Infrastructure, property and utilities assets to tumble
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Australian investors should be concerned if they are invested in overcrowded high dividend paying stocks, as they could crumble when interest rates rise, according to DNR Capital.
DNR Capital's chief investment officer, Jamie Nicol, said: "I just think you have to be pretty careful about stocks which have benefited from low interest rates. I'm talking infrastructure, property trusts, and utilities".
Investors had been investing in these defensive assets since the global financial crisis, and as interest rates fell, it supported their valuations, Nicol said. But once interest rates rose again, funds would move out of those assets.
"Stocks like Transurban, Sydney Airport, we think have got a lot of debt, a lot of debt that's priced at very low interest rates. As interest rates start to move up, that starts to create a bit of a headwind for those particular stocks".
He projected that once interest rates rose, stocks tied to the resource and finance sectors would do well, while exporting companies like Treasury Wines would also continue to benefit from the falling Australian dollar.
"A stock that we like at the moment is Qube [Qube Holdings], its recently bought the Patrick's assets, it also owns the big land bank called Moorebank, which is right next to the Ports in Sydney, and there's long-term opportunity, to really improve the logistics chain across Australia".
Nicol also said merger and acquisition (M&A) activity was increasing and companies involved in that were also likely to do well.
"There's a lot of M&A picking up. I think it's partly due to the fact that companies can get access to debt, but also growth prospects have been reasonably low."
DNR Capital held a position in Tatts Group and they projected it would do well amid a potential merger with Tabcorp, pending the Australian Competition and Consumer Commission's (ACCC) approval.
Other stocks that would benefit were those in the advising space, he said.
"So a company like Macquarie Bank is sure to be advising on a range of these transactions. That's really going to help their profit profile. So we'd expect Macquarie to do well as the M&A cycle picks up."
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