Big dividend payers such as property trusts, banks and telecommunication stocks are likely to lose out as overseas investors make a hasty exit on the falling Australian dollar and higher bond yields.
In their place, import-competing companies and those earning in US dollars are set to gain, analysts say.
Experts are expecting a seismic reshuffle in the sharemarket as overseas traders pull money out of high yielding shares, which make up more than half of the top 200 listed companies.
“I have been repeatedly been warning about the pending aggressive great unwind of the yield play and it’s now suddenly creating capital losses fast,” Investment Adviser’s Shawn Hickman said.
“To an overseas investor, it’s easy: “sell Australia”, but the scary factor is I think both of these driving factors have much further to go,” he said.
On Friday afternoon the local currency was trading at aroundUS89.5¢, compared to US94¢ just two weeks ago. The Australian 10-year bond yield rose to 3.74 per cent, nearly half a percentage point up since the beginning of September.
The market expects the local unit to continue to weaken, weighed down by falling commodity prices and the narrowing interest rate differential with the US.
“Some cracks have appeared in the last few weeks with the Australian dollar falling and bond yields rising,” UBS strategists wrote in a note to clients.
“The market has previously shown itself to be vulnerable to significant and sharp shifts in interest rate expectations [and] bond yields.”
Recipe for vulnerability
Analysts believe the cocktail of a lower currency and higher bond yield will provide a recipe for readjustment as overseas investors, who do not have the benefit of franking credits and lose with the falling Australian dollar, pull away from the Australian sharemarket.
The hardest hit will be the listed companies with high dividend payouts, like Australian property trusts, banks, telcos and regulated utilities and infrastructure.
In the Australian share scene the banks have traditionally been generous dividend payers, with all the big four trading on a net dividend yield of over 5 per cent. Telstra is on par at 5.4 per cent.
“The obvious conclusion is that our ‘yield play’, led by the banks, has further to fall.” Mr Hickman said.
CMC Markets chief market analyst Ric Spooner agreed the prominent names like the big four banks, Telstra and large miners were exposed. But it was their large market cap, rather than their reliance on the yield trade, which exposed them to quick offshore selling.
Credit Suisse considered ANZ and Bank of Queensland to remain sensitive to the US dollar moves and expected them to underperform in a falling currency environment.
But pure US property trusts such as RNY Property Trust and Mirvac Industrial remained strong, Forager Funds CIO Steve Johnson said.
Import competitors, $US earners set to gain
On the other hand, the lower domestic dollar should reward industries competing with imports, such as steel and building materials, UBS analysts said.
The investment bank picked healthcare stocks such as Ansell, CSL, Resmed and Sonic Healthcare, along with Amcor, Aristocrat Leisure, Brambles, CSR and QBE Insurance as potential outperformers.
Mr Spooner said the potential beneficiaries were likely to be the tourism industry and some sectors of the Australian manufacturing industry that compete with imports, such as GWA Group and GUD Holdings.
The other potential winners included Australian companies which have significant businesses and investments in the US, such as CSL, James Hardie Industries and Amcor, Mr Spooner said.
The biggest winners will be “any companies which sell in the US dollar” regardless of the sector, such as QBE and BHP, RBS Morgans analyst Luke McElwaine said.
Analysts hedged their bets on the resources sector, saying its performance depended on the extent of the investor exit.
“It will likely underperform if the market sell-off is significant, but potentially outperform if the correction is relatively shallow,” UBS said.
Mr McElwaine said BHP Billiton should perform well as it earns in the US dollar, but remained negative on pure play miners, including Rio Tinto, which relies heavily on iron ore.