Steven Tang
The yield thematic which has driven the strong returns of the Australian stock market over the past twelve months may have run its course, according to Zenith’s Australian Large Companies Sector Report released yesterday.
Senior Investment Analyst Steven Tang says that “The yield thematic pervading the Australian market has driven the stock prices of higher yielding companies to levels that may be more difficult to sustain in the absence of an increase in the underlying earnings growth.”
Tang believes that global economic uncertainty and the monetary easing cycle being implemented by the Reserve Bank of Australia (RBA) has helped drive this market sentiment, as investors have sought the safety and dividends provided by higher quality companies within the Australian equity market.
In recognising investor appetite for higher yielding investment strategies, Zenith has observed a substantial increase in the number of managers bringing equity income products to market, with both traditional long only and derivative equity income funds gaining traction with retail investors.
Tang notes that during this period the domestic equity market has rewarded those companies that have increased their dividend payout ratios (dividends divided by net income), or issued investors with a special dividend. Tang notes that managers remain aware of the longer term ramifications of these financial policies stating that, “higher payout ratios and special dividends naturally implies a lower level of internal re-investment, which has the potential to hamper the future growth prospects of a company.”
Managers have identified that the yield thematic has created some overvalued companies within the defensive sectors of the market, however Tang is quick to note managers are likely to remain cautious when considering investment into cheaper, cyclical companies given that these companies have earnings streams which are closely aligned with the economic cycle, and as such are more sensitive to changes in the underlying level of economic growth.
During the review cycle, managers indicated that as the RBA’s monetary easing policy begins to gain traction within the economy, they will begin to sell higher yielding companies to fund the purchase of companies which are better positioned to capitalise on an increase in domestic economic activity.
Zenith has significantly expanded its Australian Large Companies Fund universe with the release of its 2013 Australian Large Companies Sector Report. From an initial investment universe of 181 Australian Large Cap products 87 funds were assigned a positive rating, with 22 new ratings: 8 received a HIGHLY RECOMMENDED rating, 57 received a RECOMMENDED rating, and 22 were assigned an APPROVED rating.
Despite the benchmark S&P/ASX 300 Index returning 25.6% over the past 12 months, the current macroeconomic environment has proven to be difficult for active managers, with more than half of Zenith’s initial manager universe underperforming the benchmark. Pleasingly managers assigned a rating of Approved or better performed more strongly in this challenging environment outperforming the broader market.
