We’re entering a period of low returns globally, which will require increased contrarian trading strategies and a strong focus on sustainable dividend yields.
It’s going to require vigilance and discipline to successfully negotiate the next few years of sub-par growth and ultra low interest rates in Organisation for Economic Co-operation and Development (OECD) countries. It may well require a much higher level of portfolio turnover, with basic buy and hold strategies unlikely to maximise the total available return from Australian equities.
There’s absolutely no doubt in my mind that there’ll be a far greater focus on sustainable dividend yield in the equity and portfolio selection process. Reliable, high and tax-effective dividend streams will start attracting a premium. I believe this process has already started, with the big four AA-rated banks and Telstra leading the ASX 200 since the US debt downgrade.
But in general, genuine institutional interest in Australian stocks has dried up above the 4,100-level and there are net outflows from the asset class. Every fund manager I speak to has reported some degree of outflow in recent weeks.
I mentioned last week that the extreme volatility being experienced in equities would be bad for the asset class as investors approaching retirement would simply decide that they didn’t need the daily volatility of the equity market. That has proved 100% correct, with cash continuing to pour into term deposits and annuities (buy recommendation – ASX:CGF), despite term-deposit rates falling.
Another reason the ASX 200 rally above 4,100 has lacked genuine conviction is because to believe the rally is sustainable, you need to believe that the Reserve Bank of Australia (RBA) is going to slash interest rates. I’ve been in the camp of predicting a rate cut before Christmas. But, in reading the minutes from the RBA’s August board meeting that were released on Tuesday, I actually think it will simply hold cash rates at 4.75%, unless the world totally goes to cactus.
The RBA appears unmoved in its fight against structural inflation pressures. This is despite around 4,000 jobs cuts being announced by listed Australian companies alone on Tuesday. It’s an inflation-targeting bank and inflation continues to be above its target range.
I think the mistake I’ve made is to believe what falling domestic yield curves are telling me about the RBA’s intentions. Falling yields normally suggest rate cuts, but, I now think the drive lower is being caused by a wave of offshore money buying AAA-rated bonds ‘at any yield higher than the OECD’, rather than a true representation of where Australia’s cash rates are heading. The good news is these lower yield curves are allowing the Big Four banks to lower fixed rate mortgages, in effect doing some work for the RBA.
As this view becomes more mainstream, I think you’ll see the Aussie dollar continue to trade up to the top end of its new US100¢ to US110¢ range. For those sectors structurally pressured by the new Aussie dollar trading range, it’s going to continue to be an unpleasant experience. For those selling offshore holidays, it’s going to continue to be a bonanza (ASX:WEB, FLT).
Don’t get me wrong, I still believe in the relative decoupling and outperformance of Australian assets in Australian dollars over the short, medium and long-term, but we need to realise that we are in a low-growth, low-return global environment that is going to make the art of making money difficult. That is why we are focusing on bottom up, fundamental, total stock returns and refraining from making wild predictions about indices.
This is about as hard as it gets to make money, but the point I’m making is it may well stay hard for some time.
Top 10 stocks with sustainable yields
These are the top-10 large-cap stocks in our analysis of the top-150 listed companies that are most likely to maintain a yield greater than 7%:
- BHP – BHP Billiton
- CBA – Commonwealth Bank of Australia
- ANZ – Australia and New Zealand Banking Group
- WBC – Westpac Banking Corporation
- NAB – National Australia Bank
- MQG – Macquarie Group
- QBE – QBE Insurance
- RIO – Rio Tinto
- TLS – Telstra Corporation
- QAN – Qantas Airways
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