as short as 14 days or as long as two years or more. It is important to remember that benefit payments usually do not start immediately; a waiting period will apply during which no benefit is payable.

The maximum period of time that payments continue is called the benefit period. A range of benefit periods are available — some as short as one year, with the longest continuing through to age 65. Once benefits start, payments are usually made monthly in arrears.

Tax effectiveness - Premiums for income protection policies have the benefit of being fully tax deductible – a good way to protect yourself and reduce tax.

What are the alternatives? - Is this the insurance you have to have? It’s up to you of course, but consider some of the alternatives……….

Family assistance - You could rely on family or friends to help you but they’re likely to have their own financial obligations, and this may needlessly strain your relationship.

Savings - You could use savings in the short term to support yourself, but problems arise if your savings are not readily accessible or your incapacity is long term. You are also spending money that you’ve worked hard to save over an extended period of time.
Employer - You may be a valuable employee but your employer is unlikely to be able to continue paying you and find, train and pay your replacement.

Benefits - Workers’ compensation may help if your injury or illness is work related. Or social security may be available, if you meet the means tested eligibility criteria. In both cases, the benefit levels are unlikely to meet your needs.


Note: Advice contained in this flyer is general in nature and does not consider your particular situation or needs. If information contained is not appropriate to you at this stage please pass on to family and friends who may benefit. Please do not act on this advice until its appropriateness has been determined by a qualified adviser.

For more information on Income Protection Insurance or to arrange a no-cost, no-obligation first consultation, please contact: GEM Capital on Ph:8273 3222

What are the chances of being prevented from working as a result of a sickness or injury? More than 60% of Australians will be disabled for more than 1 month during their working life. More than 15% will be disabled for more than 3 months during their working life. Source: Institute of Actuaries Table IAD 1989-93 and ALT 90-92

What are Essential Fatty Acids and why are they so important in our diet?

Essential Fatty acids (EFAs) are the “good fats” and are necessary fats that humans cannot synthesize, and must be obtained through diet. There are 2 families of EFAs: Omega 3 and Omega 6.

Western diets are deficient in omega-3 fatty acids, and have excessive amounts of omega-6 fatty acids compared with the diet on which human beings evolved and their genetic patterns were established.

Good fats compete with “bad fats”, so it’s important to minimize the intake of cholesterol (animal fat) while consuming enough good fats. Also good fats raise your HDL or “good cholesterol” one of the jobs of your good cholesterol is to grab your “bad cholesterol” (LDL), and escort it to the liver where it is broken down and excreted. In other words these good fats attack some of the damage done by the bad fats. This is very important in an age when so many people in the Western world are struggling to get their cholesterol down, and fight heart disease and obesity.

EFAs support the cardiovascular, reproductive, immune, and nervous systems. The human body needs EFAs to manufacture and repair cell membranes, enabling the cells to obtain optimum nutrition and expel harmful waste products. A primary function of EFAs is the production of prostaglandins, which regulate body functions such as heart rate, blood pressure, blood clotting, fertility, conception, and play a role in immune function by regulating inflammation and encouraging the body to fight infection EFA deficiency and Omega 6/3 imbalance is linked with serious health conditions such as heart attacks cancer, insulin resistance, asthma, lupus, schizophrenia, depression, accelerated aging, stroke, diabetes, arthritis, ADHD, and alzheimer’s disease, among others.

What foods provide omega-3 fatty acids?

Salmon, flax seeds and walnuts are excellent sources of omega-3 fatty acids. Very good sources include scallops, chia seeds, cauliflower, spinach, pumpkin seeds, brazil nuts, avocado, cabbage, cloves and mustard seeds. Good sources include halibut, shrimp, cod, tuna, soybeans, tofu, kale, collard greens, and Brussels sprouts.

It is important to note the EFAs are perishable, they deteriorate rapidly when exposed to light, air and heat so freshness is important.

There are many EFA supplements available including fish oil, flaxseed oil, cod liver oil etc, for more information consult your health professional.

