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).
- 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.
Disclosure & Disclaimer
This Research report, accurately expresses the personal view of the Author.
DJ Carmichael Pty Limited, members of the Research Team; including authors of this report, its directors and employees advise that they may hold securities, may have an interest in and/or earn brokerage and other benefits or advantages, either directly or indirectly from client transactions in stocks mentioned in this report.
DJ Carmichael Pty Limited is a wholly owned subsidiary of DJ Carmichael Group Pty Limited ACN 114 921 247.
In accordance with Section 949A of the Corporations Act 2001 DJ Carmichael Pty Limited advises this document contains general financial advice only. In preparing this document DJ Carmichael Pty Limited did not take into account the investment objectives, financial situation and particular needs (‘financial circumstances’) of any particular person. Accordingly, before acting on any advice contained in this document, you should assess whether the advice is appropriate in light of your own financial circumstances or contact your DJ Carmichael Pty Limited adviser. DJ Carmichael Pty Limited, its Directors employees and advisers may earn brokerage or commission from any transactions undertaken on your behalf as a result of acting upon this information. DJ Carmichael Pty Limited, its directors and employees advise that they may hold securities, may have an interest in and/or earn brokerage and other benefits or advantages, either directly or indirectly, from client transactions. DJ Carmichael Pty Limited believe that the advice herein is accurate however no warranty of accuracy or reliability is given in relation to any advice or information contained in this publication and no responsibility for any loss or damage whatsoever arising in any way for any representation, act or omission, whether express or implied (including responsibility to any persons by reason of negligence), is accepted by DJ Carmichael Pty Limited or any officer, agent or employee of DJ Carmichael Pty Limited. This message is intended only for the use of the individual or entity to which it is addressed and may contain information that is privileged, confidential and exempt from disclosure under applicable law. If you are not the intended recipient or employee or agent responsible for delivering the message to the intended recipient, you are hereby notified that any dissemination, distribution or copying of this communication and its attachments is strictly prohibited.
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.
To elect not to receive any further direct marketing communications from us, please reply to this email and type 'opt out ' in the subject line. Please allow two weeks for request to be processed.
© 2017 No part of this report may be reproduced or distributed in any manner without permission of DJ Carmichael Pty Limited.