Global bond yields are poised to rise again and that will leave key sectors of the Australian share market exposed, according to Credit Suisse.
In a research note called “The Bondcano is back”, equity analysts Hasan Tevfik and Peter Liu have looked into which Aussie stocks are most vulnerable to the effects of higher bond yields.
Here’s the list:
It’s mostly comprised of stocks in stable industries which provide a consistent stream of dividend income to investors. In other words, stocks that act as a proxy for bonds.
It follows that such stocks are more attractive in the current environment, as they provide a safe return on investment that’s still higher than the return provided by low-yielding bonds.
Tevfik and Liu’s list also includes stocks that are currently trading on high price-to-earnings ratios, and stocks with high leverage which have benefited from cheap debt in the low bond yield environment.
Global bond yields have fallen this year as bond markets began to doubt the pace of inflation growth in developed markets.
However, Credit Suisse expects the yield on the benchmark US 10-year treasuries to push higher in the second half of the year.
“Our rate strategists expect US Treasury yields to reach 2.8% by the end of the year driven by a combination of stronger inflation, better economic activity vs expectations and further signs that central banks will continue their process of normalisation,” Tevfik and Liu said.
The two analysts said that the Aussie stock sectors most at risk from a rise in bond yields currently make up 22% of the market capitalisation of the ASX200.
They say the valuation of those sectors is currently trading on a price-to-earnings ratio of 21 times projected earnings over the next 12 months, which is 25% higher than the market average:
Tevfik and Liu also considered the influence of passive investment funds in their analysis.
Stocks which are most vulnerable to a rise in bond yields also make up a large position in the holdings of passive funds, due to their safer and less volatile nature.
Given the huge rise of passive investment vehicles in recent years, the analysts said there would be no major falls in their list of at-risk stocks unless passive funds changed their holdings.
Looking at the market more broadly, Tevfik and Liu said that share prices generally benefit when interest rates are low, and equity investors should be wary of the “Bondcano”.
“We think the Bondcano will continue to erupt, so what has been a tailwind for large parts of the equity market will become a headwind,” they said.
However, the threat to some companies from rising bond yields will be an opportunity for others. The two analysts added a table of stocks which stand to benefit if bond yields rise:
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