Australian Investment Blog

We have been discussing rising US interest rates at length over recent weeks but now feel the initial sharp increase has probably run its course. US 10-year bonds have been hammered sending their interest rate up from 1.32% to touch 2.3%, with over half of these gains unfolding in a frenzy since Donald Trump's surprise victory. The press is now full of rising interest rate stories and while we feel US 10-year bond rates do eventually head to 3% and probably beyond, a rest is now due - similar to our view on resources this week. Rising interest rates has also occurred locally with our 10-year bonds increasing from 1.8% to 2.7%, the RBA will probably remain on hold well into 2017 but the futures markets are now factoring in more chance of a hike than a cut for next year for Australia. Outside of the main banks mortgage rates have been ticking up as the lenders funding costs rise.

US 10-year Bond Interest Rates Monthly Chart

The increase in interest rates has led globally to both the "yield play" and defensive stocks being hammered. However what's interesting is the stocks have been falling sharply for the last 4/5 months while the declines since the US election have been relatively small compared to those experienced between September and October - another classic example of stocks leading the fundamentals.

Recently we purchased Westfield (WFD) for 3 reasons:

1. WFD had reached our medium term retracement target ~$8.50 . We went long around $8.40 with an initial target of $9.30.

2. WFD generates 75% of its revenue in $US and we are short-medium term bullish the $US.

3.We feel both the "yield play" and bonds are oversold short-term.

While this was a fairly aggressive play it feels correct at present as the stock has been strengthening over recent days.

Westfield Corp. (WFD) Monthly Chart

The local classic yield play stock we have discussed recently is Sydney Airports (SYD) which has fallen well over 20% since we initially turned negative the stock. Short-term we are no longer bearish SYD and could easily imagine a bounce back towards $7. However we are more comfortable buying WFD due to its $US earnings and overal debt levels plus we are not comfortable SYD being the most expensive airport globally, along with its Auckland counterpart.

Sydney Airports (SYD) Monthly Chart

A stock we prefer to SYD is TCL which has fallen into perfect long term technical support. The recent 25% decline has increased TCL's guided yield to 5.16% - which is up +11% on the same period last year. The stock goes ex-dividend at the end of December and that dividend will be partially franked (around 15%) however from then on zero franking is expected.

We believe investors can buy TCL at today's level and they will receive some capital gain plus a dividend before 2017.

Transurban (TCL) Monthly Chart

Lastly the perceived defensive stocks have gone from hero to villains as the fickle market has turned its back on them aggressively. The Telco sector has arguably been the mainstay of the defensives locally and while they have a number of fundamental issues, led by the NBN roll out and increased competition, a 30% sector decline feels oversold. The majority of the falls have been over the last 4-months courtesy of concerns of Vocus' integration of M2 Communications and a profit downgrade by old market darling TPG Telecom.

After a 46% decline over the last few months we feel TPM is poised to bounce back towards the $8 region. Similarly we can see Vocus (VOC) that we unfortunately own bouncing back over $6 and ideally towards $6.50.

We are not buyers of this sector at present but are being patient selling our poor position in VOC.

TPG Telecom (TPM) Monthly Chart

Summary.

- We are looking for a bounce in the "yield play" into Christmas.

- We are already long WFD and are considering reducing our banking exposure (if further strength prevails) into TCL later this year / early next.

Overnight Market Matters Wrap

• Another breather was seen in the US share markets overnight, with the Dow ending its day down 55 points (-0.3%) at 18,868 and the broader S&P 500 off slightly, down 3 points (-0.2%) to 2,177.
• Better activity was seen in the currencies with the US Dollar Index hitting a 13-year high, leading the Aussie Battler down 1.1% overnight to US74.74c.
• Domestically, unemployment data is due at 11.30am with expectations for a rate of 5.7%.
• The ASX 200 is expected to test the 5,300 level this morning as indicated by the December SPI Futures, with a volatile morning expected due to November Index Options expiry.

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