JP Morgan’s Paul Brunker has a simple but compelling take on stocks in the near future:
When bond yields rise it is generally a signal to favour more cyclical sectors at the expense of defensive and higher-yield ones. This has played out in the Aussie market from the end of April, with a couple of exceptions – Healthcare has gained from the AUD’s fall and Telco has been spared the ‘yield-off’ backlash, perhaps because of falling short rates and retail investor support. What complicates the rotation however is that the Aussie economy is flagging, making it harder to get upbeat about domestic cyclicals – many of which have indeed lagged (dept stores, some building materials). Meanwhile the biggest cyclical group, Mining, is still battling fragile sentiment on China. In our view, this points to an uphill battle for the market as a whole.
Makes sense to me. I will add that as QE is unwound, we can expect a risk premium to return to shares as well, likely pushing down the price multiple to already struggling earnings.
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific's leading geo-politics and economics portal.
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.
