ST Note: High yield equity indices

Current status with some numbers:

1. Yield curve remains very inverted with 3m10y at 158 bps and 2y10y at 100 bps
2. Credit spread started to widen now sitting at 530 bps but lower than last year’s high 600 bps
3. VIX is low sitting just above 14 with steep contango forward curve
4. Both high yielding carry trade pairs USDJPY (1y forward 800 pips) and USDCNH (1y forward 2,100 pips) continue to trend higher with 7.7% and 5% quarter to date return outperforming other G10 major pairs.
5. Fed funds futures are pricing one more hike this year with 74% chance in 27 July 2am SGT
6. Lowest inflation measure is 4% that was headline CPI but this Friday’s estimate PCE is 3.8% that is the first sub 4% out of the four key figures and heading towards Fed’s target as per below table

Latest Median economic projections of Fed

Ahead of quarter end this Friday, the quarterly futures expiries – among quadruple witching - have been done and dusted not too long ago and most of the major equity indices have rolled into September contract in the exception of Hang Seng index (HIS) that expires monthly.  Despite interest rates being raised and staying elevated, most of the major equity indices so far have produced a decent double digit YTD returns (USD currency adjusted) with regional top performers - NASDAQ composite with +27%, DAX with +16% and Nikkei +15%.  Some of the Asian indices however lagged behind with negative returns and relatively lower PE ratio.  These underperforming equity indices – Hang Seng and ASX 200 - happen to also have higher dividend yields compared to other major indices.

Price action of Hang Seng index looks interesting as its long term 30+ years uptrend remains intact although it has been barely holding above the trend line.  Forward PE ratio of 9.4 suggests it looks cheap but its main constituents Alibaba (09988) and Tencent (00700) have had a subdued performance this year as we are close to the half way mark.  However its projected 12 month dividend yield looks attractive at 4.2% with forecast 3 year growth of healthy 3.3%.  Furthermore in July, 11 stocks go ex dividend contributing about 180 points that is roughly 1% of the index value hence there are opportunities to either collect some income through holding CFD indices (HK50) or buy July futures contract (HSIN3) at some discount relative to cash.  August and September also have decent dividends going ex – 13 stocks with 64 points and 26 stocks with 87 points respectively.

The top yielding equity index among major developed markets is ASX 200 that began with a value of 3,331 points on 3 April 2000 and all time high was set at 7,632.8 on 13 August 2021.  Since then a major resistance level seems to have formed at around 7,600 and the index currently trades about 500 points below that while this year’s support level was set at 6,900 that looks like a double bottom.  More than half of the index is concentrated with financials and materials sectors with 28% and 25% respectively paying juicy dividends >4% with high payout ratio >60%.  The next quarter is expected to be yet another heavy dividend paying quarter similar to the first quarter earlier this year as earnings season kicks off at the end of July.  The stocks with high dividends that go ex include Rio Tinto (RIO), Commonwealth Bank (CBA), BHP, Fortescue metals (FMG), Woodside (WDS) & Wesfarmers (WES) with projected dividend yields ranging from 3.74% to 11.5%.

ASX 200 has 12 month projected dividend yield of 4.5% and dividends worth about 111 points are expected to go ex during August (44 stocks with 48 points) and September (76 stocks with 63 points) although 3 year forecast growth is flat.  Holding CFD index (AUS200) during these two months would allow receiving income equivalent to 1.5% for those who is looking to buy and hold for longer term, while shorter term traders or hedgers could consider trading SPI futures (APU3) that trades at 50 points discount to the cash as dividend components outweighs the cost of carry.