Searching for Yield Down Under

Last week interest rates grinded lower despite relatively better data out of Europe and signs that the U.S. Federal Reserve (Fed) is close to indicating when exactly it will raise interest rates. Read more about this in my weekly commentary. The persistence of low yields is leading investors starved for income to some new places, perhaps unexpectedly, Australia.

Although the U.S. economy is still the most robust major economy in the world and data continue to show decent growth, that growth is moderating. With the Fed insisting its future course is dependent on data confirming a stronger economy, investors still believe the Fed will hold back. However, we think the Fed is closer to evolving its rates policy toward more normal conditions than many in the market appear to believe. We may see a different tone from the Fed in its upcoming meeting in March, leaving the door open for a June rate increase.

With U.S. economic readings coming out on the soft side and many investors believing the Fed to be in no rush to raise rates, U.S. yields have pulled back in recent weeks. The 10-year Treasury yield has retreated back to 2%. Still, this looks generous compared to Europe, where 10-year German Bund yields reached a new all-time low of 0.28% and seven-year yields moved below zero for the first time. Even in Greece, yields are falling as the odds of a near-term Greek exit from the eurozone dropped.

Meanwhile, investors continue to struggle to find income, with bond yields in most countries hitting new lows. The low yield environment is pushing them into bond market substitutes. Last week $2 billion flowed into equity income funds.

One interesting example of the search for yield is evidenced in the recent rebound in Australian equities. We had been negative on this market since last January and, indeed, Australian stocks had trailed global equities by roughly 6% since that time. More recently, however, Australia’s market has been rebounding, despite low commodity prices and the struggles of mining companies. Why? One reason may be interest in Australian banks, which have been paying high dividends. The Australian equity market now offers a dividend yield of over 4%, more than double that of the U.S. market. With yields low around the world, investors are increasingly scouring the globe for income. That’s one reason we would upgrade our view on Australian equities to a benchmark weight.

Source: Bloomberg

Russ Koesterich, CFA, is the Chief Investment Strategist for BlackRock.

This material represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any security in particular. Past performance does not guarantee future results.

International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. These risks often are heightened for investments in emerging/developing markets and in concentrations of single countries.

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