GARY Top Ten: Stocks offering growth at reasonable yield

Long term investment strategy has always been the perennial optimisation between the macro and micro cycles. The main cycle we are seeing in the current macro is in the bond yields.

We are near the end of the 40-year US bond bull market cycle as shown in the chart below. Central banks are using substantial balance sheet to keep it elevated in the short term as the inflation cycle and supply side issues flag the inevitable nature of the cycle.

The long-term bond cycle is clearly supportive of rising bond yields over the next decade and more. This leaves global markets facing a macro cycle that hasn’t been seen for four decades.

In the last 40 years, buying any asset with real growth delivered outperformance due to falling cost of borrowing. We are coming to the end of that cycle and investment strategies will have to evolve with that.

Chart: US Bond Yields (source: Deep Data Analytics)

Fading global growth

The global growth outlook (chart below) into the next few years is expected to fade. Central Banks have continued to revert to boosting asset bubbles to keep the economic growth supported. The rise of inflation and supply side issues post-pandemic is expected to reduce the upside from the stimulus-based recovery.

As we can see from China, the world needs to move to reform-based policy work to drive structural growth. Inevitably that will deliver short term pain before long term gains are seen.

The lack of political will power to follow through reform changes has left most of the developed world in structural problems and low growth. The risk remains that Central Banks and Governments continue to take the easy path without reform and delay the structural growth recovery cycle as we have seen in Europe over the last decade.

Global markets are starting to wake up to elevated inflation and fading growth delivering stagflation risk. Historically high market multiples will struggle to support a downgrade cycle while stimulus expansion will elevate inflation even further. Central Banks and Governments are trapped between political reality and economic reality.

Historical high market multiples, high debt loading, low credit standards, high asset prices and negative real growth leaves investors facing uncertain macro environment.

Chart: Global Growth Outlook (source: Deep Data Analytics)

GARY Top-10: Companies offering Growth At Reasonable Yield 

At Deep Data Analytics (DDA), we use extensive data modelling at all levels to dynamically manage our proprietary approach to yield investing.

In the era of extreme Central Bank manipulation and market uncertainty, yield investing can easily turn into value traps that deliver negative returns.

The Growth At Reasonable Yield (GARY) model offers exposure to the best 10 stock ideas that deliver stable growth and yield at a premium to bonds. GARY is one of many model portfolio options offered to DDA clients. 

The GARY modelling starts with the S&P 300 and cuts down this universe to identify companies with growth rates of approximately 8% - 18% and also with a yield of 1% premium to the bond rate. The macro modelling sieves the preferred sector selections to deliver another layer of risk/return protection on the overall model.

GARY model performance (i.e. excludes dividends and transaction costs) below shows the long term returns against the major indices. At the end of August, GARY model portfolio had exposures in Global Packaging, Stock Exchanges, Annuities, Agriculture, Gold, Insurance, Telcos and Supermarkets.

The GARY Top Ten at the end of August* 

Amcor (AMC), ASX Limited (ASX), Challenger (CGF), Elders (ELD), Evolution (EVN), Regis Resources (RRL), Insurance Australia Group (IAG), QBE Insurance (QBE), Telstra (TLS) and Woolworths (WOW)

Chart: GARY Model Portfolio Performance (source: Deep Data Analytics)

*DDA may or may not have made changes to the model holdings since the end of August. We continue to see the cycles changing and the model portfolios evolving with that. 

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