Mike Williams

Charlie..I have been hearing this for quote some time, that rising bonds post a real risk to bond proxy stocks share prices. But why are these stocks more (and I ask out of ignorance), more prone to capital loss than growth stocks, given the risk free rate increasing should affect valuation for all shares not just the defensives? thanks

Graeme Holbeach

Rising rates are not exactly unexpected. The Fed is actively promoting it. As stockmarkets price on expectations, I would have thought much of the damage should already be priced in. While infrastructure stocks on 30 plus PEs may have more de-rating to come, I would have thought a number of REITs on PEs of 14 look pretty safe. After all, a long bond at 3% is effectively on a PE of 33.

David Lau

On a P/E basis SYD looks expensive, but as SYD is a stapled security it's misleading. Shareholders in SYD also own units in a trust, SAT1, which loans to the company Sydney Airport Ltd. Hence shareholders own the debt of the company as well as the company itself. This structure has the effect of minimising Net Profit, so as to avoid tax.

Hermanus Marais

Charlie I have to agree with Mike. If you look at a top class stock like Simon Property Group in the US it has lost 13% of its value over the last 52 weeks and has effectively priced in the rate rises. It currently trades below its NAV and has a healthy current dividend of more than 5% in USD. So why this type of business (with top assets) having lost 13% while the rest of the market gained 20% is at greater risk of losing capital I don't understand. The current market valuation on a Schiller PE basis is the second highest of all time and the main reason is the low discount rate. So far no adjustment for that but it will come!

TOm Neilson

Charlie, I also have to agree with Mike. I think you might be getting confused with an overvalued bond market (rising risk free rate) and not taking any consideration to the stock valuation (risk premium). Finance 101 teaches us that all securities are priced on a discount rate that combines the risk free rate and a risk premium. Since Hermanus brought up Simon Property Group (SPG), its currently trading on a 5% distribution yield versus a US 10 year bond yield of 3%. The last time SPG traded on a 5% yield was 13 years ago where the US bond yields at that time was 4%. In 2005, SPG's risk premium (distribution yield minus risk free rate) was 1% while it's 2% today! Is the SPG's cash flow risk different in 2005 than in 2018? I doubt it. Mike is also correct that a rising discount rate affects all securities, not just defensives. Stocks with the lowest risk premiums (aka high PE/growth stocks) will be hardest hit by rising risk free rates. Many high PE tech stocks are ticking time bombs.

Dean Tipping

Per the 1H18 TCL results announcement recently, ADT (Average Daily Traffic) grew by 1.4% on pcp yet proportional toll revenue grew by 10.5%. Pretty good kicker in revenue for a minor increase in "sales"...it could be argued workday travel savings provide customers with real value that can be factored into rising tolls without too much backlash.