Sydney Airports continues to perform well….
We own Sonic Healthcare as a key holding in our client portfolio’s.
We own Transurban in or model…..
Amcor is a core buy-write that we’re holding…..
GPT and WFD are our preferred property (REIT) holdings….
The Dow Jones 30 posted it’s 7th straight lower close for the first time since 1978.
As a result, the US 10-year bond yields fell to a 1-month low of 2.38%. An increase in equity market volatility could could lead to another 10 to 15 basis points of downside on the yield.
Some of the local names that have moved higher on the lower yields have been SYD, TCL, WFD and, to a lesser degree, TLS.
It’s likely interest rate stabilization will work as a near-term cap on these companies and allow for a covered call strategy to enhance the portfolio returns
Over the past month, we’ve been long TCL and SYD , as we felt US interest rates would not push beyond levels already priced in by the market, therefore creating value in yield sensitive names.
Out of the potential basket of yield sensitive names to consider, our preference was TCL and SYD coming into their June dividends.
With the above stocks now trading up 15%+ and 10%+, (respectively), from their recent lows and the yields now compressing below 5%, we feel potential capital gains from here are limited and it’s time to sell covered calls to enhance the return.
Domestic yield sensitive stocks are looking well supported as global yields in G7 economies retreat from recent highs. The bond market seems to be losing some of the optimism in the”reflation” trade.
Evidence of the retreat in yields can be seen in the US 10-YR treasuries where the yields are now trading down from 2.61% to 2.31%.
The impact of this is: money is now flowing back to REIT’s, infrastructure, consumer staples and telecommunication stocks.
We’ve been promoting the selling of resources and buying of defensive yield names, for the past few weeks. We continue to see defensive yield names complimented with tight covered call options as the best way to deliver 10-12% cash flow whilst protecting capital.
Chart – SCG
Shares of Transurban are up over 3.5% in early trade as the toll road developer increased H1 net profit 41.9% to $88 million on the back of strong traffic flows and operational performance.
The company also lifted revenue by 26.3% to $1.3 billion in the six months to December 31st.
As a result, Transurban will pay a partially franked interim dividend of 25 cents per share, up from 22.5 cents from the year ago period.
At $10.75 per share, we consider TCL a defensive income play. With limited scope on the upside, we suggest selling covered calls in the $11.25 area for an annual return in the 10 to 12 % range.
We’re allocating funds to defensive names with moderate earnings growth. By adding tight covered call options we’re boosting the cash flow and generating our return on investment (ROI) through a lower risk, lower volatility investment process.
We’re holding small levels of hedging through inverse ETF’s and are mindful of the increasing number of stocks within the ASX 100 and the US S&P100 that are showing fading momentum. High valuations in many names combined with relatively low revenue and profit growth is likely to weigh on share price performance.
The following names we’re currently buying. AMC, CTX, SYD, TCL & TLS
In late 2016 we began highlighting yield names which were oversold and were likely to bounce back coming into the year end. Our preferred names in the yield basket were WFD, SCG, GPT, SYD and TCL. On average, these names have rallied over 10% from their November low.
The consolidation of US yields, (bond prices no longer falling & yields no longer moving higher), along with the oversold condition in our domestic yield sensitive companies, were enough to generate the rally.
From here we feel these names will remain supported, especially if volatility picks up in the broader market during the Jan – March period. With this in mind, we continue to hold our yield basket and overlay covered calls to boost the cash flow to 10%+ on an annualised basis.
The sell-off in property trusts and infrastructure names has been substantial, 15 to 20% since early September.
The REIT sector has underperformed as bond yields have rallied. The repricing has seen the dividend yield of REIT’s back above 5%.
Historically, the correlation between Australian yield names and US 10-year yields has been inverse; as US yields fall, Australian property trusts and infrastructure stocks rise.
US 10-year bond yields have risen by 79 basis points, or over 50%, since early October. We see this pace as unsustainable and expect the local yield names to trade higher as the US Treasury yields drift lower.
We continue to track WFD, GPT, SGP, SYD and TCL versus the US10 year bond yields.
Yield sensitive names remain under pressure as the bond sell-off in the US continues. As bond prices trade lower, the yield is increasing. Higher yields, make interest rate sensitive names like infrastructure and property trusts less appealing.
The sell-off in domestic names such as APA, GMG, GPT, SGP, TLS, TCL, SYD, WFD & SCG has been significant. With many of these names now trading on yields within 4.5 to 6.5% range.
There’s a case to be made for the above stocks to find support as the outlook for interest rates begin to stabilise.
Over the last two months, bond markets have been repricing the probability of a US rate increase. During that time, we’ve watched the US10YR yields trade up from 1.3% to 1.9% . As a consequence, money managers have sold-off defensive yield names. This has been most evident in ASX 50 names within the infrastructure and property sectors.
We maintain a positive interest in these names as the current share prices now have many of the yields offering 100 basis points, (or 1%), more than they were trading at 2 months ago.
WFD and GMG are now trading back on 4% yield, whereas TCL, SYD, GPT and SCG are on average trading near 5% yield.
The December FOMC rate decision meeting will likely be the catalyst for a bounce, however, we’re not expecting these names to recapture the recent highs. Therefore, we’ll look to sell the rally into the early part of 2017. The algorithm engine will track these names and I’ll be certain to alert you to the next lower structural high, but for the time being, you may want to position around the short term bounce which could offer up to a 10% rally.
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