NEWS + VIEWS – 14/6/2024
MARKETS
The US share market pushed further into record territory while others paused.
Globally, interest rates are falling. The European Central Bank cut official interest rates by 0.25% to 3.75% but did not refer to further cuts. Canada’s central bank also cut rates by 0.25% to 4.75% and flagged further falls. US data is suggesting a cut in late 2024 and further reductions in 2025.
Domestically, the story is a bit more complicated. Sky-high government spending, increasing regulatory burdens and upcoming tax cuts continue to put upward pressure on inflation. On the other hand, business conditions are deteriorating. The worst outcome would be inflation staying sticky while economic growth declines, referred to as stagflation.
The Reserve Bank has indicated that their main focus is on inflation, which probably means higher rates for longer.
GENERATING CASH – YIELDS ACROSS ASSET CLASSES
Share market prices have had a strong run since October last year. The flipside of higher share prices is that if a company’s growth does not keep up with share prices, then dividends per share typically fall in percentage terms.
Interest bearing securities are exhibiting healthy yields.
The chart below from AMP and Livewire shows current yields (in blue) across Australian asset classes compared to pre-Covid 2019 yields (in red).
Most ‘growth’ asset classes (e.g. listed shares) are below 2019 in percentage terms. Share prices have risen while dividends have not. Interest bearing securities such as bonds and term deposits have shown marked increases since 2019 due to higher official interest rates.
Source: AMP, Livewire
Focussing on Australian listed shares, the growth in dividends per share (or lack thereof) is illustrated in the diagram below. The dominant banking sector’s dividends per share have not grown since 2019. The next biggest sectors of mining and energy have shown negative dividend growth per share, although mining dividends were at very high levels in 2019.
The overall ASX 200 dividend yield is around 3.9% compared to a long run average of 4.6%.
Source: Ausbil, FactSet
Changing the focus to the hybrid market, the chart below compares bank and insurers’ hybrid trading margins to ‘years to call’ (the date when redeemed). The ‘trading margin’ is added to the 90-day Bank Bill Swap Rate (BBSW) each quarter to arrive at the quarterly interest rate. The current 3-month BBSW is 4.3573% and usually ‘follows’ the official cash rate.
As expected, the longer a hybrid has to its call date, the higher the risk and thus the higher the trading margin. Also, the smaller banks and insurance companies attract a higher trading margin to reflect the higher risk in their balance sheets (relative to the four major banks).
Hybrids with six or more years to call are yielding an estimated 7%. Two to five years to call are paying between an estimated 6.25% to 7% and less than two years to call up to 6%.
These are attractive returns for investments with relatively low volatility.
Source: Mason Stevens, Bloomberg
CONCLUSION
Time will tell whether the ‘lower’ yields on growth assets are a portent of share price falls or alternatively, higher profits (and dividends) are about to ‘catch up’ with higher share prices.
In the meantime, interest bearing securities such as hybrids are providing solid returns for investors while interest rates stay high. Of course, the downside of these investments is that there is no scope for capital growth.
As always, a portfolio diversified across asset classes and invested in quality companies is recommended to manage uncertainty over the long term.
MINIMUM PENSION
We again remind clients with super in pension phase that your minimum pension must be withdrawn before 30 June 2024. Failure to do so could result in significant penalties.
Please contact your adviser or accountant if you have any doubt as to whether you have met your minimum pension requirements.
Gerard O’Shaughnessy
P 0423 771 330
Important Disclaimer
The directors, employees and authorized representatives of PPN Wealth do not guarantee the information in this report to be complete, up to date, accurate nor applicable to your personal circumstances. This is general investment advice only. You should not act on recommendations in this report without discussing proposed actions with your PPN Wealth adviser to ensure recommendations are suitable to your circumstances.
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