Defensive Markets

This month’s Wealth Pipeline provides some commentary on the defensive behavior of global financial markets.

Defensive Markets

Aussie equities have rallied in recent weeks however the outlook still sees global markets stuck in defensive mode with uncertainty surrounding Europe, US and China.  Here are some recent examples:

• Unilever, the large European food conglomerate, raised $550 million of five year debt at an interest rate of just 0.85% p.a., which is the lowest ever borrowing cost for US corporate debt.     
• US 30 year Treasury Bonds are trading at such a low yield (around 2.5% p.a. for 30 years) that a very small increase in market yield of 0.13% would be enough to wipe an entire year's interest.
• At times Swiss, US and German Bonds have been paying negative interest rates.  For example a Swiss Government two year note was trading at -0.1% back in August last year.
• Yield differentials are extreme - A term deposit purchased today from one of the big 4 banks is likely to be less than half of the consensus forecast grossed up dividend yield for financial year ended June 2013 for that bank.  Obviously buying their equity comes with greater capital risk. 
• Even our dollar getting to a high last year of over 1.10 vs. the USD would have been seen as farfetched a few years ago.

There are plenty more examples of extreme defensive behaviour - the real question is how long can this continue?  For the record, apart from the current market, the worst four bear markets in history (1929, 1973, 1980, 1987) so far have taken between three and a half to six and a half years for the market to recover to its previous high.

 Is this substantially worse than 1973/1974?  No one really knows the answer and there are good arguments to say that sharemarket returns may be subdued in the next few years as Governments and individuals deleverage from the great debt binge.