Increasing Focus on Global Bond Yields

Volatility expected to continue to be seen in bond proxy stocks

We’ve reviewed stocks in the ASX 100 which pay dividends/distributions, have high levels of debt compared to their earnings and have high, consensus 1-year forward price to earnings ratios. We see these stocks as the most at risk when bond yields increase. We recommend that investors should consider reducing exposure to these stocks, particularly if we see some near-term share price appreciation if bond yields do pullback. Stocks included in the list are Transurban Group (TCL), Sydney Airport (SYD), APA Group (APA), Spark Infrastructure (SKI), AusNet Services (AST) and Tabcorp Holdings (TAH).

Key Points

  • Volatility in bond markets: Over the past year, we’ve seen increasing volatility in global bond markets as world Central Bankers look to move away from the easy monetary policy stances that have been in place over the past decade as signs of global economic improvement continues to be seen.
  • US bond market: The US bond market is ultimately the standard reference point for most major bond markets around the world as we’ve seen with the Australian 10-year bond yield generally correlated to day to day movements to US bond yields.
  • Utilities considered as bond proxies: During times of low interest rates some investors buy defensive stocks which have similar characterises to bonds which provide relatively stable income streams over and above the rate of inflation. Since the start of 2011 the ASX 200 utilities index (XUJ), primarily made up of stocks which distribute gas and electricity, is up 89%, falling from 108% at the recent peaks seen in May. Stocks outside of the utilities sector with similar characteristics include operators of toll roads, ports and rail facilities.
  • A-REITS: Australian real estate investments trusts are also considered bond proxies with their relatively stable income streams which can provide better returns than leaving cash in the bank. Since 2011 the ASX 200 A-REIT’s index (XPJ) is up around 56% and was up as much as 87% in August last year.
  • A pullback in bond yields would provide an opportunity to reduce some exposure: In the near term, we expect bond yields are likely to pull back after the lower than expected inflation reading in the US which raises questions over the timing of future interest rate increases. This is likely to be supportive for utilities, infrastructure and A-REIT sectors in the short term. However, we expect that the central theme of increased volatility in global bond markets, as world central banks look to taper their QE programs and move to increase interest rates, will continue to play out.

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Recommendation Definitions

SPECULATIVE BUY – Potential 10% or more outperformance, high risk
BUY – Potential 10% or more outperformance
HOLD – Potential 10% underperformance to 10% over performance
SELL – Potential 10% or more underperformance
Period: During the forthcoming 12 months, at any time during that period and not necessarily just at the end of those 12 months.

Stocks included in this report have their expected performance measured relative to the ASX All Ordinaries index. DJ Carmichael Pty Limited’s recommendation is made on the basis of absolute performance. Recommendations are adjusted accordingly as and when the index changes.

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Michael Ron

Research Analyst

Michael has been trading equities since 2003 and since joining DJ Carmichael in 2004 has worked in numerous roles in operations, trading, compliance and research. Michael’s expertise is in trading and equity strategy using a combination of both technical and fundamental analysis.

Michael holds a Graduate Diploma in Applied Finance, Diploma of Financial Markets, Diploma of Financial Planning, Advanced Diploma of Business Administration and is currently studying towards a Master of Applied Finance.