Angus Nicholson for Chris Weston, Chief Market Strategist at IG Markets
Aussie yield-hunters buying up Telstra and the banks
There seems to have been a fundamental reassessment of the desirability of Australian equities over the past week or so. The ASX has gained 2.4% since the start of May, and that is despite the significant headwinds from the selloff in the materials and energy space over the period. The ASX hit an intraday high of 5425 today, a level not seen since early August.
While global markets in general have been steadily moving higher, there do seem to be a number of Australia-specific factors that are helping our market. The rapid succession of weaker than expected 1Q CPI, a cut to the policy rate, and significantly lowered inflation forecasts by the RBA have seen the Aussie dollar return to the sub-US$0.75 level. This has been a boon for Aussie exporters, tourism-related stocks and USD earners.
Top 20 ASX stocks with the highest correlation to Aussie dollar declines over the past year (i.e. inverse correlation to AUD/USD):
The past week has also seen the Turnbull government announce a budget and call an election that they are widely tipped to win. The limits to high income earners’ superannuation contributions and the dogged defence of negative-gearing tax concessions are also increasingly guiding the most tax-efficient asset allocation among high-income earners.
At face value, the super changes appear to incentivise high-net worth individuals to allocate excess super income to their negatively-geared investment property portfolio. The changes also seem to be spurring the growth of family trusts, such that super contributions can be made up to the limit for each family member in the trust. It’s difficult to know whether some of these changes may also be helping the search for high yielding stocks. Superannuation structures certainly incentivise the purchase of high-yielding stocks and their associated franking credits.
In any case, the 25 basis point cut to the RBA’s policy rate last week and the likelihood of further rate cuts later in the year have created a strong disincentive to keep one’s savings in the bank. These developments may have created a TINA (There Is No Alternative) situation, the acronym du jour, whereby investors are just desperate for semi-decent real yields, leaving them no alternative except equities.
These structural developments could well continue to steadily play out in the market, continuing to see strong gains in high-yielding stocks.
CBA was showing up in our momentum scans this morning, but has reversed in the latter half of today’s session. CBA is sitting at a key point of technical resistance at A$78.0, and a close above this level would be a key sign of a technical breakout and will be a key level to watch this week.
Telstra has had an impressive May so far, gaining 6.9%. Its technicals are lining up incredibly well as it looks set to close above a key level of resistance at A$5.69. The Ichimoku Cloud has turned green, indicating it’s in an uptrend. And the price is above the 9-period average Tenkan-sen (blue line), which is above the 26-period average Kijun-sen (red line). All very bullish.
