All-Canada, All-the-Time, Part II

Sunday, February 27th, 2011

All-Canada All-the-Time Part IIPrint

Posted on February 25, 2011

By Tom Bradley

As an addendum to my post last week (Risk-free? Be Careful What You Wish For), I want to revisit the words safe and Canada.

An excellent reason for investing in Canada is that it’s a safe(r) way to play the emerging markets, specifically China. Our resource stocks in particular will benefit from China’s unquenchable thirst for raw materials.

Why is Canada a safer way to play China? The argument is that:

• Our capital markets are well regulated.
• Corporate governance is best of class.
• Market transparency and corporate disclosure are good.
• And in general, our companies are well funded, or at least have ready access to capital.

All of this is true and Canada may continue to be an effective way to play China, but whether it proves to be safer or not is yet to be seen. I say that because resource stocks are the most volatile way to play any economic trend. Commodity prices are unpredictable, highly cyclical and cannot be controlled by company management. And relying on one big customer is always a risky strategy (as we’ve seen in the past, China can turn the tap on and off without notice).

The key point here (and in my previous column) is that holding a portfolio that is all-Canada all-the-time may be a safe(r) way to play the emerging markets, but it’s not a safe strategy per se. Having exposure to the world’s growing economies is a key piece of any investment strategy, especially with the developed countries being growth challenged, but it’s a more volatile piece and needs to be apportioned accordingly.

Tags: Addendum, Canadian Market, Capital Markets, China, Commodity Prices, Company Management, Corporate Disclosure, Corporate Governance, Developed Countries, Economic Trend, Emerging Markets, Investing In Canada, Investment Strategy, Key Point, Market Transparency, Raw Materials, Resource Stocks, Risky Strategy, Tap, Tom Bradley, Unquenchable Thirst
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Jeremy Siegel: Outlook for Government Bonds

Friday, May 15th, 2009

Jeremy Siegel, on his outlook for government bonds:

40 years ago [US] treasury bonds were yielding over 6.3 percent, about twice their yield today. It is mathematically impossible for government bonds to come close to matching those 12 percent returns in future decades. Stocks, on the contrary, can easily repeat their returns over the past four decades, since those returns were near their
historical average…

For the 55-year period from December 1925, when the well-known Ibbotson stock and bond series begins, through January 1982, total real government bond returns were negative. This means that, by rolling over in long-term government bonds, reinvesting all the coupons, and thereby taking no income, investors’ bond portfolios were sinking in value.

Most strikingly, for the 40-year period from 1941 through 1981, government bond investors lost a whopping 62 percent of their value after inflation. A loss in purchasing power over this long a period has never happened in stocks. There has never even been a 20-year period when real returns in stocks have been negative. In fact, the worst 30-year real return for stocks is plus 2.6 percent per year, just slightly below the average real return investors earn with government bonds.

Looking at today’s markets, the forward-looking prospects for government bonds are very poor. Yields on 30-year inflation-protected bonds are 2.3 percent, and yields are only 4 percent on 30-year Treasuries. In contrast, after stocks have fallen 50 percent from their previous high, as they did in March of this year, their subsequent 30-year real returns have always been in excess of 10 percent per year.

The 40-year outperformance of government bonds over large stocks has ended.

As a addendum, Robert Arnott, of Research Affiliates opined about bonds vs. stocks in Bonds: Reversion Cuts Both Ways?

Tags: 1941, 30 Year Treasuries, Addendum, Bond Investors, Bond Portfolios, Bond Returns, Bond Series, Bonds Vs Stocks, Contrary, Government Bond, Government Bonds, Ibbotson, Inflation Protected Bonds, Jeremy Siegel, Outperformance, Poor Yields, Prospects, Purchasing Power, Research Affiliates, Robert Arnott, Stocks Bonds, Us Treasury Bonds
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