Through 2013-14 it seemed the Australian economy was starting to transition away from a reliance on mining investment to more broad based growth. Unfortunately this transition has wavered a bit recently and growth has remained below trend. Fortunately, the RBA has recognised the problem and resumed cutting interest rates. This note looks at the outlook for growth and rates and what it means for profits and investors. Read more here
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The share market rallied to a six-year high today due to a positive cocktail of factors, including Rio Tinto’s massive shareholder returns, rising oil prices, decent company earnings, the potential for more interest rate cuts, and optimism over Greece and the Ukraine.
The market’s strongest one day gain in six weeks sent the All Ordinaries and S&P/ASX200 indices to their highest levels since mid-2008.
At the close today, the benchmark S&P/ASX200 index was up 133.9 points, or 2.33%, to 5877.5. The broader All Ordinaries index was up 127.8 points, or 2.24%, to 5835.5.
Interestingly, the big miners led the gains, with BHP up 4.8% to $32.17 and Rio Tinto up 6.5% to $63.79 after announcing a $US2 billion share buyback, while RBA governor Glenn Steven’s comments today that more than one further rate cut may be needed if unemployment continues to rise lifted the banks and Telstra as the desperate search for yield continues.
The official cash rate has been reduced to a new record-low of 2.25 per cent after being left on hold at 2.5 per cent since August 2013.
The Reserve Bank’s decision has come as a surprise: a survey of 30 economists and commentators found that 28 expected the cash rate to remain unchanged.
Westpac, NAB and ANZ all subsequently forecast that rates would fall some time in the first half of 2015.
The two survey respondents who predicted today’s cut were Bill Evans, chief economist at Westpac, and Nathan McMullen, head of product and digital at RAMS.
Mr McMullen said that with consumer confidence and inflation low, the Reserve Bank would cut rates to help boost the economy and depreciate the Australian dollar.
Several of the other survey respondents also gave an indication of what forced the Reserve Bank to act, even though they didn’t expect it to happen as early as today.
ME Bank’s general manager of markets, John Caelli, said growth and consumer confidence have been weaker than the board would like.
“Market sentiment has fundamentally shifted over the past two months as oil prices have plummeted and concerns about deflation in Europe grow. This has led to markets expecting 0.50 per cent in rate cuts in the first half of 2015,” Mr Caelli said.
The cut is being seen by many as an ‘insurance policy’ on growth going forward.
Of course, while this is great news for borrowers, it adds further pressure on investors, particularly retirees, with significant exposure to cash. With that in mind, it will be important for investors in search of a decent yield to be particularly wary of new and wonderful investment products promising higher yields – so please, run it by us before taking the leap!
At the time of writing, the Australian dollar has responded to the rate cut by falling from 0.78 to 0.77, while the local share market has rallied about 1.6%.
The Reserve Bank of Australia has announced the outcome of its monthly board meeting, deciding to leave the official cash rate on hold at 2.5 per cent.
NAB chief economist Alan Oster said he expected no change in the cash rate until the end of 2015.
“The RBA still believes that a period of stability in interest rates is the most prudent policy for the time being,” Mr Oster said.
“While there are tentative signs of an improvement in household spending, they do not yet signal a sustained change in household and business conditions,” he added. In the absence of any “major surprises”, the cash rate is unlikely to rise until late 2015, Mr Oster said.
Westpac chief economist Bill Evans noted that the November monetary policy meeting minutes were “slightly more dovish” than October’s. “The growth outlook is a little less optimistic while there appears to be less hysteria around the potential risks associated with the housing market,” Mr Evans said. “Indeed there is no implication of a substantial intervention by the authorities. The RBA is clearly in an ongoing ‘wait and see’ mode,” he said.
It is also worth noting that in other quarters further interest rate cuts are being predicted for 2015. Deutsche Bank today went on the record predicting two 25 basis points cuts mid and later next year.
Our view at Westmount is that talk of interest rate cuts is premature at this point. Unless the Australian economy significantly deteriorates further, we expect the RBA to simply maintain current rates a little longer than previously expected. Of course, if rate cuts do occur, this would probably be a positive for shares and property, so it is critical to keep your portfolio diversified and flexible at all times.
Watch a full interest rate report from Macquarie here.
Back in July, the government negotiated a deal with Clive Palmer to save the ‘FOFA’ (Future of Financial Advice) amendments. However this morning two cross benchers (Senators Lambie and Muir) did an about-face and joined Labor senators opposing the government’s FOFA agenda. We can only assume that we will now see the return of FOFA (the’full-strength’ version) unless a compromise can be found.
Considering Senator Lambie’s recent clashes with PUP leader Clive Palmer, this seems more like a personal grudge, along with a good helping of political naivety, but for better or worse, that’s the system we have.
So exactly what does this mean for you, as a client of a financial adviser? Hysteria and vested interests aside, probably very little.
If you already have a good relationship with a non-aligned financial adviser who provides an efficient and meaningful service to you at a fair price, you won’t notice much (or any) change to the way he or she interacts with you.
Let’s not forget that FOFA (Labor’s full strength version) was introduced almost 18 months ago which, among other things, effectively banned investment commissions and ramped-up disclosure requirements, creating a more transparent, trusting environment for investors, retirees and professional financial advisors alike. And contrary to media reports, this law was welcomed by virtually all concerned, including financial advisors, and continues to this day.
The FOFA amendments or FOFA ‘lite’ (introduced by the Liberals) sought to reduce some of the new law’s excessive ‘red-tape’ without jeopardising the lion’s share of consumer protections. Personally, I thought a regulatory adjustment made some sense, but that’s history now.
I’ve spent over 30 years in financial services and I believe that the vast majority of financial advisers I’ve known over this time are ethical, educated, well-meaning people who sincerely want the very best for their clients, and to also run profitable practices for themselves and their employees. That’s just good business.
So naturally, it has been disappointing to see the reputations and motives of solid professionals being publicly denigrated during this lengthy, polarising process.
My advice is to ignore the cynics with obvious vested interests. If you’re comfortable with your current financial adviser, hold on tight and follow your own instincts, chances are you’re in very good hands.
Time to move forward.
Westmount I Financial Solutions