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Are infrastructure and utility stocks revving up again?

Photo of Nick Radge, The Chartist By Nick Radge, The Chartist

min read

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

Back in 1986, just after I entered the markets, interest rates were around 17.5 per cent. Late last year they fell to historical lows, below 2 per cent. At the time, bond rates in Germany, Switzerland and Japan went negative.

In the fight for reflation, global central banks have aggressively pursued monetary stimulus and asset purchases, and yield-hungry investors have piled into the sharemarket, hunting and gathering bond proxy stocks – utilities, Real Estate Investment Trusts, infrastructure, and companies that offer long-term income streams and relatively stable fundamentals. As a result, these stock prices have been driven higher.

But the tide is turning. The US has started tightening monetary policy and global bond yields are starting to rise.

The recent rise in yields has not been out of the ordinary. Indeed, we have seen many similar increases of the same size, yet this time there has been significant turbulence in interest rate-sensitive stocks.

The key reason is central banks have admitted that monetary policy tools are at their limits and they have now turned their focus to fiscal policy. It is this realisation and subsequent rotation out of bond-sensitive stocks that have savaged these stock prices, especially in Australia, where some 60 per cent of the ASX 200 index falls into this category.

The collapse of bond yields since the GFC creates an interesting technical scenario. Major long-term trends can sometimes show a weakening of momentum. In the case of Australian 10-year bond yields (see below), each probe to new lows was distinctly shorter than the prior move. This price action looks like a falling wedge or a downward coiling pattern.

Historically these patterns tend to follow a distinct pattern; they resolve themselves against the prevailing trend, then travel back to their starting point, which in this scenario is 6.6 per cent. Bond yields could fall further if deflation re-emerges, so any break back above 3 per cent would be the signal that an upward shift has begun.
 

Aus 10 year bond yields

Source: Premium Data

(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.)
One of the biggest beneficiaries of the plunge in bond yields has been Transurban Group (TCL) which, after the GFC, started on a multi-year trend that was barely interrupted by any adverse moves. The toll road operator has steadily grown its dividend from $0.22 to a FY2017 guidance of $0.515 with a current yield of 4 per cent.

Interestingly, the more recent price action has almost 100 per cent positive correlation to bond yields. Indeed, the latest 20 per cent rise occurred at the same time Australian bond yields jumped.

Transurban has many positives; quarterly traffic and revenue numbers remain positive and strong, the West Gate Tunnel is due later this year and the Westconnex sale could be worth $3.2 billion.

Technically the stock continues to look very strong over the longer term, although we expect ongoing sideways consolidation over the coming 12 months. A pause like this is very common at this stage of the trend and is deemed healthy for its eventual continuation.

Also, it is rare that a stock can break to new all-time highs on the first attempt, so some back-and-forth posturing should play out over the coming six months. Aside from the desired consolidation, we would only be concerned about the longer-term trend if prices fall back below $10.00 again, which seems unlikely.

Transurban chart

Source: Premium Data

Another very popular infrastructure stock that could be impacted by rising yields is Sydney Airports, but as is shown in the following chart, the price action is like that of Transurban.

The operator of Sydney’s only airport has recently passed up the opportunity to build and operate the second airport in the city’s west. This alleviates funding risks to its cash flow over the coming decade and with near-term traffic growth strong, the company’s fundamentals remain appealing.

Technically the outlook is identical to that of Transurban. A potent trend that has been in place since 2009 is now having a pause, which should see prices consolidate below recent $7.50 highs for the coming six months. Any weakness toward recent lows around $6.00–6.50 could offer a buying opportunity.

Sydney Airports Chart

Source: Premium Data

A distinctly different picture is Telstra Corporation, which, on first impression, does not appear overly favourable after a 35 per cent decline since 2015.

Analysts cite several reasons to be concerned. Recent earnings results below consensus analyst forecasts, a 15 per cent fall in wireless broadband revenue, increasing competition across mobile, fixed line, data and IP markets, and the NBN earnings gap could affect future dividends.

However, from an advanced technical perspective, the recent decline falls into a typical zone of support within a much larger bullish outlook. The strong advance from the 2010 low to the 2015 high is known as an impulsive move. These tend to be very smooth and strong movements and define the larger trend.

The recent fall, however, has been a somewhat choppier movement, which is quite typical of a “breather” within a larger trend. This on its own is not enough to warrant a bullish outlook.

However, the typical dip in a larger trend usually terminates in a defined zone, in this case around the $4.50 area, which is where the share price currently sits. Should some upside traction take hold, Telstra could be in for a renewed trend higher.

Telstra chart

Source: Premium Data
 

About the author

Nick Radge is Head of Research and Trading at The Chartist and the host of the daily sharemarket podcast, On the Charts. He can be contacted at www.thechartist.com.au

Follow: @thechartist

The views, opinions or recommendations of the author in this article are solely those of the author and do not in any way reflect the views, opinions, recommendations, of ASX Limited ABN 98 008 624 691 and its related bodies corporate ("ASX"). ASX makes no representation or warranty with respect to the accuracy, completeness or currency of the content. The content is for educational purposes only and does not constitute financial advice. Independent advice should be obtained from an Australian financial services licensee before making investment decisions. To the extent permitted by law, ASX excludes all liability for any loss or damage arising in any way including by way of negligence.

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