Wednesday, May 04 2016
After months of explaining why the market has been weak, it is nice to report on a positive news event. The RBA has determined that housing prices are abating and this has given them room to lower interest rates.
Implications for the portfolio are as follows:
- Banks. Will the banks pass on the rate cuts to consumers? They run the risk of incurring the wrath of Governments during an election year so I suspect they will pass most of it onto consumers. Banks yields look attractive compared to cash rates.
- Consumer stocks. Clear beneficiaries from this decision. Consumer spending has slowed this year with a warm start to winter so these companies will be pleased with the relief offered by lower interest rates.
- Offshore exposures stocks. The currency has dropped and those stocks earnings foreign currency will benefit. It will also be of benefit to those sectors whose competitiveness will improve with a lower currency—tourism, education, agriculture, other exporters.
- Yield payers will benefit from the comparison to low interest rates.
Over the past few months there has been a number of positives which is supporting the market (now up for the year).
- We have seen commodity prices bounce which has supported resource stocks.
- Economic data from the US has turned positive reducing concerns regarding a potential recession or slowdown.
- Chinese economic data has improved off a low base as stimulus bites.
- Now the RBA has lowered interest rates. Our largest concern has been the potential for the currency (which has been nudging 80 cents) to strangle the recovery that has been evident in a range of export sectors. This was coming at a time when housing was slowing so presented a risk to the economy. So we welcome this decision as providing support for the economy over 2016 before infrastructure spending kicks in to support the economy in 2017.
The budget might provide further stimulus via infrastructure projects although this will be balanced by tax increases and the usual political machinations in an election year.
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