MARKETS SPECTATOR: Is Telstra different this time?

There's been a lot said about the performance of Telstra of late, with the investment community divided on what's happening and where it's headed from here.

On one hand there are the pure fundamentalists saying it's too expensive and they'd be a seller any day.

Then there's a growing chorus of respected strategists suggesting ‘it's different this time' and forecasting Telstra to keeping ploughing its way higher. For any seasoned market watcher, just hearing ‘it's different this time' is usually the impetus needed to hit the sell button and run for the exit.

Yet, the stock continues to push higher, hitting a four-and-a-half-year high of $4.29 yesterday.

The latest broker to do a complete U-turn is CSLA, upgrading the telecommunications behemoth to outperform from sell and upping its price target to $4.61 from $3.26. The broker believes cash flows are basically locked in no matter who wins the next federal election, due by November 30 next year.

It also sees Telstra's share of the mobile phone market increasing and the possibility that the company could raise its already attractive dividend.


Source: Iress

And herein lies the crux of the ‘it's different this time' bullish argument.

"There is a parallel trade going on right now and traditional brokers need to get off the simple view that it can only be risk on/risk off and realise that there is a new game in town called yield. And it can coexist with the risk argument,” Goldman Sachs Australia said in a recent note.

"I find many push back at my yield argument, saying its already gone too far, but if as I argue rates in Australia not only go even lower but stay low for a longish time, then these yield stocks have a massive amount of both local and international support. Don't ignore this; it's going to be a big story in 2013”.

The beginning of this new game also explains what has been underpinning very strong moves in other high yielding stocks. Bank shares have been huge winners and will likely continue to be. We are at the beginning of a historic moment in Australia, one which most alive today have never witnessed before.

As rates get ratcheted lower over the coming year to offset the huge decline in mining income, term deposit rates will continue to collapse. We've already heard of people looking to roll over their term deposits. From a yield of 6 per cent, the best they are being offered now is 4 per cent.

Put simply, people can't and won't be able to afford this drop in income and will be forced to look towards high sustainable yielding equities. Some of the $300 billion that went into bank deposits over the last three years will have to move towards high yielding equities.