Author: ciaran carolan

If you are thinking about Investments Ireland 2021, you may be wondering how suitable bonds are as an asset class right now. Here’s the rundown on the latest trends in the bond market.

Traditionally, bonds have always accounted for a significant portion of a well-constructed investment portfolio. This fixed-income asset class provides additional diversification for the more turbulent market conditions when stocks falter.

Although bonds still warrant a place in a well balanced portfolio, ultra-low interest rates and general investment market conditions require investors to review their bond allocations, and assess whether they should be reduced.

Read on to find out why.

Latest bond trends – Investments Ireland 2021

Inflation and the Yield curve – Investments Ireland 2021

Effect of bond yields on stock markets – Investments Ireland 2021

Jackson Hole – Late August FED Meeting – Investments Ireland 2021

Where to invest right now? – Investments Ireland 2021

Investment Outlook for bonds? – Investments Ireland 2021

Latest bond trends – Investments Ireland 2021

German 10-year government bonds are currently yielding -0.49%, which means they will lose 4.9% of their value in a 10-year time period, and that is before any inflation considerations. The current ultra-low interest rate environment creates a challenging dynamic for bond investors. 

Typically, bonds weaken in response to higher inflation, as inflation eats into the value of the regular fixed interest payments associated with bonds. 

On the other side of the Atlantic, 10yr US Treasury notes have rallied since the beginning of April and this has been the source of much confusion for investors, as the pace of US inflation (CPI) continues to worry. These elevated inflation levels have challenged the FED’s view that high inflation during the US recovery will be temporary. 

The consumer price index increased 0.5% in July, after climbing 0.9% in June. In the 12 months through July, the CPI advanced 5.4%, the fastest pace since August 2008. Although the CPI data for July decelerated, inflation still remains at significantly elevated levels.

US 10yr Treasury yields have continued to fall during this period, closing out July at 1.22%. Yields move inversely to the price of bonds.

Inflation and the Yield curve – Investments Ireland 2021

The June CPI inflation data initiated a counterintuitive trend within the US government bond market.

The rise of the COVID-19 delta variant and a surprise hawkish tilt from the FED in response to the inflation readings (prospect of “tapering”/reducing the bond buying program), surprisingly led to an increased demand for 10-year Treasury notes, even as the inflation readings were at levels last seen over a decade ago.

The surprise hawkish FED tilt also resulted in a spike in short-dated Treasury yields, resulting in a flatter US Treasury yield curve.

The shape of the yield curve portrays the state of the overall economy. A normal upward sloping yield curve implies stable economic conditions, as yields increase for bonds with higher maturity.

Investors want to get compensated for holding bonds with a longer duration in a normal economic landscape. The recent flattening of a yield curve suggests a more uncertain economic environment and easing inflation concerns, in the anticipation of tighter monetary policy. 

Investors have been betting that an adjustment to short-term rates will have the ability to quash inflation concerns in the longer term, leading to the variation in movement between the front and back end of the curve.

Reduced summer trading volume coupled with weaker supply in recent Treasury auctions have also supported the downward trend of 10yr US Treasury yields.

Effect of bond yields on stock markets – Investments Ireland 2021

The negative relationship between US 10yr yields and the Nasdaq 100 (Tech) is evident in the chart below [1]:

The recent advance in tech stocks (defensive COVID strategy) came at a time when the price of Treasury bills has risen. The yield on the 10-year Treasury has since fallen nearly a half a percent since the end of March, while the Nasdaq 100 has gained 17% over that period, outperforming the S&P 500 Index by more than 4%.

Jackson Hole – Late August FED Meeting – Investments Ireland 2021

As FED policy makers prepare for another virtual Jackson Hole conference at the end of August, the meeting seems to hold more significance for the global investor community than usual. Any indication that the FED is going to taper the bond buying program is likely to steepen government bond curves, as longer maturity bonds are likely to sell off. 

Longer-term interest rates have dominated equity markets over the past year. Investors that expect the 10-year yield to climb in in the latter part of 2021 and into 2022, should be reducing exposure to tech stocks – due to the risk of higher interest rates.

When the 10-year Treasury yield rose to 1.74% during the first quarter of 2021 (rise of 80 basis points), that period also coincided with a significant Growth to Value style rotation within equity markets. The MSCI World Value index rose by nearly 9% during that period, while the MSCI World Growth index barely moved.

This resulted in cheaper (undervalued) equity markets, such as Europe and the UK, outperforming the US. This trend has reversed over the past few months, as the 10-year US Treasury yield plunged to 1.17% by early August, as the fear over the Delta variant gripped global investment markets.

Delta concerns have supported renewed investment in the “stay at home” growth stocks, as they started to outperform again.

