2014 is being touted as the year that the transition from bonds to stocks truly takes hold. After the GFC hit many share market investors fled to the relative safety and stability of government bonds.
Investors scared of losing their capital in the sharemarket, and sick of low term-deposit rates pushed bond prices up (and thus yields down) to the point where the Australian 10-year bond yield hit an all-time low of just under 2.7%.
But this is starting to change. More and more investors are now switching from bonds to shares in search of better returns. We saw this start in 2013, with high-yielding shares in the big four banks and Telstra Corporation Ltd (ASX: TLS) outperforming the market.
Now that these companies have jumped ahead of the market, a team at Credit Suisse had a look at which companies would most appeal to bond investors switching back to shares.
After being accustomed to low yields for some time, Credit Suisse believes bond investors will be most interested in companies that deliver sustainable yields (not necessarily the biggest yields) with the potential for some capital growth. The analysis considered that as investors get more comfortable with the risk inherent in the share market, they start to consider the promise of capital gains more highly than the yield.
As a result, mining, financial, consumer and infrastructure stocks dominate the list. The stocks are:
- Miner and steel producer Arrium Ltd (ASX: ARI)
- Iron ore miner Fortescue Metals Group Limited (ASX: FMG)
- Life insurance and funds management group Challenger Ltd (ASX: CGF)
- Regional bank Bank of Queensland Limited (ASX: BOQ)
- Big bank National Australia Bank Ltd. (ASX: NAB)
- Retailer Myer Holdings Ltd (ASX: MYR)
- Insurer Suncorp Group Ltd (ASX: SUN)
- Banking and funds management group Macquarie Group Ltd (ASX: MQG)
- Mining services company Mineral Resources Limited (ASX: MIN)
- Iron ore miner Rio Tinto Limited (ASX: RIO)
- Electrical distribution infrastructure group Spark Infrastructure Group (ASX: SKI)
Together, the 11 stocks represent a well-diversified list of higher and lower risk companies with varying degrees of growth potential.
Foolish takeaway
Economists and share market analysts almost universally consider bond prices to be on their way down in the years to come. With the end of Quantative Easing in the US and the prospect of interest rate rises in Australia, investors are expected to transition from the safety of bonds into higher-risk assets such as shares.
To benefit from this, Foolish investors should, as always, purchase great companies at good prices and reap the rewards. The 11 stocks above represent a selection of companies that Credit Suisse believe will appeal to bond investors when they switch to shares. Investors should always remember to consider the quality of management, sustainability of the business, and competitive advantage over peers before investing in any business.
