Macquarie Securities has increased exposure to “bond proxies” in its Australian equity strategy portfolio to 40 per cent, in the face of a weakening economy.
Macquarie’s view is that during periods of volatility equity investors should shift into low volatility stocks with higher earnings certainty. They should also keep some exposure to sectors that have already sold off, given their potential to bounce more when the market turns.
“The risk in rotating to bond proxies now is that they have already outperformed in the correction. But our view is that bond yields could continue to fall after equity markets have bottomed, and a lower discount rate would support the valuations of bond proxies.”
Macquarie recommends adding to holdings in Telstra, GPT, Dexus and Mirvac Group.
On the expectation that banks’ credit impairments will deteriorate, Macquarie recommends removing Westpac and NAB from portfolios. The likelihood of another rate cut is also a negative for the banks.
Macquarie recommends maintaining exposure to banks through Commonwealth Bank, which has the lowest share price volatility among banking stocks.
“For additional financial exposure, we add IAG, which should also be relatively defensive in a volatile market,” it says
To make room for these new positions Macquarie is recommending removing REA Group, Cleanaway Waste and Lendlease Group, “which has development risk and uncertain construction earnings”.
Macquarie says: “The outlook for stocks after Covid-19 fades is attractive, as there will be monetary and fiscal stimulus to support earnings. The fall in bond yields also means a lower discount for future earnings and an attractive equity risk premium.
“Groups that would perform well in this environment are resources, travel and technology. We are looking to add technology names to the portfolio after there is a peak in ex-China Covid-19 cases.”
Some of the big stock price falls from 2020 highs include Seven West Media, which is 58 per cent off its year-to-date high, Corporate Travel Management (down 52 percent), Wisetech Global (down 48.9 per cent), Myer Holdings 9down 46.6 per cent) and Kogan (down 45.5 per cent) (all price changes are to March 6).
Macquarie says: “Low volatility stocks have seen smaller drawdowns than high volatility stocks in 2020, with an average decline of just under 9 per cent, compared with a 33 per cent fall for high volatility stocks.”
Macquarie’s low volatility basket is full of real estate investment trusts (REITs), Transurban, Commonwealth Bank and Spark New Zealand.