Stocks are going nowhere fast. Up a little here. Down a little here. Waiting… Waiting for Trump to lose, self-combust, or both. Waiting for the next jobs report… Waiting for the next RBA meeting… Waiting for US earnings season… Meanwhile, there’s no shortage of pundits lining up to give you their two-bob’s worth. Bill Gross, the so-called bond king, reckons central bankers have turned world financial markets into a casino. He argues ultra-low interest rates not only fail to provide any cushion should a recession occur, but they will also lead to capital destruction as opposed to capital creation as…
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Stocks are going nowhere fast.
Up a little here. Down a little here.
Waiting for Trump to lose, self-combust, or both.
Waiting for the next jobs report…
Waiting for the next RBA meeting…
Waiting for US earnings season…
Meanwhile, there’s no shortage of pundits lining up to give you their two-bob’s worth.
Bill Gross, the so-called bond king, reckons central bankers have turned world financial markets into a casino.
He argues ultra-low interest rates not only fail to provide any cushion should a recession occur, but they will also lead to capital destruction as opposed to capital creation as “zombie” corporations suck the lifeblood out of global economies.
He might be right.
But, as he readily admits, central bankers aren’t about to put the pedal to the metal and suddenly send interest rates higher.
All of which means, like it or not, low interest rates are here, and here to stay.
Here in Australia, when compared to much of the rest of the world, we’re lucky. By leaving our money in the bank, we can still earn around 2% on our cash, totally risk-free. Savers in many other countries are lucky if they earn 0.25%.
Still, on a chunky $100,000 deposit, at 2% or 0.25%, although your money will be safe, you’re not going to get rich stashing all your cash in the bank.
All of which leaves investors and savers with a dilemma.
In what Gross is calling a casino-like atmosphere, do you, as he says, “scrap like a mongrel dog for tidbits of return,” or leave your money in the bank and watch its purchasing power slowly rot away?
Or, like Gross recommends, do you turn to Bitcoin and gold?
Bitcoin is SO far outside my circle of competence that I couldn’t possibly touch it.
History has consistently shown gold to be such an awful investment that I couldn’t possibly touch it, or gold mining stocks.
A case in point?
In Australian dollar terms, gold has lost around 25% since this year’s high after the Brexit vote.
ASX gold stocks have now lost more than 20% since their July high, putting them in a bear market.
Make that two cases in point…
Gross obviously has an interest in talking his own book.
Yet, like the rest of us, he’s forced to invest in something, and for his Janus Global Unconstrained Bond fund, that predominately means corporate bonds. He supplements the 2% yield on those corporate bonds by using options and derivatives, aiming to boost the overall yield to around 5%.
Sounds like he’s the one scrapping like a mongrel dog.
It also sounds like a lot of hard work to me. And not without risk. If interest rates do rise, the underlying prices of those corporate bonds will sink.
But for all his rhetoric, and even though he thinks they are wrong, Gross believes central banks will do anything they can to keep interest rates low.
Bureaucrats and politicians alike are concerned about their legacy. Not on their watch would they want to willingly crash the share market or send the economy into recession.
So we bumble along. Low interest rates for the foreseeable future. Budget repair pushed off to the never-never land.
All of which means we should be prepared for a world of lower returns, including the stock market.
Over the very long-term, historically the ASX has returned around 10% per annum, on average.
That’s a mighty fine return, especially as it has included periods of high inflation, recession, war, crises, numerous stock market corrections and the occasional stock market crash. It’s a return that, compounded over 40 years,turns $100,000 into over $4.5 million.
I have some bad news…
You should NOT expect the same 10% rate of return going forward…
What should you expect?
Bill Gross is aiming for a total positive annual return of about 5% per annum.
Not so long ago were were earning a 5% return on our term deposits, totally risk-free!
How things have changed…
In better news…
Here in Australia, courtesy of our higher interest rates, our higher dividend yields, and our dividend imputation system, an average annual return from the stock market of around 7%, over the long term, seems about right.