This information is for general educational purposes only and does not replace individualized diagnosis and care.
Donald Rudin, MD, and Clara Felix. Omega-3 Oils; A practical Guide. US: Avery, 1996.
Andrew L. Stoll, MD. The Omega-3 Connection. New York: Fireside, 2001.

Thursday, 24 November 2011 09:34

A Life Transformed

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PUBLISHED: 24 Nov 2011 PRINT EDITION: 24 Nov 2011
Jill Margo
It was a socially awkward moment. Simon Eldridge was standing in a circle of friends at Christmas 2008 when someone made a funny remark. As he laughed, the contents of his mouth sprayed over the woman standing next to him.

Fortunately, it was only water, was easily dealt with and the party continued. But Eldridge stepped back in puzzled embarrassment. He didn’t know he was losing muscle power in his lips and that soon he would have difficulty holding them closed. Nor did he know this was an erratic early sign of an incurable disease that would put him in a wheelchair two years later.

At the time, Eldridge seemed indestructible. He was 44 and in his prime.

The financial markets were in a slump and, as managing director of Credit Suisse’s Australian equities sales trading, he had been staying in Sydney while his wife Sheila and their two sons took their annual break at the family’s holiday house in the Hunter Valley. He commuted on weekends.

When Sheila called him at work, his voice was intermittently slurred and she inquired if he had  been to lunch. He hadn’t. While she put it down to fatigue at the end of a tough year, he said it was odd and his tongue felt heavy.

Gradually, other things began happening. At night, Simon’s left arm began to twitch and cramp. Was it the way he was lying? There were pins and needles in his hand. Thinking his wedding ring might be restricting blood flow, he took it off.

As other symptoms developed, they went to their family doctor, who referred them to a neurologist. By now Sheila had been exploring Google and had narrowed Simon’s condition down to two possibilities; multiple sclerosis or motor neurone disease (MND). She kept this to herself.

In May 2009, when the neurologist said the situation was grave and they should get their affairs in order, Sheila went to water.

She knew what was next but didn’t expect to hear that MND would disable Simon so quickly that he would be unable to work beyond Christmas. There was no cure and he would just grow weaker and weaker. They found their way back to the car, sat inside and wept. Eventually, Simon said: “Well, I guess we can sell the house in the Hunter. We could also sell the wine cellar.

“No way! I am going to need that,” Sheila replied.

They laughed, and rather than facing anyone, went for a quiet walk on Chinaman’s Beach, down from their house in Mosman. Then they turned for home, where Simon called his mother and his sisters while Sheila called the boys’ school to ask the counsellor for advice on how to guide them through this rapidly deteriorating situation.

Later, Simon went to work and told colleagues. Still reeling, his intention was to confront his circumstances as directly as he could. Nothing should be hidden. The Eldridges subsequently received a second opinion from an expert who softened the predictions, put Simon on medication to slow the progression and introduced him to a multi-disciplinary clinic where all aspects of his disease could be managed.

Relieved to have found the best care, and feeling almost upbeat, he and Sheila composed an email to friends and family disclosing their predicament (see below). To cope with what was surely coming, Simon began anti-depressants and has remained on a fairly even keel ever since. He’s engaged in the world and, as it is now an effort for him to speak, he carefully articulates what needs tobe said, conscious that it should be concise and intelligible.

Although difficult to understand, his mind is razor sharp and he is without illusions. He knows his body is declining inexorably. “Knowing where I have come from in the last two years, I have a pretty good handle on the future,” he says.

“On a daily basis the deterioration is very gradual but on a monthly basis is it pretty powerful and I know I am heading to paralysis. Three months ago, I could undo my pants and take them off. Now I can’t.”

“Mentally I am still capable of being an MD of our global investment bank, but physically I can’t do it. My computer chip retains all its memory but I am trapped inside a machine that is corroding.” Simon knows this disease will see him out but also knows some forms of it allow for longevity. The celebrated theoretical physicist, Stephen Hawking, was diagnosed at 21, is soon to turn 70 and is  still working.