Where to invest right now? – Investments Ireland 2021

Investors should be focussing on sectors that are positioned to do well in an increasing yield curve environment, which is one that depicts economic reopening and recovery. The latest viral challenge should be viewed as yet another hurdle along the road to economic recovery, as opposed to a barrier, although the variant may cause a more uneven globally recovery.

Investment Outlook for bonds? – Investments Ireland 2021

According to a recent regulatory filing, Michael Burry, played by Chirstian Bale in the Big Short, has a large short position on long-term (20+ years) US Treasury bills. The options contracts will make money if the value of long-term Treasury bonds depreciate (yields go up). Burry, who was made famous by his very profitable bet against the US housing market, shares the same bearish outlook as many of Wall Street’s elite.

With the Federal Reserve inching ever closer to a “tapering” of its QE bond purchase program, all eyes are once again on the bond market.

Next steps

You can read our more investing in Ireland analysis here.

You can check out our other guides on Investing in Ireland here.

You can find out where to get individual investing in Ireland and financial advice in your area here.

In our ultimate guide to how to buy shares in Ireland and what shares to buy, we will take you through the basics of what a share is, how to choose which shares are good value and how to buy them. Buying shares in Ireland is almost certainly easier than you think, you can use an Irish financial advisor/broker or through an international online broker.

A share is simply a slice of ownership in a company. Read on to see what this means for share prices.

The right shares to buy are obviously those that will grow in value. Based on fundamentals these should be shares that are cheaper than they should be right now when you forecast out their future profits.

In my view investors should always try to focus on company fundamentals when looking to invest in shares. Ignoring a company’s fundamentals is taking a shot in the dark and leaving everything up to chance, not an advisable strategy for your money.

Read on to see how you work out which shares to buy in Ireland right now.

What is a share anyway? How to buy shares in Ireland

How do I choose which shares to invest in? How to buy shares in Ireland

Which is based Fundamental or Momentum based investing? How to buy shares in Ireland

In a nutshell. How to buy shares in Ireland

Next steps. How to buy shares in Ireland

What is a share anyway? How to buy shares in Ireland

The ownership of a publicly traded company is thinly sliced into equal shares on the stock exchange to make them easier for investors to buy and sell, hence the name for this split in ownership – shares.

Traditionally, companies are priced by each individual share, which leads to the question of what the price of a single share tells investors about the value of a company? Absolutely nothing…

A single share does not tell you anything about the value of a company. Instead, it is the number of shares in the company multiplied by the price per share that gives you the total market value of the company, or the market capitalisation.

A company can be thinly or thickly sliced, but investors should only be concerned by the overall value of a company.

A rookie mistake is to compare one company share price to another, as both companies are likely to each have a different number of shares outstanding. Looking for cheap stocks is similar to comparing the size of two loafs of bread, simply by comparing a slice from each loaf, which would be a strange method for picking out which loaf or indeed company that you would like to own a “share” of.

So if you can’t use the price of a share alone to work out if it is good value what can you use?

Read on to find the key tactics that investors use, to zero in on shares that offer the highest potential for returns.

How do I choose which shares to invest in? How to buy shares in Ireland

There are two text book tactics that investors use to determine the underlying value of a share, Relative Valuation and Discounted Cash Flow. Here’s how they work and the pro’s and pitfalls of each.

Relative Valuation

Relative Valuation methods are quick and easy. They represent a straight forward way to compare a stock to its own historical price, other companies or to the price of the overall market.

Relative valuations indicate whether a company is over or undervalued, but they do not give a fair market value for the stock. There are two ways to do this relative comparison, Dividend Yield and the Price-to-Earnings Ratios.

Dividend Yield is the amount of money a company pays shareholders as a dividend, as a percentage of its current stock price. The lower the dividend yield, the more expensive the stock.

Yields also depend on the industry the firms in or how mature the company is. Growth companies often decide not to pay any dividends, as the money is instead reinvested into the company to fuel growth. Indeed five of the seven largest S&P 500 members currently do not pay any dividends at all.

Price-to-Earnings (P/E) ratio is the other main relative valuation metric, which depicts a company’s value in terms of its earnings, allowing investors to compare companies of all different types and sizes. Simply put, the higher the P/E ratio, the more expensive the stock.

Determining a fair P/E ratio hinges on how fast you think a company’s earnings will grow. A fast-growing company will warrant a higher P/E ratio, as opposed to a company in decline.

An extreme recent example would be the high premium that investors are currently willing to pay for Tesla, which currently has with a P/E ratio of 998, compared to General Motors modest P/E ratio of 13.

Although you may hear Dividend Yield and P/E ratio bandied about by some on the internet and in social media. These relative valuation tactics are very blunt instruments.

