The Telstra Corporation Ltd (ASX: TLS) share price has been a disappointing performer in 2020.

Since the start of the year the telco giant’s shares have fallen almost 11%.

Is this a buying opportunity for investors?

I believe the weakness in the Telstra share price is a buying opportunity for investors for a number of reasons.

Firstly, I think the company’s shares are trading at an attractive level in comparison to their peers.

At present they are changing hands at 19x estimated full year earnings. This compares favourably to rival TPG Telecom Ltd (ASX: TPM), which is trading at approximately 29x estimated full year earnings.

Another reason I think Telstra’s shares are in the buy zone is its dividend yield.

As I have mentioned here previously, I’m confident that Telstra’s free cash flow will be sufficient to maintain its 16 cents per share dividend for the foreseeable future. Based on its current share price, this equates to a fully franked 5% dividend yield.

I think this is particularly attractive given the low interest rate environment we are living in. Especially when you consider that the cash rate looks likely to remain at a record low of 0.25% until at least 2022.

Improving outlook.

Another key reason I am bullish on Telstra is its improving outlook.

Thanks to the NBN rollout nearing completion, sizeable cost cutting, and the simplification of its business, I believe a return to growth is on the horizon. In fact, Telstra would have returned to growth in the first half of FY 2020 if were not for the NBN headwind.

For the first half, Telstra reported a 6.6% decline in underlying earnings before interest, tax, depreciation, and amortisation (EBITDA) to $3.9 billion. However, underlying EBITDA excluding the in-year NBN headwind grew by approximately $90 million. This was the first time its EBITDA has grown since FY 2016.

So, with the NBN rollout now nearing completion, it won’t be long until this headwind is gone forever and management can focus on growing the business again.

All in all, I think this makes Telstra’s shares a great option for patient long-term focused investors right now.

More reading

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Telstra Limited. 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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The S&P/ASX 200 Index (ASX: XJO) is rallying hard today. At the time of writing, the ASX 200 is up a hefty 4.10% and back over 5,954 points.

As of yesterday, ASX 200 shares were down more than 7% since last Wednesday. But now it seems whatever brought this panic about has suddenly abated. Hallelujah… right?

Don’t get me wrong, I’m an investor who enjoys seeing ASX shares rise. Rising shares normally translates into rising wealth for me and anyone else who is invested in the ASX share market.

But this ASX market rally today has got me worried.

To understand what’s occurring, let’s look at the could-be reasons for the market’s rally. We can never be absolutely certain with these things, but signs point to the announcement by the US Federal Reserve overnight as the primary catalyst for today’s market moves.

Risk-on, risk-off for ASX market rally

According to reporting in the Australian Financial Review (AFR), last night (our time), the US Fed announced that it will be buying corporate bonds on the secondary bond market. In English, this means that the US central bank is now purchasing the debt of individual companies on the bond markets.

Now, this state of play is highly unusual, if not unprecedented. Normally, central banks like the Fed have stuck with tinkering in the government bond markets. This does have an impact on financial markets, albeit not directly. But buying bonds of individual companies do. Normally, a company’s debt is priced using a classic risk and reward market mechanism. ‘Safer’ companies offer less interest on their debt, and ‘risky’ companies more. If no one wants to pay for a company’s debt, it could be the start of bankruptcy.

But the Fed stepping in and buying up corporate bonds immediately distorts the normal market operation. In my opinion, it signals to companies that they don’t have to worry about being prudent with their capital. It gives hope that the government will always be there to lend them money. Of course, investors (both in the USA and Australia) are cheering this on and sending ASX shares up today.

But I don’t think it’s a cause for celebration. Historically, government intervention in financial markets doesn’t end well. We have a market for a reason – it’s the most efficient (although not completely) mechanism to regulate risk and reward on the bond markets and price and value on the share markets. Messing around with these mechanisms may bring a short-term sugar hit for asset prices, but I see it as a long-term problem.

I’m still investing in ASX shares, of course. History has also taught us that trying to move your money around based on what you think might happen is fraught with danger. But I’m not excited about the Fed buying corporate debt. And I’m certainly not cheering today’s ASX market rally as a result.

More reading

• 3 ASX 200 shares to buy for income and growth
• UBS picks the best ASX retail stocks for the post COVID-19 world
• 3 fantastic ASX 200 shares to buy right now
• Leading brokers name 3 ASX 200 shares to sell today
• ASX 200 jumps 3%: CBA rebounds, Afterpay hits a new record high

Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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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