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Why the Transurban share price could underperform for the rest of 2019

The Transurban Group (ASX: TCL) share price slumped this morning after Credit Suisse downgraded the stock even though the toll road operator posted a stronger than expected traffic report.

The TCL share price reversed 1.4% to $13.14 when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index is holding around breakeven in morning trade.

Transurban isn’t the only infrastructure income stock that is on the nose today although its sell-off is deeper than its peers. The APA Group (ASX: APA) share price dipped 0.1% to $9.51, the Sydney Airport Holdings Pty Ltd (ASX: SYD) share price declined 0.3% to $7.43 and the Spark Infrastructure Group (ASX: SKI) share price fell 1.1% to $2.20.

The group is falling out of favour because bond yields are starting to rise with some experts believing yields have bottomed. I’ll come back to this a little later.

When an upgrade is a downgrade

Meanwhile, Transurban has been hit by a report from Credit Suisse, which cut its recommendation on the stock to “underperform” from “neutral” after the company posted 2.3% improvement in overall Average Daily Traffic (ADT) for the March 2019 quarter.

“Sydney ADT was up 2.1% (vs CSe -1% in 2H). ADT for Melbourne and Brisbane [were] up 3.1% (vs CSe +2.3% in 2H) and 1.1% (vs CSe -1.7% in 2H), respectively,” said the broker.

“North America ADT increased 2.9% (vs CSe -2.3% in 2H).”

But the good news is more than priced in given that the stock has jumped around 9% since it posted its profit results in February this year.

Even though Credit Suisse upped its price target on the stock to $12.20 from $11.80 per share, there doesn’t appear to be much more meat left on the bones to justify another leg-up for the stock.

Credit Suisse believes the falling Australian government 10-year bond yield to record lows recently has fuelled the share price rally, and I believe that’s true.

Bond yields are a large and growing headwind

But bond yields seem to have found a floor with economists predicting that the US economy is set to rebound over the coming months while the latest economic data from China is also providing optimism that the worst is over.

This bodes well for the global economy by extension and growth is bad news for government bonds as investors will likely dump these defensive investments for riskier assets.

Falling bond prices mean higher yields as these move in opposite directions, and the same fate probably awaits “bond proxies” – or stocks that typically move with the bond market.

If you’ve guessed that Transurban and other infrastructure stocks are classified as bond proxies, you’d be right. The next few months could be tough on this group of stocks in the absence of merger and acquisition news, other corporate developments or a major increase in risk aversion.

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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Sydney Airport Holdings Limited and Transurban Group. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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