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The draw of yield

Bond markets continue to tell me one thing – central banks’ bets remain firmly to the downside. You can look at almost all the G10 currency countries and draw this conclusion.

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Source: Bloomberg

The ECB is now only 36 hours way from pulling the QE trigger and the European bond markets firmly believe to be a fact. You only need to look at how much German bunds are being bid up, seeing yields sliding to 44 basis points on the ten-year.

The negative deposit rates from the ECB will also continue to force funds out of its coffers and into the equity markets. We are bullish on European equities for these reasons, particularly European banks. Most of these funds will likely flow into quasi-bond trades. The current monetary policy setting from the ECB basically backstops bank earnings.

Japanese Government Bonds (JGBs) illustrate a similar situation (although there are domestic factors that force JGBs to be so low) as the Bank of Japan (BoJ) continues to pump ¥60 to ¥70 trillion into the economy and interest rates remain at or near 0%. The Nikkei will continue to be the wealth creator for Japan on their monetary policy setting, although it has fallen of late.   

Although we are not expecting anything to out of the ordinary from the BoJ today, it will be interesting to see if energy prices are raining on their inflation goals, along with the consumption tax introduced in April last year. Further downside in the inflation rate will force the BoJ to rethink its position once again.

It’s the Australian bond market that is really interesting from an equity strategy point of view. The Australian ten-year is currently at 2.66%. However, in the past week it has touched 2.49%, which puts it under the cash rate of 2.50%. It has fallen 27 basis points in the past month and there are growing expectations there will be further rate cuts in 2015.

This is playing havoc with the yield curve of Australian bonds; based on inverse-yield curves, some are speculating that a recession is approaching. History shows this theory does not hold true in Australia as the long end of the curve is heavily influenced by USD. Therefore, inverse-bond yields are not a reliable predictor of recession in Australia. However, from an equity strategy prospective, the slide in bond yields are something to take note of.

Yield differentials between bonds and equites in Australia are growing once again, with the ten-year at 2.66%. Compare that to the forecasted net yields for Australian banks in FY15: NAB at 6.2%, ANZ 6.04%, WBC 5.8% and CBA at 5.1%. Grossed up (including franking), all but CBA are over 8%.

Banks will remain a quasi-bond trade, and the more evidence the market sees of a possible rate cut from the RBA, the more this trade will benefit. Lower-for-longer is a key part of my strategy for the first half of 2015.

Telstra has a forecasted net yield of 4.91% and 7.5% grossed up. The advantage of TLS is that it is clear of exposure to the cyclical mining and energy spaces. It doesn’t have exposure to lending requirements and has a stable revenue stream, as demand for telecommunications is relatively constant. Even a forward P/E ratio of 18.1 times will not deter yield investment.

Yes, I know the banks, high-yielding industrials and Telstras of this world are boring investment vehicles. However, the macro world is forcing my hand in this direction as they are likely to outperform and demand a premium once more in 2015.

ASX is pointing higher on the open, we are calling the market up 17 points to 5324 as most commodities bounced in overnight trade. BHP’s ADR is pointing 1.7% higher and Brent bounced once more, which is likely to see energy players bouncing back as well.

Denne informasjonen er utarbeidet av IG, forretningsnavnet til IG Markets Limited. I tillegg til disclaimeren nedenfor, inneholder ikke denne siden oversikt over kurser, eller tilbud om, eller oppfordring til, en transaksjon i noe finansielt instrument. IG påtar seg intet ansvar for handlinger basert på disse kommentarene og for eventuelle konsekvenser som et resultat av dette. Ingen garanti gis for nøyaktigheten eller fullstendigheten av denne informasjonen. Personer som handler ut i fra denne informasjonen gjør det på egen risiko. Forskning gitt her tar ikke hensyn til spesifikke investeringsmål, finansiell situasjon og behov som angår den enkelte person som mottar dette. Denne informasjonen er ikke utarbeidet i samsvar med regelverket for investeringsanalyser, så derfor er denne informasjonen ansett å være markedsføringsmateriale. Selv om vi ikke er hindret i å handle i forkant av våre anbefalinger, ønsker vi ikke å dra nytte av dem før de blir levert til våre kunder. Se fullstendig disclaimer og kvartalsvis oppsummering.

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Denne informasjonen er utarbeidet av IG, forretningsnavnet til IG Markets Limited. I tillegg til disclaimeren nedenfor, inneholder ikke denne siden oversikt over kurser, eller tilbud om, eller oppfordring til, en transaksjon i noe finansielt instrument. IG påtar seg intet ansvar for handlinger basert på disse kommentarene og for eventuelle konsekvenser som et resultat av dette. Ingen garanti gis for nøyaktigheten eller fullstendigheten av denne informasjonen. Personer som handler ut i fra denne informasjonen gjør det på egen risiko. Forskning gitt her tar ikke hensyn til spesifikke investeringsmål, finansiell situasjon og behov som angår den enkelte person som mottar dette. Det er ikke utarbeidet i samsvar med lovens krav for å fremme uavhengighet av investeringsanalyse og som sådan er ansett av å være markedsføringskommunikasjon. Selv om vi ikke er hindret i å handle i forkant av våre anbefalinger, ønsker vi ikke å dra nytte av dem før de blir levert til våre kunder.