Direct Share Income Portfolios

30 September 2011

  eQR Direct Share Portfolio’s have been ahead of the ASX by between 2% and 5% since inception. The Income Model is earning 7.15% per year plus Franking Credits, grossed up yield of nearly 10% income per year. Not to be sneezed at.

The price of those shares though have had a wild ride. The mess of the world economy is complex and there are many and varied opinions on why and how and what next.

I have put together some data which I hope will put a little logic behind our investment view which is summarised below.

Did You Know?

Fact 1 – Income from a few Australian shares as at 20 August 2011 share price. (the following is general data and not a recommendation).

 

 

 

 

 

 

 

 

 

 

Fact 2 – Chart Showing historical stock market recovery times after large falls.

See chart below and follow the blue line.

Let’s say its takes  8 years for the ASX to get back to its last high price in 2007 of 6800. This means the ASX would need to rally by 17%-20% pa for next 4 years to get back to 6800 in 2015.

What if it took 10 years…that’s still 11% per year for the next 6 years to reach 6800 in 2017.

A recovery period will begin at some point, may not be in the next 3-6-12 months but will begin. If you refer to the first chart and your enjoying income of 7%-9% per year waiting for the recovery you should be pretty comfortable.

 

Current problems driving fear:

Most of the world has already decided that Greece will default in part or in full over time. We are now at the point where it will become official or it will be saved…again. I am uncertain as to how this becomes official. In fact, to me they have already defaulted. To explain this, the markets have already declared Greece in de facto default with bond yields soaring to extraordinary levels. Two year Greek government bond yields rose to 84.52% last Wednesday and one year Treasury bills soared to a stunning 148.89%. The capital markets have voted with their wallets and do not wish to be on board as the nation sinks. This on its own is not catastrophic on world scale. However the complexity occurs as its part of EU- they are unfortunatly linked. The theory that is driving the fear is this, if Greece left EU it will have to change currency back to Drakmar, with threat of huge devaluation in its currency and so individual net cash wealth devaluation with a potential run on banks then Greece banking collapse. Then this same fear happening in Italy, Spain etc etc etc it becomes contagious.

Many believe the EU has only one choice, to keep the EU together and issue EU bonds. Politically this will probably occur. The German populous will be unhappy that they are helping Greece meet all its commitments. Some of these commitments are funding the retired Greek population pension. A pension that is 60,000 Euro per year available from age 55…not too bad. So one can understand the German’s resentment of the bailouts.

The current sell off in European equity markets has that 2008 feel about it and yet the S&P 500 is down only 4.26%, year to date. Europe, of course, is at the epicenter of the submerging world’s sovereign debt crisis, whereas the 2008 crash was very much born in the USA. It is hard to imagine that America can continue to be largely immune to the worsening crisis in Europe. They too face a mountain of debt and the spectre of policy paralysis. The talk from Capitol Hill in the US is starting to get it right. Long term policy to reduce the monolithic Government Debt but gradually increasing taxes over the next 10 years. (Keep in mind the US corporate tax rate is 15%, Australian is 30%). This combined with the jobs creation package spend. These are very reasonable actions that need to be implemented and executed well. As of this week the economic news from US is showing some signs of improvement.

Looking ahead, investors will increasingly view Asia and Pacific as the ultimate safe haven.

We Recommend These 5 Step’s to Stress Free Investment or Superannuation

  1. Focus on quality assets producing strong income.
  2. Get your timeframe and risk tolerance rechecked.
  3. Keep things simple and above all, liquid!
  4. Volatility and uncertainty will be there.

(Right now it will be with us for the near future: 3 months, 6 months, 12 months? However the medium to long term we expect some sort of recovery and normality to economy and markets).

        5.      Take action: If you’re unsure call me to arrange a review today.

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