Views at a Glance / Income Report; we’ve spent a little money on an unpopular stock!

By Market Matters 27 September 17

Income Report; we’ve spent a little money on an unpopular stock!

Income Report 27/09/17

The Income Portfolio added a small 0.05% this week, mostly as a result of the Goodman Group hybrid that went ex-dividend on Friday. The GMPPA has also ceased trading, as spoken about in last week’s income report, and will repurchase the notes next week. This will increase our cash back up to 19% (after 5% was allocated to TLS today).

The market has struggled this week, falling 0.83%, and the performance of the Income Portfolio is exactly what we are aiming for at this early stage – being the maintenance of capital while regular income is being received – and we remain comfortable with the portfolio’s composition.

Telstra (TLS)

Today we allocated 5% of the MM Income Portfolio into Telstra around $3.48 leaving us with a healthy 14% cash holding.. Our view is TLS is now likely to rotate between $3.40 and $3.80 through 2017 making its current 8.93% fully franked yield extremely attractive.

With the ASX200 sitting only 20-points / 0.36% above its 20-week low some further good entry opportunities do feel close at hand.

Telstra Daily Chart

Updating the MM view on Interest rates

The local RBA cash rate remains at the historically low 1.5% level but everyone’s been warned that the next move on interest rates is up and we’ve already witnessed home loan rates tick higher while these official rates have remained unchanged. The RBA is in a very difficult position with global rates ticking higher and while it feels like they are keen to follow suit there are 2 big issues causing them concern.

1. Recently the Australian dollar has been hovering around the 80c area, not a great level for domestic competition on the global stage, and rising interest rates is likely to be supportive for our currency.

2. Unfortunately the average Australian is more indebted than ever before in history and rising interest rates is only going to make the situation worse leading to a potentially very negative impact on the whole economy.

We feel Australia is likely to join the global interest rate rising party later than most but we are confident interest rates are going higher, our best guess at present would be November 2018 but please note this is a guess, the RBA does like to make a move on Melbourne Cup Day!

Australian RBA Cash Rate Monthly Chart

The US have already started raising interest rates with one more flagged for this year and a significant 3 for 2018. We are initially targeting the 3% area for US 10-year bond yields which is an increase of ~35% from todays 2.24% so definitely not inconsequential.

The main beneficiary from our bullish view on global interest rates should be the banking and insurance sectors hence we are still exploring these stocks for buying opportunities e.g. NAB is currently yielding 6.34% fully franked and significantly higher if bought today as 3 dividends would then be payable over the next 14-months taking the yield closer to 10% fully franked over this period.

Conversely we will be avoiding the traditional “yield play” stocks like Sydney Airports (SYD) and Transurban (TCL).

US 10-year bond yields Monthly Chart

3 other stocks on the radar

1 Macquarie Bank (MQG) $88.80

Macquarie recently came out with  a solid operating update leading to some well-deserved market outperformance. We will be very interested the stock into weakness back around the $85 area where the stock will be yielding ~5.5%. One issue with MQG is that the dividend is only partially franked, however income is income, and this yield may be too good to pass up.

Macquarie Bank (MQG) Monthly Chart

2 Harvey Norman (HVN) $3.85

We already own a small 4% exposure to HVN from slightly higher levels and will be happy to average this position around the $3.50 area where the stock will be yielding an attractive ~7.5% fully franked yield.

Harvey Norman (HVN) Weekly Chart

3 BHP Billiton (BHP) $25.70

We remain keen to allocate some funds into the resources space moving forward but have not decided clearly on where and at what levels, plus we are concerned this view has become crowded over recent weeks / months. At current levels the following yields are anticipated from the sector – BHP 4.2% fully franked, RIO – 4.5% fully franked, Alumina (AWC) – 4.3% fully franked and Fortescue Metals (FMG) 8.7% fully franked.

We will update subscribers on preference (s) as they evolve.

BHP Billiton (BHP) Weekly Chart

Summary

We are keen to add to the portfolio, continuing to look at a range of options – MQG, HVN and BHP are currently our preferred picks.

We are looking to buy into the current weakness.

We are also looking to increase our hybrid exposure after the GMPPA is bought back.

Disclosure

Market Matters may hold stocks mentioned in this report. Subscribers can view a full list of holdings on the website by clicking here. Positions are updated each Wednesday.

Disclaimer

All figures contained from sources believed to be accurate.  Market Matters does not make any representation of warranty as to the accuracy of the figures and disclaims any liability resulting from any inaccuracy.  Prices as at 27/09/2017.  2.00 pm

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