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 economic backdrop for the year ahead is likely to be fairly similar to what we saw in 2014; expect continued economic expansion but at a relatively modest and more uneven pace…
• Growth is likely to remain around 3.5%; ranging from 1-1.5% in the Eurozone and Japan, 3.5% in the US and
7% in China.
• Inflationary pressure is likely to remain fairly low and the overall monetary backdrop, despite a probable
tightening by the US in the middle of the year, will remain fairly easy. We will likely see further easing
in Europe, Japan and China.
• We should see growth move up to around 3%
• Inflation is likely to remain benign
• The Reserve Bank of Australia is projected to cut the cash rate to 2.25% early in the year with a 50%
chance of another cut in the June quarter.
Rebalancing the economy
As Australia transitions back to a more balanced economy, investors should try to avoid getting too gloomy. Yes, the mining sector is slowing down, but low interest rates and a falling Australian dollar is providing a great boost for non-mining parts of the Australian economy. For instance, we’re seeing a return to life for retail-related areas of the economy. Housing and construction has picked up, construction activity related to infrastructure continues, and the tourism, manufacturing and higher education sectors are showing signs of improvement.
Unemployment will eventually fall
While economic growth is still not strong enough to lead to a fall in unemployment, we expect that the job market in 2015/16 will start to pick up as the stimulus to the economy from lower interest rates and the falling Australian dollar starts to feed through.
What does this mean for investors?
It should mean another year of reasonable returns for diversified investors. But there are two key things that investors need to be mindful of:
1 What we saw in 2013 and in 2012 (returns of around 20%) out of shares is not sustainable over the long-
term. Expect something more like 8-10%;
2 Every year experiences a lot of ‘noise’ and 2015 will be no different. This can be negative in terms of
distracting you from your key investment strategy. Try and turn down the volume on the financial news and
focus on maintaining a long-term investment strategy. (Dr Shane Oliver, AMP Capital)
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
After a year long phasing down period, last night the US Federal Reserve finally ended its quantitative easing (QE) program, introduced at the height of the Global Financial Crisis back in 2008.
Since the worst days of the GFC, unemployment has fallen, consumers are spending again, businesses are investing and banks are lending. So after all is said and done, QE seems to have actually worked – the US economy is now well and truly into expansion mode and looking a lot stronger than Europe and Japan that have taken longer to adopt QE.
It would be fair to say that, while the US economy isn’t exactly booming, the Fed Reserve’s decision to take the economy off life-support was, at least for now, an important sign that the US may now be able to finally stand on its own two feet.
While the punch-bowl may have been removed from the table, the music continues to play. Consistent with the Fed Reserve’s softly, softly approach, they’ve also indicated that interest rates won’t be going up in a hurry, even as the US economy continues to recover – an encouraging signal to the US (and the rest of the world) that concrete evidence of a sustainable recovery will be needed before interest rates are finally raised in earnest.
The ending of US QE is also a positive for Australia and removes a source of upwards pressure on the Australian dollar (great for exporters).
Westmount I Financial Solutions