The release of the iPad was well-timed for Simon because he can use the touch screen to manage his reading and correspondence, which he gets in abundance. He is genuinely surprised at the ongoing support he is receiving from colleagues. The esteem in which they hold him was reflected in a  celebration in March this year to mark his 30 years in the industry.

His career break came because he was tall for his age, and over the summer holidays the Melbourne stock
exchange was looking for a chalkie tall enough to list the price moves.
Simon, the son of a plumber, applied, got the position and went on to spend 26 years with McNab Clarke, now
Credit Suisse.
For the past 13 years, he has led the Credit Suisse Australian equities desk. For the celebration,  Credit Suisse took the extraordinary step of donating half its brokerage commissions from March 30 to the Eldridge Trust Fund and to nominated MND charities. Other brokers contributed too and $800,000 was raised.

Simon says about $300,000 went to three MND charities and the remainder to a trust fund for his sons and to help him with equipment and carers. He and Sheila made radical changes. First, their large federation family home, with its swimming pool, tennis court and period furniture, was sold with all its contents.

They scaled down to an apartment renovated for optimum wheelchair access. As he would be spending much time there, Simon wanted a large terrace, with a open view of the harbour and Chinaman’s Beach.

Simon traded his convertible for a vehicle that can ferry a wheelchair and he and Sheila continue to make the effort to go out. With his youthfulness and healthy glow, outsiders find it difficult to grasp that his life is slipping from him.

“Initially, I was in a bit of denial, but now I have come to terms with dying from this godforsaken disease,” he says. “My aim is to take as much pleasure out of life as I am capable of. I have to do whatever I can today because tomorrow I may not be capable of it.”

One pleasure is watching Fred, 16, and Henry,14, play sport. “They won’t have me in later life as I had my father and my greatest wish is that their education is assured so they continue to grow into the fine young men they are becoming.”

For Sheila, the only good thing about the experience is that they had time to shed debt and organise their finances. “Simon was finding bits everywhere that I would never have known about.

I used to pay the bills, but I didn’t know where it all came from. We’ve had that luxury of being able to prepare and it has made many of my friends sit up and think about their own situation,” she says. If Simon has one piece of advice, it is “never underestimate life insurance”.

The Australian Financial Review

Monday, 07 November 2011 04:15

Shares And The Long Term

Written by

A few weeks ago, after producing a graph showing shares outperform cash and bonds over the long term, I was asked a question along the lines of  “if shares outperform other asset classes over the long term, how come over the last decade equity-dominated balanced funds (which returned  4.5% per annum [pa]) have underperformed cash (which returned 5.4% pa)?”. The same issue was alluded to in a recent Bloomberg observation that in the US, bonds have beaten shares over the last 30 years. While one can quibble over the details, given these observations it is natural to think maybe it’s time to give up on stocks and switch to cash and bonds.

Stocks do outperform over the long term
The first point to note is that over the very long term, shares have provided higher returns than cash or bonds. The next chart is the one referred to earlier and shows the total returns from Australian shares, bonds and cash from 1900. Despite numerous disasters along the way, such as the World Wars, the Great Depression, the stagflation of the 1970s, the 1987 share crash, a major Australian financial crisis in the early 1990s - A$1 invested in Australian shares in 1900 would have risen to A$287,087 by last month with a compound return of 11.9% pa. By contrast, the compound returns of 4.6% pa and 6% pa for cash and bonds would have seen A$1 invested in these assets rise to only a fraction of this.

Shares beat cash and bonds over the long term - Australia

Source: Global Financial Data, Bloomberg, AMP Capital Investors

It’s been a similar story in other comparable countries. Following is the same chart for the US. Not quite as impressive but still the same story.

Shares beat cash and bonds over the long term - US

Source: Global Financial Data, AMP Capital Investors

The long-term outperformance of stocks over bonds and cash is as would be expected – the greater riskiness of shares is rewarded with higher long-term returns.

