With the fall in deposit rates and ultra-low or even negative bond yields, it is near impossible for investors to live on the income generated by these asset classes, traditionally viewed as defensive.

Necessity has thus driven many ‘conservative’ investors into high dividend paying equities and those perceived to offer earnings certainty, typically in sectors such as Healthcare, REITs, Telcos and Utilities. This scrambling for income has, however, resulted in these stocks generally trading on stretched valuations, both compared to historical trading ranges and relative to the broader market. Looking at the PE ratio ranges per sector between 2011 – 2016 using FY1 estimates, with the exception of Telco’s, the ‘bond proxies’ are trading at or near the maximum observed levels.

While it’s impossible to know when the performance cycle will turn, expensive valuations mean that in a fickle market where disappointments are harshly dealt with, these asset classes can no longer be viewed as defensive investments. It’s important to ensure that you’re not simply chasing a crowded yield trade.

If you would like more information please call 1300 ELSTON or email info@elston.com.au and an adviser will be in touch.