Stocks vs. Term Deposits in Australia: Which is better for the Long Term?

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Australian stocks have one of the highest dividend yields in the world. Many firms offer yields of over 5%. Over the long term rising equity prices together with high income,lead stocks to beat bank term deposits in terms of returns. With interest rates offered by banks at historical lows, the gap in return between the assets have further increased. The following excerpt from a recent article shows the superior performance of stocks over bank deposits in Australia:

Chart #3 Shares can provide stronger growth in income with less volatility than bank deposits

Investing in shares entails the risk of capital loss, but can offer a higher and less volatile income flow over time. The next chart compares initial $100,000 investments in Australian shares (ASX 200) and one-year term deposits in December 1979 and the income they have provided over time (before franking credits are allowed for in the case of shares).

 

The term deposit would still be worth $100,000 (red line) and last year would have paid roughly $2200 in interest (red bars). By contrast the $100,000 invested in shares would have grown to $1.31 million (blue line) now and last year would have paid $47,792 in dividends before franking credits (blue bars). The point is that dividends tend to grow over time (because profits and hence an investment in shares tends to rise in value) and are relatively stable compared to income from bank deposits, which vary with interest rate settings. Over the period the worst decline in dividend income from shares was a 32% decline between 2009 and 2011, whereas the income from bank deposits plunged 68% between 1990 and 1994 and by 65% between 2011 and this year. And it’s set to plunge even more given the falls in term deposit rates since June. Once franking credits are allowed for, the comparison would become even more favourable towards shares.

Source: Five great charts on investing for income (or cash flow) by Dr Shane Oliver Head of Investment Strategy and Economics and Chief Economist, AMP Capital

Key Takeaway: Though stocks have the risk of losing entire investment (principal) of a company fails, the outsize returns they provide over the long term cannot be ignored. However diversification is important to reduce the risk of losing principal.

The entire article is worth a read as well.

Related ETF:

  • iShares MSCI Australia Index Fund (EWA)

Disclosure: No Positions

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The New American Normal: Long Live Monopolies !

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The US used to be a free market economy where competition thrived and the law of supply and demand determine prices of goods and services. Unfortunately that is no longer the case. For the past few decades competition has become a dirty word in most industries and monpolies have formed to dominate entire industries. As a result, consumers suffer as the invisible hand of the free markets has been replaced by the pricing power of monopolies. The lobbying power of private capital and the general unwillingness of regulators to do their jobs effectively has led to this current situation. To put it another way it is as though the state has decided that free markets are no longer fashionable to follow. I have written about monopoly in many industries including railroads, media, ratings industry,  airlines, cable tv, etc. before.

Even the labor market, which is the most basic of any meaningful free market, has become noncompetitive. For some workers the current labor market may feel like a modern day slavery or the serf system that was so popular in the olden days. According to one study, nearly one-third of workers have signed non-compete agreements that prevent them from joining a competitor. Any third-grade economist would agree that this is not a common feature in countries that follow free market economic principles.

With that brief intro on the topic of monopoly and its awesome benefits, I came across an article at The Guardian by Thomas Philippon, Max L Heine Professor of Finance at the Stern School of Business at New York University. He notes that monopolies cost American consumers about $300 per month according to his calculations. From the article:

When I landed in Boston in 1999, the United States was the land of free markets. Many goods and services were cheaper here than in Europe. Twenty years later, American free markets are becoming a myth. Internet service, cellphone plans, and plane tickets are now cheaper in Europe and Asia than in the US. In 2018, the average monthly cost of a broadband internet connection was $31 in France, $39 in the UK and $68 in the US. American households also spend twice as much on cellphone services as households in France or the UK.

This is a result of policy choices. In 1999, the US had free and competitive markets while European markets were dominated by oligopolies. The airline industry is a prime example. Over the past two decades a wave of mergers has turned the US airline industry into an oligopoly while Europe has opened its skies to competition, thanks in part to low-cost carriers such as Ryanair and EasyJet. US regulators allowed these mergers to happen without meaningful challenges. EU regulators, on the other hand, encouraged the entry of low-cost competitors by making sure they could get access to takeoff and landing slots.