However, even in the long term there is a cycle

The following chart shows a real accumulation index for US stocks since 1900. The trend line represents a real rate of return of 6.2% pa.
Whenever the index is rising faster than the trend line, stocks are providing above trend returns. Vice versa when it falls relative to the trend line.

Long-term bull and bear phases in US shares

Source: Global Financial Data, AMP Capital Investors

Long-term bull and bear phases are evident, and the bear phase over the last decade is not unusual. This pattern also exists in other countries. The following chart shows the rolling 10-year return difference between shares and bonds. Every so often shares have lengthy phases where they underperform bonds, e.g. in the 1930s, 1970s and more recently.

Shares periodically go through a decade or so where they underperform bonds

Source: Global Financial Data, AMP Capital Investors

This suggests that at any point in time, the experience of the past 10 to 20 years is no guide to the long term. An investor in US stocks at the end of the 1960s would have been wrong to project the above average returns of the 1960s into the 1970s (when actual real returns averaged -0.7% pa). Likewise the bad 1970s were no guide to the 1980s (when real returns averaged +11% pa). In other words 10 to 20 years is not the long term when it comes to shares. So the fact that US shares have underperformed bonds over the last decade doesn’t mean they will over the next.
In fact, what’s evident is mean reversion. 10 to 20-year periods with above-trend returns and above-average returns relative to bonds and cash tend to be followed by weak 10 to 20-year periods where returns are below trend. The table below shows the top performing asset classes (out of equities, bonds, cash and property) for each decade over the past century in the case of the US, the world and Australia.

Top performing asset classes by decade

Source: Global Financial Data, Dimson et al, AMP Capital Investors

The 1982-2007 bull market in Australian shares arguably spoilt investors and we have simply forgotten that the superior longterm performance of shares comes with a cost, which is that there are sometimes lengthy periods during which shares can perform poorly.

The 10 to 20-year return cycle in shares reflects fundamentals.

It’s no guide to the ‘long term’. The 10 to 20-year secular cycle in shares appears to reflect a combination of factors including:

  • Starting point valuations – US share prices were high relative to trend earnings (i.e. the price-to-earnings ratio) in 1929, the late 1960s and in early 2000 (after which followed the secular bear markets of the 1930s, 1970s and 2000s) and low in 1949 and 1982 (after which followed two decades of strong returns);
  • Underlying economic developments – depression in the 1930s and inflation in the 1970s were bad for shares, whereas solid economic growth, disinflation, economic rationalism, globalisation etc. in the 1980s and 1990s were great for shares. Right now it’s deleveraging in the private and public sectors in the US and Europe which is proving to be bad for stocks.
  • Technological innovation – rapid technological innovation helped push stock returns above trend in the 1920s (electricity, mass production), 1950s (petrochemicals, electronics) and 1990s (IT).

Perhaps the most important point is that the starting point matters. Ten years ago US stocks were offering a dividend yield of just 1.5%, but the 10-year bond yield was 4.6%. This made it much easier for bonds to outperform shares as indeed they have over the last decade. But it’s now going to be harder for bonds to outperform over the decade ahead as their yield has fallen to less than 2% whereas the dividend yield has increased to 2.2%. This is still low, but even if share prices do nothing over the decade ahead, shares will outperform bonds. Likewise in Australia, 10-years ago bond yields were 5.6% and dividend yields were just 4.3% so it was comparatively easy for bonds to do well. Today though, bond yields are 4.2% and the grossed up dividend yield is 6.8%. In other words, it’s currently easier for shares to outperform bonds over the decade ahead as bond yields are quite low relative to dividend yields. This is also highlighted in Australia with the dividend yield grossed up for franking credits now running well above bank term deposit rates which are now falling. In fact, on this basis the grossed up dividend yield of 6.8% compared to term deposit rates of around 5.5% imply shares are paying out 1.3% more cash per annum than term deposits.

The Australian dividend yield is up, deposit rates are down

Source: RBA, Bloomberg, AMP Capital Investors

Concluding comments
The historical record suggests:

  • Over the very long term stocks do outperform most other asset classes;
  • However, there are 10 to 20-year periods over which this is not necessarily the case. In this context the recent experience in share markets is not unusual; and
  • The outlook at any point in time in part depends on the starting point. After a decade or so of above-average returns a period of slower returns is likely, and vice versa.

