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Is fixed interest starting to look more attractive than shares?

11 May 2022 1 month(s) ago

The ASX has been weakening and the long term bond yield is rising.

The economic signs all over the world are turning bearish, especially with indications of stagflation in the United States. In China the bizarre lockdowns will also weaken the economy and there are no positive signs in Europe, either, where inflation is soaring. It is not looking good for stocks.

There are also signs of a return to interest rate levels more like the historical average, which could be of great interest to SMSF investors looking for low risk income. Fixed interest has been mostly off the table as an option for many years. The current base rate of 0.35 per cent is still very low but it is likely to be heading higher, as indicated by the fact that the Australian 10 year bond rate has hit 3.56 per cent. Last August it was only 1.06 per cent.

In the US interest rates are becoming more important:

Bell Potter notes that the ASX 200 is down -4.3% for May and 4.4% for the year to date. Not exactly unambiguous bear market territory, but certainly not positive. There may be more weakness to come, which will of course lead to a great buying opportunity.

Bear markets are the time to go in, to state the obvious:

Bell Potter says the smaller end if the market has been harder hot, presumably because they do not provide the same level of dividends; they are more pure capital gain plays:

“The Small Ords hit harder as it dropped -2.91% to be down -7.8%in May MTD & ?YTD -14%. Weakness was from (again) the friendless Tech / Growth stocks with many hitting multi year lows today. The resources were also hit with commodity prices & Iron Ore down with fears ?by some, that the Chinese zero Covid policy may extend into October when they ?have their 5 year Congress. ?

“Also weak Chinese data did not help – ?Export growth in April slowed to 3.9% vs vs 14.7% last month the weakest pace since June 2020 but it was better than mkt at just 2.7% ?Imports were unchanged in April better after -0.1% in March & better than mkt at -3%.”

Bell Potter says the stocks that were weak were BHP, ANZ, Macquarie Bank, NAB, Goodman, RIO, Block, Wesfarmers, CBA, Lynas and Aristocrat.

“Stocks that tried as best they could to support the ASX 200 were Energy stocks but also mainly solid “defensives” & big liquid consumer stocks that are where institutions “hide their money” in a falling market – so as to preserve cash in case the falls get a lot worse.”

Potter says a “selling plague” may hit the market “like what we saw in 2008 lows where we had about 400 lows & March 2020 when we had about 250 lows at the bottom.”

The broker adds, however, that “for now, it looks like many of these stocks will soon get a decent recovery off this low” but warns that there could be a second wave of selling in the first two or three weeks of June as institutions settle their books at the end of the financial year.


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