The yield convergence trade is over

Crispin Murray, Head of Equities at BT Investment Management, highlights how the yields on offer across different sectors of the market have gradually converged over recent years. Traditional defensive stocks such as banks, Telstra and Wesfarmers have rerated. On the other hand industrial companies like BHP and RIO have cut costs and upped their payout ratios. The result, as illustrated in the chart, is that yield is no longer a differentiating factor for these companies. Murray says that this scenario implies mispricing and therefore opportunity. "The market is actually quite confused. Because the likelihood that all these stocks are going to grow their dividends at the same rate for the next 10 years is extremely low and that's what the market right now is effectively assuming. So it tells me there is mis-pricing and therefore opportunity."