What will rise and fall in uncertain times?
Amid movements in bond yields, analysts offer their views on the companies and sectors set to benefit – or not
How can stock investors profit from the increasingly striking movements in global bond yields?
It is the question brought into focus by last week’s equity market rout, partly sparked by the recent sharp move upward in US government bond yields, and reiterated on Wednesday after US consumer prices data pushed them higher again. As equity traders around the globe wake up to the prospect of higher inflation and interest rates – and adjust to a higher yield range – many are seeking the best trades to capitalise on movements in the bond market.
“We have clearly seen a shift in expectations on monetary policy and global rates over recent months,” said Mahmood Noorani, the founder of Quant Insight, whose past experience includes roles at BlueCrest Capital Management and Credit Suisse. “The challenge for equity investors is to identify stocks that are sensitive to these macro shifts.”
Advice is starting to trickle in. What follows represents the views of strategists and analysts on which specific companies and sectors stand to benefit – or lose out – in an environment where moves in bond yields are becoming more important for the direction of stocks.
Quant Insight
The firm, which uses algorithms to identify assets most sensitive to particular factors such as currencies or economic growth, has identified the following European stocks as the winners and losers from rising 5-year Treasury yields and higher US rate volatility.
Winners: Altice, Close Brothers, Centamin, GKN, Investec, ITV, Kingfisher, Ladbrokes Coral Group, Mapfre, Merlin Entertainments, Orion, ProSiebenSat.1 Media, RTL, Banco de Sabadell, J Sainsbury, Siemens Gamesa Renewable Energy, Swedish Orphan Biovitrum, Sartorius, Tullow Oil, UCB.
Losers: Associated British Foods, Bayer, Capita, E.ON, Eutelsat Communications, H Lundbeck, Metso, Lagardere, Novozymes, Pennon, Recordati, RELX, RWE, Saab, SAP, Suez, Sonova, Snam, UDG Healthcare.
It is also singling out the following USstocks as most sensitive to higher US rate volatility and inflation:
Winners: Advance Auto Parts, Akamai Technologies, Anadarko Petroleum, CH Robinson Worldwide, Discovery Communications, Foot Locker, Fluor, TechnipFMC, General Electric, WW Grainger, Helmerich & Payne, Incyte, Marathon Oil, Pioneer Natural Resources, Ross Stores, Seagate Technology, Ulta Beauty, Viacom, Vornado Realty Trust.
Losers: Brown-Forman, DR Horton, Estee Lauder, Equity Residential, Essex Property Trust, Hanesbrands, Welltower, H&R Block, Kansas City Southern, LKQ, NiSource, Prologis, Perrigo Company, PVH, Regeneron Pharmaceuticals, T Rowe Price Group, Tyson Foods, VF Corp, Ventas, Xylem.
RBC Capital
Strategists at RBC Capital Markets note that since the financial crisis, value stocks have outperformed when the 10-year yield is on the rise, while growth has won when yields are falling. That relationship has broken down in recent months, but may return, according to RBC’s Lori Calvasina. JP Morgan and Goldman Sachs are among banks predicting a rebound in the value style.
Energy, materials and financials shares are positively correlated with 10-year yields and inflation expectations, suggesting they should lead in a rising rate environment, RBC says.
HSBC
While equity traders are scrambling to find ways of benefiting from rising yields, HSBC strategists are looking to do the opposite. The bank is recommending that European investors consider buying equities poised to benefit from falling bond yields, based on its view that the 10-year US Treasury yield will peak around the end of the first quarter and weaken to 2.3 per cent by year-end.
Sectors that stand to gain from falling yields are growth shares such as luxury goods and ones with higher dividend yields like utilities and energy. HSBC has an overweight position on those in Europe, while it’s been cutting its position in financials, where it still holds a modest overweight, but says the yields environment will be a headwind.
UBS
UK grocer Tesco is among UBS’ top single-stock picks, as it is relatively low-beta and has historically demonstrated limited exposure to 10-year US Treasury yields, the bank’s strategists wrote in a note. Overall, UBS’s wealth-management unit does not believe yields will rise to levels that will prevent equities moving higher in the next six months.
Pimco
In Asia, Pacific Investment Management (Pimco) says that Asian dollar bonds face the risk of an unwinding in demand from Chinese investors amid a weakening in the US currency.
“That’s definitely a risk – less demand for dollar denominated assets in a world where the dollar is depreciating,” said Mark Kiesel, the asset manager’s chief investment officer of global credit.
China’s sprawling HNA is perhaps a good example of the challenges. It faces some $16 billion worth of financial hurdles, amid a roller coaster ride for one of its dollar bonds.
Since the conglomerate took full effective control of Pactera Technology International from Blackstone in the first half of 2017, its April 2021 notes have climbed and fallen as the issuer ran into difficulties.
S&P Global Ratings downgraded the notes by two steps to CCC+ on Tuesday – deep into junk territory. Pactera is only a “moderately strategic” subsidiary of HNA, which is unlikely to provide additional financial support if the unit falls into distress. HNA’s acquisition of Pactera triggered a change-of-control offer for the 2021 notes in March last year; Pactera bought back $169 million of them in a tender, funded by a $105m loan from HNA, according to Moody’s Investors Service.
Pactera then issued a notice in late September to redeem the remaining $105.6m of the notes at 106 cents on the dollar on November 28, subject to sufficient financing.
The call date has since been deferred twice as conditions were not met, first to January 27 and then to March 26, causing wild swings in the prices, according to Bloomberg data. Another delay past April 15 would allow Pactera to call them at 104 cents.
Negative or super-low interest rates have prompted yield hungry investors from Beijing to Paris to buy dollar bonds from Asia, pushing average premiums of such securities to record lows, according to a Bloomberg Barclays index going back to 2009. Chinese buyers, in particular, have loaded up on US dollar debt, but the weakening currency could spur less investor interest, according to Pimco. China’s yuan last week advanced toward the strongest level since before its devaluation in 2015.
Pimco has been avoiding Asia dollar bonds as the credit spreads are too tight and finds better value elsewhere including Mexico and Brazil, according to Mr Kiesel.
“We’re going to sit back and wait until they become cheap again,” he said.