Not bad, in this low interest rate environment. At that rate, your money would double every 10 years or so. Again, not bad.
But not great, either.
There’s no getting around it… in order to generate above-average returns, you have to take some risk.
It’s always been such, except that in the Internet-era, where on a daily basis you can read about some “stock market crash warning,” or some conspiracy theory on gold, or about how the markets are being manipulated, or that it’s time to “sell everything,” the risks seem to be permanently elevated.
You can look at that one of two ways…
If your glass is half empty, you can sit in cash and await for armageddon. I just trust you didn’t pile your life savings into gold in the last few weeks.
If your glass is half full, because all the doomsters and gloomsters are scaring people away from the stock market, you could deduce there’s still value to be had in equities.
I’m not here to tell you equities are cheap.
Some are riskier than many investor’s realise, including the likes of Commonwealth Bank of Australia (ASX: CBA) and Westpac Banking Corp (ASX: WBC), given the big banks are highly leveraged to the local property market and to debt-laden consumers.
And then there are some companies that are growing quickly, have decent tailwinds, and have long growth runways ahead of them. Plus, they pay dividends too, many fully franked!
I’m talking about a company like liver cancer treatment manufacturer and distributer, Sirtex Medical Limited (ASX: SRX).
In its most recent results, revenue grew by 32%, net profit jumped by 33% and it increased its final dividend per share by 50%. Looking ahead, Sirtex says so far it has only penetrated 2% of its addressable market, anticipates continued double-digit dose sales growth, and awaits the results of three major clinical studies.
No wonder Sirtex shares are up over 400% for Motley Fool Share Advisormembers who followed our advice to buy the shares in April 2012.
Today, Sirtex Medical shares trade on a forward P/E of around 25 times earnings. That’s not cheap. But nor is it overly expensive, given the company’s growth prospects, and also when compared to Wesfarmers and Woolworths, who trade on forward P/Es of around 20 and 19 times earnings respectively.
As a retail investor, your greatest advantage is time.
Pay fair prices to invest in great companies, and then sit back and let time, and the power of compounding returns, work their magic. Numerous studies have shown the less you actively trade, the more likely you’ll generate better returns.
Buy and hold companies like Sirtex Medical.
Buy and hold companies like Corporate Travel Management (ASX: CTM), up over 700% since Scott Phillips first recommended them as a buy for Motley Fool Share Advisor members.
Buy and hold companies like Cochlear (ASX: COH), up over 135% since Scott rushed out a buy alert email to Motley Fool Share Advisor members.
There’s a whole world of opportunity outside the popular ASX 20 stocks. Growing companies trading at fair prices, often paying fully franked dividends.
In his brand new “Best Buys Now” report, Scott has just named four such companies, exclusively to members of his Motley Fool Share Advisor advisory service.
Two of the companies are growing like gangbusters, their consumer products targeting the mass markets both here and abroad, including China.
Another is also a play on the growing Asian middle class. Not only is this company growing its profits at double digit rates, it also trades on a forecast fully franked dividend yield of 4.3%.
Just to mix things up a little, Scott’s final “Best Buy” is an unpopular deep value stock whose share price is now finally on the move. Even after its 30% gain in the last 3 months, the stock still trades on a forward P/E of just 8 times earnings and a fully franked dividend yield of 6.8%. It looks to me like the smart money could already be on the move…
Bill Gross may be known as the bond king, but given his Janus Global Unconstrained Bond fund has generated a total return of just 1.05% since its inception in May 2014, his reign at the top may be coming to an end.
I’m not suggesting it will be all plain sailing from here for equity investors either.
But with fully franked dividend returns of 4.3% and 6.8% alone on just two of Scott’s brand new “Best Buys Now,” and with the very real prospect of capital gains on top, I know which asset class I’ll be investing my hard-earned money.
Motley Fool General Manager Bruce Jackson has positions Corporate Travel Management, Telstra and Wesfarmers. The Motley Fool Australia owns shares of Corporate Travel Management Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.