The long-term cycle in equity markets should clearly be allowed for when setting investment strategy for individual investors. While 10 years might not seem long for me, it is very long for my mother. So, as discussed in a recent note, an outcome or absolute return investment approach may be appropriate for those with a short-term investment horizon or specific investment needs. However, for those with a longer-term investment horizon it’s worth bearing in mind that in an historical context, the turbulence in share markets in recent years is not unusual and doesn’t tell us shares won’t provide superior long-term returns going forward. This is particularly so with dividend yields on shares rising at a time when yields on bonds, cash and term deposits are falling.

Dr Shane Oliver
Head of Investment Strategy and Chief Economist
AMP Capital Investors

The assets of a person who does not leave a will are distributed according to the law.  In South Australia, the following distributions apply to surviving members of the family according to Section 72 of the Administration and Probate Act 1919.

Intestacy is the legal term that refers to someone who dies without a legal will.

We have highlighted 3 of the most common situations that people may find themselves in when dealing with Intestacy and what the law stipulates about the distribution of assets owned by the deceased.


1.    Surviving Spouse but no children


All assets are distributed to the spouse or domestic partner.

A husband or wife is a lawful spouse.  A person may be determined by Court to be a domestic partner if he or she has been living in a close relationship for three years (or has a child from the relationship)


2.    Surviving Spouse and Children


If the total estate is less than $100,000, the whole estate passes to the surviving spouse or domestic partner.

If the total estate is more than $100,000, the spouse or domestic partner is entitled to the following:


a)    Personal Property (including furniture, effects and car)

b)    $100,000 and half the remaining balance

c)    Where the family home is in the sole name of the deceased, the surviving spouse has the right to purchase the home


Children are entitled to the balanced of the estate.  The share of any child under the age of majority (ie under 18 years) must be given to the Public Trustee to manage under trust.

For example a person dies without a will and is survived by a spouse and 2 children.  The assets comprise of a family home worth $400,000 owned by the deceased solely, $50,000 in investments as well as a motor vehicle and personal effects.

The distribution would be:

1)    To the spouse – motor vehicle and personal effects $275,000 (comprising $100,000 plus half the balance which is $175,000)

2)    To the children - $175,000 divided equally between them

On paper this sounds benign, but let’s examine this situation in more detail.  The key question here is how would the children’s share of the estate be funded?  They could receive the term deposit, but then would the house have to be sold in order to provide funds for the children.

The surviving spouse has the right to purchase the house, but how would that be funded.  The surviving spouse may not be employed and therefore potentially unable to secure a loan.

The death of a spouse without a will can result in the surviving spouse having to sell the family home to pay the children’s entitlements under intestacy laws.


  1. Surviving Children only – no spouse


Distribution is in equal shares to the children (if a child has died and has had children, then those children take their parent’s share in equal proportion)

What about assets in joint names?

Joint Tenants

When property is owned as joint tenants, it generally passes automatically to the survivor upon the death of the other joint owner.  As a result, joint property does not form part of a person’s estate.  It cannot be disposed of by a Will or under intestacy laws.

Tenants in Common

When property is owned as tenants in common, the deceased person’s share of the property does not automatically pass to the surviving owner.  The deceased’s share of the property is distributed according to the terms of his or her Will.  If there is no Will, the deceased person’s share of the property is distributed according to the intestacy laws.


Note: Advice contained in this article is general in nature and does not consider your personal situation or needs. Please do not act on this advice until its appropriateness has been determined by a qualified adviser.  While the taxation implications of this strategy have been considered, we are not, nor do we purport to be registered tax agents. We strongly recommend you seek detailed tax advice from an appropriately qualified tax agent before proceeding.  The information provided is current as at October 2011.


Monday, 17 October 2011 23:49

Greek Default Inevitable - What Next

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