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Is the attraction of ‘yield darlings’ fading?

Photo of Michael Gable, Fairmont Equities By Michael Gable, Fairmont Equities

min read

What the share-price charts say about CBA, Telstra, Sydney Airport and Transurban.

At any one time there are a few different themes running in the Australian sharemarket. Get some of them right and you can do well with your investing.

Some examples in the past few years include the decline in oil and iron ore prices, the falling Australian dollar and the rise of the healthcare sector.

One of the major themes for the past few years has been the yield trade. Declining interest rates across the world have led to a flood of money search for stocks with a decent, reliable yield and these have been bid up higher and for longer than expected.

Australian Real Estate Investment Trusts (AREITs), infrastructure, banks and Telstra have all been treated as “proxy bonds” by investors because of their higher yield. As the buying continued, the yield (the dividend as a percentage of the share price) naturally came back to lower levels, and the price-earnings (PE) ratios have been hitting numbers which suggest these stocks are “expensive”.

Reports of the demise of the yield play have been greatly exaggerated in the past, but we could be seeing the beginning of the end for this theme – at least for now. Great profits have been made in riding this wave, but we are seeing the first signs of it coming undone.

Economists are starting to shift their outlook on Australian interest rates from one of “lower for longer” to one where rates are staying on hold or even heading up in 2017.

In the past few months, Australian 10-year yields have risen by nearly 20 per cent, indicating that bond markets are starting to factor in a world of rising interest rates.

In my opinion, investors are already preparing for a US rate rise and this means the yield trade will start to unwind. It will not happen overnight and there will be some dead-cat bounces along the way, but this will be a major theme that investors need to make sure they are on the right side of.

Many stocks have benefited from this theme but I have already started repositioning clients away from the yield trade.

Here are my views on four of the most popular stocks in the yield trade: Commonwealth Bank (CBA), Telstra (TLS), Sydney Airports (SYD) and Transurban (TCL). To be a successful investor, not only should you look at macro issues and company fundamentals, but also need to apply some good technical analysis and look at the charts.

(Editor's note: Do not read the following ideas as stock recommendations. Do further research of your own or talk to a financial adviser before acting on themes in this article).

1. Commonwealth Bank

Gable-CommonwealthBank-Graph

Source: AmiBroker

From 2012 to early 2015, CBA went on a fantastic run and its share price doubled. It was clearly a beneficiary of the yield trade, but its peak was more than 18 months ago. This was during a time when interest rates in Australia were still on the way down, so we cannot blame the slide on the recent phenomenon of the yield trade ending.

Banks are not as expensive as some other sectors and there will be some benefits to them from slightly higher interest rates. This means that as a yield trade, they will be more resilient than others. The chart shows that the $70 region has offered some strong support during the past year.

However, it is not making any higher highs and the volume during the past month has been fairly weak. Sometimes the more you test a support level, the more you weaken it. I would be wary of another move back towards $70 as this could lead to a break under it, which could trigger some stop-losses and some further selling.

This may result in a brief spike down towards $65, which would represent a fantastic buying opportunity. Otherwise, if we see CBA climb to $80 and hold that level, that would be a very positive sign. At the moment, however, the shares are in no-man’s land.

2. Telstra Corporation

Gable-Telstra-Graph

Source: AmiBroker

As CBA peaked in early 2015, so too did Telstra, reaching levels not seen since 2001. When it reached its 2016 high in July it became obvious to me that Telstra was going under $5. By reversing under the $6 level, it was on course to make what is known in Elliott Wave analysis as a “five-wave decline”.

Although it has already now achieved my initial price target of trading under $5, I can see recent weakness on the chart to suggest there is further to go. I would expect levels as low as $4.50 during 2017.

Telstra has a growth problem and the main attribute propping up the stock is the dividend yield. As the yield trade unwinds, the lack of growth means the share price could make little progress during the next year or so.

3. Sydney Airport

Gable-SydneyAirport-Graph

Source: AmiBroker

From 2012 to its recent high, Sydney Airport achieved a threefold increase in its share price. It is a quality company and the yield is reliable, which helps explain the stellar rise in an environment of lower interest rates. However, earnings growth is starting to moderate and combined with the prospect of higher rates next year, the stock has taken a tumble.

At the time of writing, the shares are sitting at trend line support, but the severity of the drop and the volumes are causing me some concern. I would expect lower levels before I consider Sydney Airport a buying opportunity again.

I can see some support near $5.70, which is where the shares are likely to head to. If that cannot hold, then the low $5s would be a worst-case scenario.

4. Transurban

Gable-Transurban-Graph

Source: AmiBroker

Transurban, owner of toll-roads, is similar to Sydney Airport in some respects, in that it has a defensive profile with reliable earnings. And like Sydney Airport, its peak was recently, in August, and the sell-off since has been fairly savage. Infrastructure stocks tend to have high levels of debt so increasing interest rates can concern a lot of investors.

Price action also suggests we are likely to see lower levels for the stock during 2017. There is some good support near $10.50 for a short-term bounce but ultimately we can see levels as low as $9.50 as any rallies are likely to be sold into.

Conclusion

Identifying the yield trade has been a profitable theme to hitch your wagon to, but it is starting to unwind and investors need to be cautious. In some instances it is now time to jump off. Some beneficiaries of the yield trade are likely to stay well supported though, such as the banks. My philosophy to investing is to combine fundamental and technical (charting) aspects, and these charts show that lower levels are possible for some of these shares in 2017.

About the author

Michael Gable is an investment adviser, helping his clients achieve higher returns from their share portfolios by combining fundamental and technical analysis. He is also a media commentator who regularly contributes to Sky News Business, the Australian Financial Review and online investing sites. Access a free trial to Michael’s weekly stock picks and a copy of his free trading guide here.

Follow: @GableMichael

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