Batten down the hatches, the bond yield storm is coming…

Welcome to the first of our new fortnightly updates from the Antipodes investment team. These will provide insights into how the team is thinking about the latest news and market events impacting the portfolio.

Bond tumult

1.7% is the figure that caused much tumult late last week in the bond market and reverberated through the NASDAQ. The US 10-year Treasury bond yield climbed above 1.7% for the first time since January 2020 when “coronavirus” was only just beginning to creep into our vocabularies. It’s a 14-month high and we think there’s more to come. 

We find it extraordinary that real rates are being held so low across the western world given what’s going on in economies. We could see a supercharged second half of 2021 as vaccine driven reopening is supported by yet another wave of huge stimulus, not to mention vast household savings from prior rounds. This is a potent mix in the economic punchbowl. But every party with a potent punchbowl ends with a hangover – and in this case we think that will be volatility in inflation and rising real yields. This will be headwind for higher multiple stocks if they don’t live up to growth expectations. Already we’ve seen some extraordinary volatility in the tech-heavy NASDAQ.

Why do bond yields and interest rates have such an impact on growth companies like high-flying tech? Put simply, many high growth businesses are valued on aspirational future earnings – many barely make a cent of profit today. Anticipated rate rises effect the discounted value of future earnings more than current earnings.

Batten down the hatches

Amongst the bond yield storm, it seems to be a case of batten down the hatches for many investors. Interestingly it appears market participants remain badly positioned for the rotation we’ve been seeing since November and have been anticipating. Net exposure levels across energy and materials remain near historic lows, while exposure to the technology sector remains near historic highs.

As a value-biased active manager, we’re not complaining. The herd’s dedication to high-multiple tech provides us with significant opportunity, both on the long and short side.

A stock we’re buying

In recent weeks we’ve increased portfolio exposure to Airbus Group. As the rollout of vaccines accelerates in developed markets the movement of people across borders will begin to normalise, and we expect domestic travel to return first. We think Airbus can disproportionately benefit in this environment given it dominates the narrow-bodied aircraft manufacturing market – planes used predominately in short-haul/domestic travel.

 
Antipodes Partners Limited (ABN 29 602 042 035, AFSL 481 580) (‘Antipodes’) is the investment manager of Antipodes Global Investment Company Limited ABN 38 612 843 517 (‘APL’). Any opinions reflect the judgment and assumptions of Antipodes and its representatives on the basis of information at the date of publication and may later change without notice. Disclosure contained in this communication is for general information only and has been prepared without taking account of any person’s objectives, financial situation or needs. Persons considering action on the basis of information in this communication are to contact their financial adviser for individual advice in the light of their particular circumstances.

 

23 March 2021
Antipodes