Megan Stals

Market analyst, Stake

How is Stals feeling about the Middle Kingdon right now, with its burgeoning youth unemployment, awfully ageing population, preposterous local government debt, and a property crisis for the ages?

“Although September’s GDP surpassed expectations – indicating a few of Beijing’s stimulus measures were taking effect – subsequent data releases have painted a less optimistic picture.”

Manufacturing activity – contracting. Construction and services – slowing. CPI – declining nearly as rapidly as the price of pork.

“Given that core inflation, which strips out more volatile products, also dropped by 0.6%, it’s clear that domestic demand continues to be weak,” Stals says.

And this ongoing downturn has been one of the main factors behind the ASX 200’s poor performance in 2023. Fortunately, if Stals is right, “it’s clear that China is looking outwards in the hope of stimulating growth, and this could work in favour of Australian stocks over the long term.”

Stocks like these, starting with wine:

Treasury Wine Estates (ASX:TWE – $10.49, $8.16bn MC): Megan says the expedited review of tariffs on Australian wine, expected to conclude within five months, offers significant promise.

Heavy trade tariffs have helped lead TWE’s profits to shrink around 35%. It pivoted by diverting high-end red wines from Australia into Thailand, Malaysia, Singapore and Vietnam, but “has expressed its desire to return to China when possible.”

Since the tariff review, Treasury Wine’s stock rose by 4% higher, but it’s still down by over +17% in the past year, and a long, long way off its pre-pandemic highs.

Elders (ASX:ELD – $7.22, $1.13bn MC): Stals says the elimination of tariffs on beef imports by 1 January 2024 is a positive for ELD.

“Australia is one of China’s major beef suppliers, capturing 9.5% of the import market through its reputation for quality, and the company’s export and distribution units look set to benefit.”

Adverse weather conditions from La Nina has hit profits in recent years but last week ELD received some better-than-expected full-year results, helped by falling prices for fertilisers and agricultural chemicals.

And then there’s the recent acquisitions — nine (no less) — which Stals reckons are expected to pay off in the coming year.

“The stock is still down over 28% YTD which could be seen as a potential buying opportunity,” she notes, but “the stock goes ex-dividend on the 21st of November, so bear that in mind before diving in.”

Sandfire Resources (ASX:SFR – $6.23, $2.85bn MC): Ah, our old bellwether friend, Dr Copper. We meet again.

Stals reckons the struggling property sector in China might have cast shadows over iron ore, but it’s not all bad news for Australian commodities.

“China’s been gradually easing unofficial curbs on Australian copper imports and despite the red metal’s connection to construction, this is being offset by China’s EV manufacturing dominance.

Copper miners have not performed well recently but the consensus is a significant copper deficit over the next decade is inevitable.

While China is ramping up its own production of the metal, its importance to electrification means copper ore imports are still likely to continue for the foreseeable future,” Stals says. That brings her to Sandfire which owns the Motheo mine on Botswana’s Kalahari Copper Belt.

Its steady climb from $4.74 to $6.10 in the last year makes it a standout and while revenue actually dropped 13% over last year, Stals reckons “the long term outlook appears positive, and this is being reflected in the share price.”

Kyle Rodda

Senior financial market analyst,

Cyclicals look sickly. Copper and oil are heading down. And those surging global bond yields are finally showing signs of fatigue… perhaps even rolling over.

That, according to Rodda, points to an “imminent growth slowdown”.

It’s the yields that has Rodda’s stock-picking eye though, having been driven up by the US ‘higher for longer’ mantra, and increased bond issuance by Treasury as it looks to fund massive fiscal deficits.

It’s that run-up in long-dated yields that’s kept equity prices down, and the market bearish. And as Rodda notes, “Where the US economy goes, so goes the US 10-year yield, and where the US year yield goes, so goes the Australian 10-year yield.”

The important question though – what does a slowdown in economic activity mean for your portfolio?

“Time to play some defence,” Rodda says.

Starting with these three blue-chip stocks that historically perform well when long-term yields fall. (Bonus: They pay a relatively stable dividend yield.)

Transurban Group (ASX:TCL – $12.87, $37.9bn MC): Rose to $15 on the narrative it was an inflation hedge, as the road tolls the company charges are inflation-linked.

However, Transurban shares are strongly correlated with Australian bond yield, so rising yields weakened the stock’s appeal despite a hefty, stable dividend yield of around 4.6%.

Investor sentiment also weakened after the ACCC knocked back its bid for Melbourne’s East Link.

TCL shares are now at the bottom of its range, boosting its dividend yield, with analysts forecasting solid earnings growth that may drive it above 5%. A turn lower in economic growth and bond yields could boost the stock’s appeal.

CSL (ASX:CSL – $259.13, $125bn MC): The shocks to the company’s operations have subsided, and it would seem the collections, especially in the US, are beginning to improve. However, this year’s run-up in long-end rates has compressed CSL’s multiples, pushing its share price to a four-year low.

Despite this, analysts forecast a sustained return to double-digit topline growth as the company grows with its sizeable market.

A peak and trend reversal in yields should reflate CSL’s multiples as the economic fundamentals lead to lower growth and inflationary pressures. If economic growth slows materially, the defensive qualities of the stock could also shine through.

Telstra (ASX:TLS – $3.79, $43.8bn MC): Investors had the rug pulled from underneath them when the company balked at selling some of its major infrastructure assets, which many investors thought would deliver a significant cash splash. Analysts are forecasting full-year earnings per share of $0.17 in FY24 as the business continues to provide sustained dividends.

However, with a current dividend yield of approximately 4.5%, the surge in long-end yields to 11-year highs has meant the pay-out doesn’t deliver attractive enough risk and reward.

By market standards, Telstra’s dividend yield is high, the company maintains a track record of delivering income to its investors, and if yields peak, it may draw investors towards the stock in a reach for income.

After Telstra’s recent correction, price action is becoming more constructive. The stock has carved out a rounding bottom formation and is testing previous support and now resistance around $3.90.
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