Those looking for something more tethered to the underlying value of the shares often reach for some something known as the discounted cash flow model.

Discounted Cash Flow

The discounted cash flow model involves estimating the future earnings of the firm and then calculating how much the future earnings are worth today. The estimates of the company’s future earnings are discounted because of the uncertainty of the future.

Simply put, investors are willing to trade the promise of a larger sum tomorrow, for the certainty of a smaller sum today. The total value of the firm is equal to the discounted value of the company’s future earnings under this model.

The amount you discount the earnings is the combination of what an investor would be guaranteed by putting their money in a risk free investment (usually the current yield on a US 10-year government bond) plus a risk premium that is based on how probable the future returns are.

The future earnings plus the discount equals the total value of the firm (enterprise value). You then take away the balance if what the company owes in it’s accounts to get the company’s total value.

(Value = Enterprise value – Debt + Cash)

Dividing the total value of the company by the number of shares produces a value for one share. Using this logic, if you can buy the share cheaper than the calculated value it’s a good investment.

This approach provides a direct relationship between the value of a company’s share and its fundamental measure of success, its future earnings.

Momentum plays Fundamentals. How to buy shares in Ireland

Both absolute and relative valuation models rely heavily on the company’s earnings. Indeed how much should a company be worth if it does not have solid earnings? This approach is often called value or fundamental based investing, most famously used by Warren Buffet, the billionaire ‘sage of Omaha’.

In my view investors should always try to focus on company fundamentals when looking to invest in shares. Ignoring a company’s fundamentals is comparable to taking a shot in the dark that leaves everything up to chance, which is clearly not an advisable strategy when looking to invest.

In a nutshell. How to buy shares in Ireland

There are many ways for investors to buy shares in Ireland. It is possible to buy shares directly through one of the online brokerages operating in Ireland, such as DEGIRO or eToro. “Robo advisors” have also increased in popularity, as the digital advice provided requires with little human input.

Speaking to a dependable financial advisor still remains the most advisable approach to investing in stocks. Reviewing your finances with a financial advisor will allow you to see how investing in stocks can help you to achieve your financial goals.

Next steps

You can read our more investing in Ireland analysis here.

You can check out our other guides on Investing in Ireland here.

You can find out where to get individual investing in Ireland and financial advice in your area here.

I offer investment advice to Irish financial advisors, and my role is to help my clients make the right choices, at the right time, when looking to invest in Ireland. This article cuts through all the noise to give you the information you need to make better investment choices. If you’re Investing in Ireland here’s what you need to know in 2021.

Share valuations are at record highs versus company earnings and markets are jumpy with COVID-19 still at large. Yet given the potential risks, equity stocks must still be viewed as a sound investment in the current climate, as we look forward to multiple vaccine roll-outs, upgraded growth forecasts and continued central bank and government support.

A recent investor survey highlights a shift in investor sentiment, as investors look to move away from over owned US markets, driving an increased capital flow to value opportunities across Europe and other regional markets

In particular, UK stocks may offer the best value opportunity of all, as the market with a notable lack of technology stocks starts to play out a post-Brexit catch-up. Although the Brexit drama has resulted in a notable “skinny trade deal”, UK equities have a lot of ground to make up on Global markets performance since the referendum in mid-2016.

After a bit of a battering in recent months, gold has bounced back and is a good way to balance out your investment in shares. The need for diversification will drive continued demand for gold, amongst the unprecedented money printing by central banks at present.

Read on to get more Investing in Ireland insights including

Party like it’s 1921  – vaccine a shot in the arm for shares in 2021

Don’t fight the fed – why government policy will continue to prop up long term share valuations

Sanity Clause – Brexit done, British shares to bounce back in 2021?

In a nutshell – the vaccine, stimulus & brexit triple booster

What next? – Further investing in Ireland insights

Party like it’s 1921  – vaccine a shot in the arm for shares in 2021

The western world faces into the new year armed with 3 effective vaccines to control the COVID-19 pandemic.

Inoculation programmes cannot come at a moment too soon. COVID-19 is currently surfing its third major wave since the pandemic erupted. In Ireland, caseloads have exploded, with the fastest-growing infection rate across the EU. Straining the capacity of the healthcare system and prompting severe lockdown restrictions.

Ireland’s pattern of renewed societal restrictions is a broadening theme across the global economy. Lending even sharper focus to rapid vaccine deployment.

So far, 13m doses have been administered in 33 countries worldwide, of which 4.7m have occurred in the United States, 1.4% of the population. Remarkably, the Israeli government has already managed to administer double-doses to 14% of its people. China is also broadening distribution of it’s vaccine, with 4.5m doses already administered, 3m of which in the past 3 weeks alone.

