Yield Stocks – Hold or Fold?
US stocks ended little changed overnight however there was obvious intra-day volatility with the Dow Jones being down ~130pts at one stage before rallying into the close. More Trump emails and links to Russia not helping confidence however the headlines seem to get the short term spotlight before traders realise there is more important things to concentrate on - corporate earnings and the like!
One aspect that is glaringly obvious at the moment has been a lack of volume and a lack of conviction in this market. It seems we’re in a holding pattern ahead of US earnings - here’s a quick snapshot of volumes around the globe – most major markets a long way below averages. The New York Stock Exchange was -40% below the 20 day average overnight, the NASDAQ was 30% below while yesterday our market was down 24% on its 20 day average in terms of volume.
As we suggested yesterday, we tend to think the short sharp run up in global interest rates needs a pause and that happened overnight with the US 10 year yield drifting back from 2.39% to 2.36%. Clearly we think US rates go higher over time and we’ve written about this theme at length, however the big sell off in bonds (which pushed yields higher) was aggressive, and looks to have run its course in the short term.
US 10 Year Yield Daily Chart
If US rates stay stable for a period, or actually track lower in the short term, does this set us up for a bounce in the yield names that have clearly been under pressure? And if so, is this a BUY weakness sort of play or SELL Strength?
Property
The ‘pin up’ property stock has typically been Westfield (WFD), however a few years ago they broke up their US assets with their Australian ones. Westfield now is a US exposure while Scentre Group (SCG) holds the Australian assets. Both stocks performed very strongly into the middle of 2016 and have since rolled over, with Westfield down by 30% in that time - the stock closing at its lowest level since 2014 yesterday. The peak in Westfield’s share price on the 26th July 2016 at $11.14 was 20 days after the low in US interest rates on the 6th July 2016.
If US Rates stay stable, or pullback in the very short term then we may see a bounce in WFD and other property stocks. This would create a selling opportunity.
Westfield (WFD) Monthly Chart – $7.78
Infrastructure
Many investors have fallen in love with the likes of Transurban (TCL), Sydney Airports (SYD) and APA Group (APA) over the past few years. The operating environment for these companies has been excellent. A thirst for yield, strong underlying corporate performances, low interest rates reducing the costs of borrowing and importantly, allowing investors to ‘justify’ big valuations for the assets has seen the likes of Sydney Airports trade from $3.00 5 years ago to a high near $8.00 in June this year.
Last year when interest rates started to move higher, Sydney Airports dropped sharply, down around 30% in a heartbeat and we called that move well. We also bought Sydney Airports near the low and made money from a counter trend move however we underestimated how quickly the stock would come back into favour as the move higher in interest rates stalled.
Now we find ourselves back in the same boat, with interest rates globally moving higher and as a consequence we should see continued weakness in Sydney Airports and other infrastructure plays over time. In the short term though, a bounce back up into the mid $7’s seems a likelihood, which would create another selling opportunity for a deeper correction towards ~$5.50. Clearly, we think this is a sell strength sort of story.
Sydney Airport (SYD) Monthly Chart – $6.88
Conclusions
We have no interest in property and infrastructure stocks given the longer term picture for global interest rates – going higher
In the very short term , a bounce in these stocks would be an opportunity to sell
Overnight Market Matters Wrap
· Another uneventful day in the US overnight, with the majors ending the session pretty much unchanged from the previous day and volume like Australia, way below average!
· Investors seem to sit on the sideline until they see further confirmation on where the US Fed’s stance on the economy is heading.
· Iron Ore continued its resilience, rallying 2.11%, with BHP in the US indicating to outperform the broader market after ending its session up an equivalent of 0.85% from Australia’s previous close to $24.99.
· The June SPI Futures is indicating the ASX 200 to open marginally lower this morning, around the 5725 level.
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