The 0.4% move to the down side in the ASX and the five basis point move in two, three and five-year bonds in the minute after the RBA decision, clearly illustrated how crowded the yield trade really is. The unwind in the market yesterday was solid with over 100 points being shed over the session, most of which came from the banks, diversified financials and healthcare, as they turned from green to red very sharply.
This is a very interesting glimpse into what will happen when monetary policy normalises globally. The unwind in the yield trade will be very quick and very violent as institutional investors dump the risk from the overcrowded equity trade and return to normal portfolio distributions across the asset classes. Institutional investors have been forced into the market by the underperforming returns from cash and other money market instruments, leaving a wall of cash on the sidelines. The GFC has been pushed into the market over the past eight weeks and I suspect that will continue. However, it’s a concern how fast the rush to the exit was.
Before I go on, I must provide the following caveat around the direction of the RBA and rates in general. There are some great statistics flying around about how the RBA has operated under Stevens and none better than this one: Of the 68 meetings since February 2009, the statement has used ‘for the time being’ eight times and every time that phrase has been used, the Governor has moved rates within one of two meetings of adding this phrase to the statement. It has been used six times in the preceding month; it has appeared twice eight weeks after the fact. In short, rates are going lower and the yield trade will resume.
Yet the indiscriminate sell off across the well bid sectors is something to be aware of as the year ticks by. With earnings season now over, the statistics from last month can been calculated and it shows clearly corporates are not only listening to the market about yield but actively promoting a yield strategy, as investors demand a constant return for the risk of investing.
Payout ratios on the ASX grew by 5% with the average payout ratio now 65%. The net average yield for the ASX is 4.26% according to the latest on Bloomberg. Yet underlying earnings growth was flat at best. Earnings grew by 2%, most of which was driven by cost cutting and efficiency drives. Revenue growth was just as benign and that is a bigger concern – there is only so much efficiency you can squeeze out, This is going to come to a head as dividend growth will slow eventually.
However, it’s where the dividend growth is coming from that is even more interesting. Woodside upped its payout ratio to 80% 12 months ago and the likes of Rio Tinto and BHP Billiton are ‘considering’ increasing future investor payments. That has led some to forecast resource and energy companies are likely to up payout ratios to 70% - that begs the question: is growth no longer in a company’s train of thought?
Ahead of the Australian open
We are currently calling the ASX down 10 points to 5923. I would expect some buying of the dips after yesterday’s trade and the fact the RBA still has a clear easing bias. However, the iron ore price into Qingdao fell to be within a US$1 of the record lows last night and the selloff in the material play is likely to continue. What is also muddling the intraday outlook is Australia’s GDP read today – will bad news be seen as good news for the market?