This trend has occurred irregularly yet persistently over each cycle, with each cyclical peak and trough shallower than the previous one. Debt relative to income went higher, reducing how much interest rates could rise before causes debt servicing issues. In turn, this environment has conditioned investors to build portfolios that would have done well in the recent past. Lower interest rates provided a tailwind to bonds and stocks, leading to high nominal and real returns over the past forty years.
Over that time, bonds were not only a reliable diversifier to other riskier assets, but also added quality gains to a portfolio. And since bonds of that duration have price risk, all it takes is a slight move in interest rates which can happen at the daily timeframe to wipe out the entirely of the annual yield. Falling interest rates increase the present value of future cash flows from stocks, or the basic discounting process that drives their values.
Lowering rates is the main tool central banks use to boost the economy in downturns. A stocks and bonds portfolio can diversify with respect to growth but diversifies poorly with respect to inflation. Because 60 percent of the allocation is in stocks and 40 percent of the allocation is in bonds, it seems somewhat balanced because of the dollar amount in each.
That means the stocks part of the portfolio will be felt disproportionately. Nominal bonds are the standard variety, with fixed coupons and principal. So, for example, if a year bond yield 0. If a year inflation-linked bond yield minus-1 percent, but inflation comes in at two percent for the year, you get the minus-1 percent plus the inflation figure of two percent, for a total return of 1 percent.
In terms of economic policy, central banks now place more emphasis on putting a floor under inflation rather than a lid. Given how difficult it has been to stimulate inflation, more focus is now on preventing deflation. With respect to what this could mean in terms of portfolio dynamics, this could make some allocation to inflation-linked bonds more important than normal. This is because there is no floor under real bond yields.
Real yields can go much lower than zero, boosting their prices. Bonds all along the yield curve gave 0. For example, if one yield is one percent but inflation hits 10 percent, then the real yield is minus-9 percent. If the year Treasury yield is 50bps and the inflation breakeven rate rises, the real yield declines. As mentioned, at the end of the year, the government provides a separate coupon equal to CPI inflation. The image below shows the yields between a standard nominal bond top line and inflation-linked bond bottom line.
The exception would be when inflation is negative or priced to be negative going forward. The holder of the inflation-linked bond receiving a payment at the end of the year based on CPI would put the TIPS yields on par with the Treasury yield. An inflation-linked bond is a better performing asset relative to its nominal yield counterpart when inflation runs above expectations, and vice versa.
Gold has benefited and is likely to further benefit from ongoing monetary stimulus. When real yields are unacceptably low and the central bank has to create a lot of money to keep pace with debt servicing demands, gold becomes a form of currency hedge.
It also has a track record going back thousands of years. Gold and commodities can play a role, as well as the aforementioned inflation-linked bonds. Some also consider things like newer asset classes like cryptocurrencies and other forms of digital currencies. The buyers and sellers in these markets are heavily skewed toward smaller speculators who are trying to make a profit off the price movement.
They largely do not see it as something that will hold its value over time, though some are trying that approach as well. Bitcoin specifically became one of the more popular asset bubbles in recent memory after public attention from its price rise in fueled heavy speculation among the public. The technology is easy to copy. And these are the institutions that are largely responsible for the demand of most financial assets. Cryptocurrencies have a very long way to go as a source of currency reserves for the large players in the markets.
In the financial and technology world, and in the intersection of both fintech , some are launching digital currencies or are in the early stages. The primary aim of new platform-based currencies or payment methods is to extract efficiency improvements in some form. Ultimately it comes down to value as the asset class matures and graduates beyond mere speculative instruments. The degree to which digital currencies can create value will be dependent on their ability to streamline operational processes, create value-additive processes for customers and business partners, reduce costs, and do it in a way better than alternatives i.
This can lead to legal gray areas or have such systems used as a conduit for illicit activity. Cryptocurrencies have the potential to work well and eventually have use in mainstream investing portfolio. But they currently have a long way to go. Remember that even gold has been banned by governments throughout history, as it was in the US from to No longer can central banks cut interest rates to stop the fall in equities when cash flows fall. Covid also brought forth a new type of risk for some businesses that rely on gathering customers within public spaces.
