Defensive stocks starting to look overpriced

Uday Cheruvu, Portfolio Manager at PM CAPITAL, sees risks in ‘expensive defensive’ stocks at current prices. Prices on Transurban and Sydney Airport have risen over 120% each in the past five years. The driver behind these gains is the 10-year government bond rate falling from 5-7% a few years ago to around 2% today, he says. “If you put at 1-2% discount rate (risk-free rate) to the present value of the earnings of these long-term businesses like infrastructure, say Transurban or Sydney Airport, even with low passenger growth, the discount rate is so low that you get a high valuation.” The question then becomes whether the bond rate stays at these levels, and he feels the risks are more skewed to the downside than the upside. Watch the full video below for more details, including the area of the market he's seeing complacency now.