Elsewhere, vaccine programmes will ramp-up over the next few months. All of the major economic blocs have pre-ordered sufficient doses to put herd immunity within reach by late-Summer, if not sooner, with all things going to plan.

This represents a massive shot in the arm for the global economy, whose historic 4.4% contraction in 2020 may now see a 6%+ springback. Demand for economic goods and services did not die last year, rather it was suspended. It is pent-up demand that informs more bullish outlook for the global economy in 2021/22.

Some more excitable commentary heralds the dawning of this century’s Roaring Twenties which followed WW1 and the Spanish Flu. Whilst this is simplistic, Irish investors could see roaring returns from the right investment selections.

Don’t fight the fed – why central bank policy will continue to prop up long term share valuations

Traditionally, working out whether a company’s shares were a good investment focussed heavily on dividing a company’s share price by the associated earnings of the firm. The higher this ratio, the less of a bargain you are getting, all else being equal. This guideline ratio is at a documented all-time high in the S&P500 (a composite index of the top 500 companies in the US), and this has been a source of caution for investors right now, and understandably so.

Yet, the current central bank policies that are stimulating the economy have altered this equation. The size of the stimulus is difficult to grasp, COVID-19 and its associated lockdowns triggered a vast $13trn fiscal stabilisation effort last year. Roughly 15% of global GDP.

The lack of other viable investment options will continue to drive more investors into buying shares, driving up values above ratios that would have been considered as historically high. The reduction to US yields has however rendered any historical comparison to the time proven P/E ratio as obsolete. More specifically, the standard equity risk premium against current US Treasury yields allows for a higher P/E ratio.

Significantly, US Federal bank chair Jerome Powell saw fit to comment on this last month. “if you look at P/Es (price to earning ratio’s), they’re historically high, but in a world where the risk-free rate is going to be low for a sustained period, the equity premium, which is really the reward for taking equity risk, is what you’d look at”. 

These conditions and the resulting premium is set to continue with Powell pledging that “we’re going to keep policy highly accommodative until the expansion is well down the tracks”.

Market commentators now appear to be singing off the same hymn sheet. Expecting stronger equity and commodity markets, flatlining bond yields and a weaker US dollar. This all points to share valuations holding up well compared to the assets that are traditionally perceived as lower risk such as bonds.

Sanity Clause – Brexit done, British shares to bounce back?

The sealing of a 1246-page free trade agreement (FTA) between UK and EU negotiators at 14.44 CET on Christmas Eve, brought to an end 9 months of fractious and repetitive talks.

For all the obvious shortcomings of the deal, improvements across UK financial assets brought a difficult 2020 to a more optimistic close.

Sterling ended the year at its highest level versus the weakening USD since April, 2018.  The FTSE100 outperformed its major stock market peers for the second consecutive month.

Brexit uncertainties have weighed heavily on the UK economy since mid-2016. Investors, both domestic and overseas, have abandoned UK stocks in the pursuit of richer pickings elsewhere. This condemned the UK market to wallow at record low valuations relative to US and global peers.

The FTSE100 has barely risen in the post Brexit referendum period. For those investing in Ireland and trading in Euro’s it has actually returned a cumulative 5.5% loss. This compares to a 67.5% gains for the US market S&P 500 and 51.2% for World market MSCI World.

Now, with the weight of Brexit uncertainty lifted, investors are likely to seek value in the UK stock market driving gains. Respondents to December’s BAML Global Fund Manager Survey were already turning less bearish (less downbeat) towards UK equities.

In a world where shares are still the value play, UK shares look like the best value of all.

In a nutshell – the vaccine, stimulus & Brexit triple booster

The year ended in festive financial mood.

Thanks to the initial vaccination roll-out for COVID-19 and a further $900bn stimulus deal on Capitol Hill. The MSCI World led a host of major equity indices to fresh record peaks by year-end. Up 14.3% across the full-year, with a 68.3% rebound from late-March lows. The S&P500 saw a 16.3% rise compared with average 11.8% gains over the previous ten years.

Other assets performed poorly. Bond markets remained close to historic lows. The Dollar remained weak closing at the lowest levels since April 2018. As a result, Gold rebounded to complete its biggest annual advance since 2010.

This points to shares in general still being a sound investment in 2021, whilst gold continues to provide a source of diversification amidst the unprecedented money printing by central banks at present. The commodity is a good way to provide balance to an increased equity exposure across a portfolio, particularly at time in which bonds yields are returning next to nothing.

UK stocks may indeed represent the best equity value opportunity at the moment, as they are playing catch-up with the other markets post-Brexit.

What next? – Further investing in Ireland insights

You can read our more investing in Ireland analysis here.

You can check out our other guides on Investing in Ireland here.

You can find out where to get individual investing in Ireland and financial advice in your area here.