Australia's Best Growth Asset Has Been Bonds, Not Stocks

  • Bonds returned 81% over 10 years versus 68% for equities
  • `It's the end' of the trend, Nikko's Roger Bridges says

Australian bonds have been beating up on stocks for the past decade. The debt market’s reign is now being threatened as the central bank reports an improvement in the economy that may allow it to refrain from further interest-rate cuts.

Government securities returned 81 percent in the 10 years through Sept. 30, versus 68 percent for equities, data compiled by Bloomberg show. While bonds haven’t beaten stocks every single year, they came out on top in 2014 and are set to do so again in 2015 thanks to waning Chinese demand for commodities.

Australia is an exception because stocks have been the winners elsewhere. An index of shares globally has returned 67 percent over 10 years, versus 47 percent for bonds. The local debt market is losing support with Reserve Bank Governor Glenn Stevens signaling that he’s content to hold interest rates after cutting earlier this year. He reiterated this month that the economy is in a “moderate expansion,” underlining the prospects that bonds’ winning run over stocks is drawing nearer to a close.

“As the economy rebalances, that should dissipate,” Roger Bridges, the chief global strategist for interest rates and currencies at Nikko Asset Management Australia in Sydney, said regarding the trend. The company has $16.9 billion under management. “I would say it’s the end.”

Bridges, who has almost 30 years of experience in fixed-income markets, said in July that 10-year notes yielding 1 percentage more than the central bank’s benchmark were attractive. The spread has since narrowed to about 68 basis points.

The following three charts show how bonds and stocks are neck and neck, the RBA’s response to weakening demand for key export iron ore, and the decline in mining investment being offset by growth in other parts of the economy.

Chart 1: The Bloomberg AusBond Treasury 0+ Yr Index is beating the S&P/ASX Accumulation 200 Index over the past decade.

Chart 2: As iron ore shipments to China fell, Stevens and his board cut the benchmark rate to an unprecedented 2 percent, aiming to ease Australia’s transition amid the collapse of a once in a century raw materials boom.

Chart 3: As investment in mining wanes, expenditure is increasing in other parts of the economy such as utilities, construction, trade, retail, information technology and real estate services.

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