Investors seek yield to fund their funds

From the beginning of 2015, as key data from around the world came in on the downside (barring the US), it was clear that return of capital for the risk of investment would be key to investment return.

Source: Bloomberg

In this low inflation, low growth and low interest rate environment the world now finds itself in; every investor from the institution to the retail investor wants yield for the risk of investing.

This isn’t a new phenomenon, however the GFC has certainly created mass conservativeness when it comes to risk, and that is still continuing despite the fact markets in the US and Europe are at record highs, Japan is at 15-year highs and the ASX at seven-year highs.

The return of capital theory was laid bare overnight with a report clearly showing US banks are part of the yield drive having amassed over US$2 trillion in US treasuries and other ultra-safe bonds. The bond market has been telling me for months that the market sees the low rate environment is here to stay. This means inflation is still a concern and perhaps the strength of the US economy is not as solid as the data suggests, considering borrowers remain on the sidelines and banks are sitting on cash rather than lending it out.

All of this just continues to justify my current strategic position – that is from a macro down perspective funding of investment capital remains the most positively bid to be leveraged to in the interim.

The return of capital even in this market remains king and with rates in Australia, Canada and possibly New Zealand all expected to be lowed over the coming six months. Europe and Japan are expected to leave rates at record lows and the US may delay its expected rate rises.

You only need to look at the recovery in Commonwealth Bank of Australia since going ex-dividend. CSL having reported softer than expected results dropped 7%, but the very strong revenue streams coupled with an ever consistent and growing dividend has seen the initial overreaction evaporating and CSL recovering.

The argument is that yield is not total return. There is a risk of just piling into yield at the expense of total returns. There is no doubt the risk in yield is building – now a highly crowded trade - and the bond market is a prime example. What happens when this unwinds and the yield of the instrument (bond, stock) doesn’t cover the capital depreciation? Bond markets will clearly show this happening before the equity markets and when it does it will be very strong due to the size of capital in these instruments.

However, getting back to my base strategy – return of capital is king and funding of your funds is here to stay as unconventional monetary policy is not shifting in the next six months. It’s why the banks, healthcare, telecommunication and diversified financials will continue to outperform.

The Australian Open

China is still closed for Chinese New Year so the indifferent trading environment will remain until Wednesday. Iron ore markets reopened with Singapore back online however it is unchanged from where it closed last week and will not provide further assistance.

Some big names report today, none more so than BHP Billiton; it will be about debt, capex and the spin out of South32 as the headline figures will be awful as the commodity slow down hits net profit. QBE is the other to watch for as margin in general and life insurance continue to be squeezed.

Ahead of the open we are calling the ASX flat down a handful of points to 5903.

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