Growth at reasonable yield (GARY): April 2024

Yield investing with data in a high interest rate environment
Mathan Somasundaram

Deep Data Analytics

Yield investing, a strategy traditionally cherished for its potential to generate steady income, now faces a constellation of economic challenges that test its resilience and adaptability. High bond yields, a rising risk of a new inflation wave, slow global growth, elevated interest rates, and the looming threat of recession paint a complex backdrop for investors seeking to maintain or grow their income streams from investments. The GARY (Growth At Reasonable Yield) model from Deep Data Analytics offers that mix of outperformance and risk management.

High bond yields have recently become a prominent feature of the financial landscape. As central banks ramp up interest rates to combat inflation, the yields on newly issued bonds have increased, which could be seen as a boon for new investments in the bond market. However, for existing bond portfolios, this scenario poses a risk, as the value of older bonds with lower yields declines. Investors need to carefully navigate these waters by considering the maturity profiles of their bond investments and potentially shifting towards shorter-duration bonds, which are less sensitive to changes in interest rates.

US 30 year bond yield cycle has turned positive after 40 years up cycle followed by 40 year down cycle.
US 30 year bond yield cycle has turned positive after 40 years up cycle followed by 40 year down cycle.

Amidst these dynamics, the Rising Risk of a new inflation wave adds a further layer of complexity. Triggered by factors such as ongoing supply chain disruptions, labor market constraints, and expansive fiscal and monetary policies across various countries, this new inflationary pressure threatens to erode the real returns of investors. Inflation-linked securities such as Treasury Inflation-Protected Securities (TIPS) and other inflation-hedging assets like commodities or real estate investment trusts (REITs) become critical components of a yield-focused investment strategy under such circumstances.

The situation is compounded by slow global growth. Many economies are still recovering from the impacts of the COVID-19 pandemic, and with the added burden of geopolitical tensions and trade uncertainties, global economic expansion has been tepid. This slow growth environment challenges yield investors by dampening business earnings potential and, by extension, the ability of corporations to pay dividends or interest. In this light, diversification across geographies and sectors, as well as a keen focus on quality and sustainability of earnings, is vital.

Elevated Interest Rates present a dual-edged sword. On one hand, they offer an opportunity for investors to lock in higher yields, particularly through instruments like fixed deposits or bonds issued at these higher rates. On the other hand, high interest rates increase the borrowing costs for businesses, potentially leading to reduced profitability and, consequently, lower dividend payments or even defaults on bonds in more extreme cases.

Adding to the investor's conundrum is the potential risk of recession. As high interest rates persist to control inflation, the cost of financing increases across the board—slowing consumer spending, reducing corporate investment, and generally dampening economic activity. A recession could lead to higher default rates, particularly in the more vulnerable sectors of the economy, which would impact the returns from both bonds and stocks.

In such a challenging environment, strategic adjustments are required. Investors might consider rebalancing their portfolios more frequently, keeping a closer eye on macroeconomic indicators, and remaining flexible in their investment choices. Yield-focused strategies might increasingly incorporate elements of capital preservation, such as investing in high-quality, low-duration bonds, or sectors of the equity market that are less sensitive to economic downturns, such as utilities or healthcare.

In conclusion, while yield investing remains a viable strategy, the current economic climate demands a more nuanced approach. Investors must be prepared to adapt to rapidly changing conditions by enhancing their focus on risk management, diversifying their investment approaches, and maintaining a vigilant eye on global economic developments. In doing so, they can navigate through high bond yields, inflation risks, slow growth, elevated interest rates, and recession threats more effectively, aiming to secure not only yields but also the capital preservation necessary in uncertain times. Deep Data Analytics’ Growth At Reasonable Yield (GARY) offers that with premium outperformance.

The best YTD performers in the GARY Top 10 are: Codan (ASX: CDA), Austal (ASB), Downer (ASX: ASX) and Elders (ASX: ELD).

GARY keeps delivering through the cycles. 
GARY keeps delivering through the cycles. The performance chart excludes dividends and transaction costs.

Note: DDA may or may not have made changes to the model holdings since the end of March. The data driven model portfolios will continue to evolve with the economic/market cycles.


........
Deep Data Analytics provides this financial advice as an honest and reasonable opinion held at a point in time about an investment’s risk profile and merit and the information is provided by the Deep Data Analytics in good faith. The views of the adviser(s) do not necessarily reflect the views of the AFS Licensee. Deep Data Analytics has no obligation to update the opinion unless Deep Data Analytics is currently contracted to provide such an updated opinion. Deep Data Analytics does not warrant the accuracy of any information it sources from others. All statements as to future matters are not guaranteed to be accurate and any statements as to past performance do not represent future performance. Assessment of risk can be subjective. Portfolios of equity investments need to be well diversified and the risk appropriate for the investor. Equity investments in listed or unlisted companies yet to achieve a profit or with an equity value less than $50 million should collectively be a small component of a balanced portfolio, with smaller individual investment sizes than otherwise. Investors are responsible for their own investment decisions, unless a contract stipulates otherwise. Deep Data Analytics does not stand behind the capital value or performance of any investment. Subject to any terms implied by law and which cannot be excluded, Deep Data Analytics shall not be liable for any errors, omissions, defects or misrepresentations in the information (including by reasons of negligence, negligent misstatement or otherwise) or for any loss or damage (whether direct or indirect) suffered by persons who use or rely on the information. If any law prohibits the exclusion of such liability, Deep Data Analytics limits its liability to the re-supply of the Information, provided that such limitation is permitted by law and is fair and reasonable. Copyright © Deep Data Analytics. All rights reserved. This material is proprietary to Deep Data Analytics and may not be disclosed to third parties. Any unauthorized use, duplication or disclosure of this document is prohibited. The content has been approved for distribution by Deep Data Analytics (ABN 67 159 532 213 AFS Representative No. 1282992) which is a corporate approved representative of BR Securities (ABN 92 168 734 530 and holder of AFSL No. 456663). Deep Data Analytics is the business name of ABN 67 159 532 213.

4 stocks mentioned

Mathan Somasundaram
Founder & CEO
Deep Data Analytics

Over 30 years’ experience in the finance/tech industry. Mathan has worked extensively in all parts of the finance sector (i.e. County NatWest, Citi, LIM, Southern Cross, Bell Potter, Baillieu Holst and Blue Ocean Equities). Currently Founder and...

I would like to

Only to be used for sending genuine email enquiries to the Contributor. Livewire Markets Pty Ltd reserves its right to take any legal or other appropriate action in relation to misuse of this service.

Personal Information Collection Statement
Your personal information will be passed to the Contributor and/or its authorised service provider to assist the Contributor to contact you about your investment enquiry. They are required not to use your information for any other purpose. Our privacy policy explains how we store personal information and how you may access, correct or complain about the handling of personal information.

Comments

Sign In or Join Free to comment
Elf Footer