The Australian market has seen an increased inflow of capital as global investors search for yield in the current low interest rate environment, says George Lucas, managing director Instreet Investments.
“With the amount of debt in negative yield now at a staggering $13 trillion, it is no wonder that the main driving force for equities will be the global hunt for yield.
“Thanks to years of continued investor activism, top Australian companies pay higher dividends and help produce one of the highest yielding companies in the world. Compared to the S&P 500, which yields about 2.3%, the yield from ASX 200 companies is attractive, resulting in foreign inflows and leading Australian companies being included in global yield ETFs listed in the US.
“And it’s not just equity yield that is attractive in Australia. The AAA rated government bonds are producing significant yield when compared to negative yields.
“Foreign inflows are also having an effect on the Aussie dollar, which is on the rise despite the RBA cutting rates to record lows in August. This rise in the dollar, coupled with mortgage lenders not passing on the full rate cut to borrowers, has seen the RBAs recent decision completely wasted. If it is a weakening in the dollar that the RBA are interested in, then they may think twice about cutting again.
“A quick look at Japan shows that further weakening should see a flow of YEN into Australian equities for yield.
“The recent announcement by the Bank of Japan to buy more equity-linked ETFs means that the Japanese equity market is at risk of becoming overvalued – similar to the way that the Japanese bond market was distorted, and now trades in negative yields,” said Lucas.
