It’s been a good three years for my pet (theoretical) allocation of shares into dollar-exposed industrials. But the good times are only just beginning according to UBS today:
Rising Bond Yields & Falling A$ – Reversing The 2014 Trend
Investors have been confounded for much of this year by the unexpected resilience of the A$ and the unexpected fall in bond yields. However, some cracks have appeared in the last few weeks with the A$ falling and bond yields rising. We examine the potential impacts on relative stock and sector performance.Yield-Heavy Market Still Looks Vulnerable
We think the recent market correction can extend on the back of a continued backup in long bond yields with further iron ore downside risk an additional potential catalyst. To the extent that these drivers bring down the A$ the Australian market should be able to eventually rebound on the basis of a better outlook for corporate profits.Potential Stock & Sector Winners & Losers
Under a “higher bond yield lower A$” scenario the yield trade (e.g. REITs, Banks, Telcos, Regulated Utilities and Infrastructure) is vulnerable and US$ defensives should do best. Domestic defensives that have not been bid up on the yield theme should outperform. The lower A$ should set up a better backdrop for import competing stocks such as some of the domestic cyclicals, e.g. (steel and building materials) though they may get hit in any short term market correction. Our analysis of last year’s “taper tantrum” highlights Health Care stocks such as Ansell, CSL, Resmed and Sonic Healthcare as well as Amcor, Aristocrat Leisure, Brambles, CSR, QBE Insurance Group as potential outperformers under this scenario.
Not a miner in sight.
