Search for yield pays dividends for Aussie equities and currency
As we enter the 3rd week of August, the Northern Hemisphere is on holiday; and it is no surprise that the markets are confounding investor expectations, as they are meant to do in August.
In the current interest rate environment, it is all about yield. The amount of debt with negative yield to maturity is now a staggering 13tn dollars. It is no wonder that the main driving force for equities will be the global hunt for yield. This in turn is seeing increased inflows into the local Aussie market.
- sponsor - Wealth Know How
Wealth Know How is the online network helping people manage their wealth through financial education. Whether you are looking for simple ways to better manage your cash, or you are after a complete strategy on how to save for retirement, we can help you understand your options. It is important to have a vision for your future, but its knowledge not dreams that will ultimately deliver financial success.
Published on 18 Aug 16
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As we enter the 3rd week of August, the Northern Hemisphere is on holiday; and it is no surprise that the markets are confounding investor expectations, as they are meant to do in August.
In the current interest rate environment, it is all about yield. The amount of debt with negative yield to maturity is now a staggering 13tn dollars. It is no wonder that the main driving force for equities will be the global hunt for yield. This in turn is seeing increased inflows into the local Aussie market.Sponsor - Wealth Know How
Wealth Know How is the online network helping people manage their wealth through financial education. Whether you are looking for simple ways to better manage your cash, or you are after a complete strategy on how to save for retirement, we can help you understand your options. It is important to have a vision for your future, but its knowledge not dreams that will ultimately deliver financial success.
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Venezuela tension heats up
Duration 03:16
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Aussie dollar surprises market
Duration 03:10
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Markets climb as investors watch US healthcare bill
Duration 02:31
In the current interest rate environment, it is all about yield. The amount of debt with negative yield to maturity is now a staggering 13tn dollars. It is no wonder that the main driving force for equities will be the global hunt for yield. This in turn is seeing increased inflows into the local Aussie market.
Thanks to years of continued investor activism and franking credits, top Australian companies pay higher dividend yields compared to the S&P 500, which yields at about 2.3 per cent. The yield from ASX200 companies is very attractive, resulting in the current increase in foreign inflows into Australia.
It’s not just equity yields that are attractive in Australia, with AAA rated government bonds producing significant yield to maturities when compared to the negative yields you would receive from both sovereign and corporates bonds in Japan and Europe with lower ratings.
Foreign inflows are also having an effect on the Aussie dollar, which is on the rise despite the RBA cutting rates to record lows in August. This rise in the dollar, coupled with mortgage lenders not passing on the full rate cut to borrowers, has seen the RBAs recent decision wasted. If it is a weakening in the dollar that the RBA is interested in, then they may think twice about cutting again.
The Australian Dollar Japanese Yen is the currency cross we will be closely watching. Further weakening should see a flow of YEN into Australian equities and bonds for yield. A favourite trade for Japanese housewife. The recent announcement by the Bank of Japan to buy more equity-linked ETFs means that the Japanese equity market is at risk of becoming overvalued – similar to the way that the Japanese bond market has been distorted, and now trades with negative yields.