There are many layers of irony in this historic reversal. One irony is that the free market ideas and business models that benefit European consumers today were inspired by US markets. Another irony is that some leftwing US politicians are now contemplating policies that most Europeans would find extreme. We do not think private health insurance companies should be abolished. We favor wealth taxes, but we do not think they are a cure for all ills.

The polarization of the political debate is partly the result of ignorance. The American left sees Europe as an El Dorado of free healthcare, free education and workers’ rights. The American right sees it as a socialistic nightmare with no growth and no innovation. They’re both wrong, and the result is misguided policies and time wasted tilting at windmills.

Source:Monopolies cost Americans $300 a month. We’re no longer the land of free markets, Thomas Philippon, The Guardian

The entire article is worth a read.

 

 

Homicide Rates in Europe by Country: Infographic

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Russia has the highest murder rate in Europe. The rate is higher than Afghanistan and the US. Though it has deceased by 68% since 2000 Russia still tops the rank.

All the developed European countries have a lower homicide rate than the US. Other than Russia, the only countries with a higher murder rate than the US are Afghanistan and the former Soviet republics of Ukraine, Moldova and Turkmenistan.

The following chart shows the homicide rates in European and a select few countries:

Click to enlarge

Source: RFE/RL

Should You Buy Defense Stocks Now?

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The defense sector has been one of the stable and strongest growing sectors since the 9/11 attacks. Firms in this sector were the biggest beneficiaries of rising defense budgets especially in the US. For example, Lockheed Martin (LMT) is up about 46% year-to-date. Despite excellent performance in the past, a recent journal article cautions investors on this industry. From the WSJ article:

Investors in defense companies have spent years uncorking Champagne bottles because the world couldn’t be going any better for them. But that may be their biggest problem as well.

Defense shares have returned 130% since 2014—based on a constructed index of 25 firms—compared with 89% for the S&P 500. This year has been particularly buoyant because investors were eager to buy stocks but also hedge against a slowing economy, so they piled into “safe” income-paying assets.

Military contractors have also ridden the coattails of unprecedented Congressional defense spending, which has pushed net-profit margins to records. This is part of a broad effort to retire the last Cold War defense technology in favor of a new generation of weapons such as hypersonics—an area where China and Russia are racing ahead.

The deck appears stacked in their favor: U.S. military spending is set to rise for a fifth consecutive year to a near-record $738 billion, the number of bidders for government contracts keeps shrinking, and geopolitical tensions are mounting—including escalating tension with North Korea over the country’s nuclear program and with Iran over alleged attacks on oil tankers.

Under the surface of all these astronomical numbers, however, there may be too many assumptions baked in by investors.

Political spats involving defense are escalating ahead of next year’s presidential election. Some voices within the Democratic Party argue for military spending to be slashed, including presidential candidate Sen. Elizabeth Warren. While most Democratic lawmakers don’t plan to follow, it is now likely that Congress won’t agree on a full defense bill before year-end for the first time in 58 years amid controversy over such projects as Mr. Trump’s border wall and new nuclear weapons.

Source: How Long Can the Defense Party Last?, WSJ, Nov 9-10, 2019

The Top 10 Defense Companies in the world for 2019 are shown in the graphic below:

Click to enlarge

Source: Defense News

Some of the major US-based defense firms are:

  • Lockheed Martin (LMT)
  • General Dynamics (GD)
  • Boeing (BA)
  • Northrop Grumman (NOC)
  • Raytheon (RTN)

The SPDR S&P Aerospace & Defense ETF (XAR) has soared 39% compared to S&P 500’s return of 23% year-to-date:

Source: Yahoo Finance

Takeaway:

Investors looking to add defense stocks may want to wait for pullbacks. Even if you have to deploy some cash soon it is wise to add in a phased manner.

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Disclosure: No Positions