Bond yields will continue to fall, driven by the negative impact of recent tariff increases, according to a new equity market report by Macquarie Securities.
In an ongoing low-rate environment, Macquarie likes bond proxies and defensive stocks. It says its model portfolio has a “high defensive weight”.
Among bond proxies the top performers have been transport and REITs. Among defensives, healthcare has been the top performer. Retail has been a surprisingly good performer.
Macquarie says income investors should avoid small caps and cyclicals. They should prefer larger ASX 100 stocks with sustainable earnings.
Preferred bond proxies are Transurban Group, GPT, Stockland and APA Group.
Preferred defensives are CSL, Ramsay Health Care, Coles, Cleanaway Waste, Goodman Group, Orora Ltd and Amcor.
Macquarie says: “Bond yields and stock prices fell in the final months to 2018. This was when investors positioned for a US recession and Australian house prices were falling at an accelerating rate.
“This is a more normal correlation but it changed in the final days of 2018. In 2019, we mostly saw lower bond yields, yet higher valuations for ASX industrials, likely due to an expectation of central bank easing as signaled by the decline in bond yields.”
“We think negative policy rates in other markets can impact domestic valuations, as ASX stocks tend to have higher dividend yields compared with most countries.
“The case for why global investors may want to invest in Australia comes down to the high dividend yield and a growing population.”