Mr Henry does something curious
David James |
20 March 2015
The former head of the Treasury Ken Henry, has questioned the chase for yield by investors, which includes many SMSF investors. It is an interesting argument. He starts by making a case that Australia's mining boom was a one off thing:
"There really are no historical precedents," he says. "In 1951 the terms of trade increased by about 50 per cent. That's an enormous increase. People of my generation were taught that 1951 was an aberration – we should never expect to see anything like it.
"But between late 2003 and 2011, the terms of trade actually doubled – an increase of 100 per cent," he says. As commodity prices have fallen, the terms of trade has subsided, but Henry says the cycle hasn't run its course yet.
The collapse in commodity prices, which has led to a remarkable slide in the share prices of our biggest miners, combined with record low interest rates around the world, have contributed to the most overcrowded trade there is – the rush to yield."
This is a curious argument. Mining stocks typically don't offer much yield because they don't pay out much of their profits as dividends. It is stocks like the banks and Telstra that provide the yield plays. Henry may be right about some dangerous signals in the Australian economy and therefore the Australian stock market:
"Many people will remember how the tech boom unfolded," he says. "The several years preceding the GFC were also characterised by relatively low inflation and high global saving. And that period ended badly too.
"A question investor analysts should be pondering is whether, with low inflation and high household saving likely to be with us for quite a while, expectations of long-term yield might need to be revised down."
But surely this applies to capital gains, not yield? That was what the tech boom was about, and it is what mining investment offers. After all, in terms of capital gains, the All Ordinaries is yet to get back to its pre-GFC high. But investors have made a lot of money out of dividend yields.
Perhaps Mr Henry is more suited to macro-economics than investment. He may be right that the concentration on high yield stocks has been overdone; any long term market trend is often over done. He is also mounting a case that the Australian economy is entering some rough waters. But from an investment perspective it seems he is talking more about capital gains stocks, not yield stocks.