The Business Advisory Blog

The Business Advisory Blog

Insight, news and updates from Alliott NZ Chartered Accountants, Auckland New Zealand. The views expressed here are the views of the author and should be discussed in further detail should an article be relevant to your individual circumstances.

While every effort has been made to provide valuable, useful information in this publication, this firm and any related suppliers or associated companies accept no responsibility or any form of liability from reliance upon or use of its contents. Any suggestions should be considered carefully within your own particular circumstances, as they are intended as general information only.

David Burt
Published on
Bonds, with their well-earned reputation for modest but steady returns, looked so very attractive in the risk-averse wake of the Global Financial Crisis (GFC). In fact they looked so good that huge amounts of cash chased bonds worldwide in the period 2008-2012.  Understandable, of course, but the result has been what you always get when lots of money bids for one asset class – a price bubble.

For example, some UK Government bonds hit 300 year highs in 2012, and German and US bonds have been bid for so strongly that the effective interest return to buyers is under 2% p.a. Purchasers buying over the last year or so risk finding they’ve bought at a peak.  And those holding bonds now must ask whether they still present a good position.
In the past conventional wisdom has held that shares are ‘risky’ and bonds are ‘safe’. Current thinking challenges that profoundly.

A couple of years on from the GFC and what was apparently a safe haven for money is, on a grand scale, losing many bond holders around the world as prices unwind.  As the US enters the ‘tapering off’ phase to its stimulus package, the great sponge that is the US Federal Reserve Bank, that has been buying up US$85b of fixed interest securities a month, will no longer be in the market. It will no longer soak up One Trillion US Dollars of fixed interest a year and, without that to prop up bond prices, it doesn’t take a genius to see what the effect on already sky-high bond prices could be.
Perhaps in this environment, share markets don’t look quite so bad. In fact a number of highly regarded fund managers are saying that, for a while, they see cash and shares as the place to be.

Safety in shares, you ask?  It's a funny old world, sometimes. Conventional wisdom has its place, but common sense has to override it when massive government interventions shifts the goal posts so far that it becomes a game changer.

The above note is not personalised for any individual or entity. It does not take into account your particular financial situation or goals (or any one or more of them). If you act on information contained in this note the outcomes may not be what you expected nor suit your particular circumstances. Neither David Burt, Alliott NZ Ltd, Alliott Financial Management (NZ) Ltd nor Global Portfolios Ltd will be responsible for any loss or non-payment as a result of actions taken upon information or recommendations provided in this note. Readers should seek investment/tax advice prior to action in relation to any of the matters discussed above.

Topics: bonds Global Financial Crisis return on investment shares