MARKETS SPECTATOR: The local yield story is over

Tim Toohey says yield hungry investors will search outside Australia for markets that offer better returns.

The yield party is over, according to Goldman Sachs’ Tim Toohey. “Australia no longer has a suite of stocks on attractive dividend yields in a global context,” he says. In June 2011 Australia had 30 stocks with a yield greater than six per cent and a beta less than one. Now the market has just one such stock, according to Goldman Sachs.

“Global investors are likely to bank the gains they have made and look for opportunities elsewhere,” Toohey says. That includes superannuation funds, he adds. This will drive the Australian dollar lower. Toohey forecasts the dollar will trade at 97 cents against the greenback in three months, 96 cents in six months and 90 cents in a year’s time.  

Global holdings of Australian bonds peaked in the middle of last year, according to Toohey. If global bond yields rise, investors are likely to dump their Australian bonds for paper elsewhere, the Goldman analyst says, especially if they become more pessimistic about the Australian economy. That will put downward pressure on the local currency.

Further dampening investor sentiment may be the realisation that expectations of further cuts to the benchmark cash rate, currently 2.75 per cent, are too optimistic, according to Toohey.

Meanwhile, he adds, “the Reserve Bank may have delivered its final interest rate reduction for this cycle” because the Australian dollar has fallen below parity to the greenback. “Nevertheless, as evidence accumulates that the mining investment is in decline through the second half of 2013, and should the post-election period usher in a new period of fiscal austerity, the Reserve can be expected to deliver one final rate cut in November 2013.”

The Goldman Sachs analyst is keeping his year-end target for the S&P/ASX 200 Index at 5,200. Some analysts are predicting a rotation from yield stocks into ‘domestic and global cyclicals’ such as mining, homebuilders, transport and manufacturing shares.

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