Speaking on the latest Nest Egg podcast, BetaShares chief economist David Bassanese warned investors of the sectors that would likely struggle this year amid rising bond yields
“The general theme [in 2017 will] be rising bond yields, long-term interest rates and a stronger US dollar, so that would suggest the defensive yield areas, like listed property and gold, will be under pressure,” Mr Bassanese said.
“They would be the two to be wary about under [rising rates].”
The US Federal Reserve hiked rates in March and said it anticipated it would increase rates twice more this year, and three more times in 2018, squeezing bond proxies, such as listed property, telecommunications and utilities.
“You’ve got Donald Trump [promising] fiscal stimulus, and you’ve got the US Federal Reserve raising rates so the valuations [of bond proxies] probably need to come back somewhat, so that’s one area that I think is going to maybe not do so well at the moment,” Mr Bassanese said.
“By contrast, the two big sectors of our market are financials and resources, and the good news is that they look pretty well-placed at the moment.”
This was reflected in the market as investors got out of safe defensive bond proxies and bought back into the big four banks at the end of 2016.
“The dividend yields are looking okay and particularly with the banks, who were kind of left behind during the rally over the last year or so because of the concerns about capital raising,” Mr Bassanese said.
“I think those concerns are now priced into financial evaluations with valuations of the banks, for example, less than what they have tended to be in the last few years, so relative valuations look OK there.”
Mr Bassanese said there were a few factors Australian investors should be aware of in 2017.
“In Australia, keep a watchful eye on China because China’s still stimulating its economy, keeping steel demand high, which will keep iron ore prices up and help the resource’s sector,” he said.
“The main three things [are] Trump, China, and the RBA, but bottom line is the economy’s doing OK and earnings growth is still coming through, which is going to support the equity market.”