This includes restaurants, movie theaters, and various forms of brick-and-mortar retail, which can see their revenues dry up all the way to zero. Other companies that can serve as quality stores of wealth include those at the frontier of productivity. These are often tech companies in some form who have strong balance sheets i. The market is readily willing to fund them if necessary.
The ones with cyclicality embedded in their business model i. This includes airlines and automotive manufacturers. Most portfolios do poorly in big market shocks because they are poorly diversified. Wealth is always moving between asset classes, between countries , between currencies, and between different fiat and non-fiat storeholds of wealth. Even during the Covid shock, which by many measures was the biggest economic shock in modern history , the global economy sunk just 6 percent. Global diversification has become more important than ever with the yields across developed markets.
That not only means low returns on cash and bonds, but it also means equities start bending down closer to those yields as well when there are no other alternatives to park money. And with the geopolitical situation playing out, global diversification can also start being more effective than normal.
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They are not Ofrex but they would fit! The box of staples just says Ofrex Nipper, with no numbers. This is the best stapler ever invented, and it has worked perfectly ever since I got it in Canada in It uses small staples, and I can't find anything here in the US that fits. Rexel no. Chain recently gone bust, btw. Stay informed with continually updated economic and flash News, giving you Analysis and preview of the forex market including cryptocurrencies!
Website: www. Lesson 1 - What is Forex and how does It work? Alpari UK 1,, views. Our car is a spacious combi and perfectly fine for our family of four. Running costs are pretty low for a car of that size. When acquiring a piece of a business, I want profitability, stability, a broad and durable economic moat ensuring me stable dividend income. And in my view, when it comes to brand loyalty and financial strength, there are very few car makers playing in the same league as BMW.
In the first six months of , the company sold over 1 Million vehicles, Free Cash Flow comfortably covers the dividends despite a significant ramp-up in investments amongst others for new electric models etc. I just did not see a price level where I felt perfectly fine in pulling the trigger.
In the meantime, I decided to have a look at its European peers. I already have a nice position in Unilever and have been rewarded quite handsomeley over the last few years. But there are two other businesses offering compelling brand portfolios and very solid growth: The German chemical and consumer goods company Henkel and its British peer Reckit Benkiser.
In June, I acquired 32 stocks of Henkel. The years old company operates in three business areas:. For me, it is the perfect long-term investment showing very solid top-line and bottom-line growth over the last decades as well as very nice dividend hikes. From to , revenues grew from Bn. EUR EUR 2. EUR 3. Reckit Benkiser operates in following three segments:.
Reckit Benkiser is an incredibly profitable business and its stock never get really cheap. What do you think about our stock acquisitions in ? Did you make some nice buys this year? Please, let us know below. Disclaimer You are responsible for your own investment and financial decisions.
This article is not, and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action. I like your defensive plays because, like you say, they are relatively recession-proof, and seem likely to benefit from the growing middle class in many developing countries. I also like BMW, especially since they seem to have an eye on the future with electric vehicles and other such emerging technologies.
Hi Miguel Yeah, consumer staples are in a sweet spot, there are great catalysts for long-term growth despite some headwinds in the short run. What I am looking for much more consequently now as my portfolio has a certain size are safe dividends with reliable growth. I let these companies and the compound effect do their work and watch my dividend income increase year by year.
Thanks for stopping by and commenting. I bought some water stocks. I thought they might be good plays with a solid dividend and a huge moat. I can imagine that barriers are huge or even impossible to overcome for potential competitors to enter a certain market. Fixed costs must be extremely high so established large providers have a tremendous advantage. Water has no substitutes and demand grows as the population does. Hi Maximiliane Thanks for your comment and continued support.
Glad to have you as fellow shareholder of Henkel and Diageo. I particularily liked the first semester results of Diageo, solid organic growth. Its presence in the alcohol sector is just amazing, I realize it over and over again e. I also like Brown-Forman and Pernod Ricard, will certainly keep an eye on these businesses the years to come. Hi FS, Thanks for sharing your investments purchases.
You have purchased some great businesses and put an awesome amount of money to work this year. Also, this post is a great reminder that I need to add more positions in consumer staples.
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