Today the Reserve Bank of Australia (RBA) finally decided to take the plunge and reduce the cash rate by 25 basis points to 2.00%, a record low.
This wasn’t a huge surprise as economists this morning were factoring in a 78% chance of a rate cut today. Interestingly, the RBA provided no outlook statement for interest rates going forward, so unless the Australian economy deteriorates significantly from here, this could be the last of the rate cuts. We’ll see.
At the time of writing, the Australian share market was initially up 1.1%, however has since fallen into negative territory as the Australian dollar, surprisingly, went up in defiance of the interest rate cut.
While this is welcome news for borrowers, the decision will put more pressure on investors, particularly retirees, with significant cash/term deposit holdings – interest rates are low and will stay low for some time to come. If you need income, it’s time to consider your options.
On a different matter, the Federal Budget will be announced next Tuesday night (12 May) and, as usual, the rumours have been flying fast and furious, from superannuation to negative gearing to pensions.
Our advice is to ignore the background noise. Typically, the lead up to every Federal Budget is a showcase of worse case scenarios and general fear mongering, coming from both side of politics, usually leading to fairly unspectacular, watered-down announcements on the night.
We’ll distill the budget details into a simple, easy to understand report for our clients soon after budget night, once we’ve had a chance to thoroughly weigh-up the proposals on the table. More importantly, we’ll contact you individually should there be anything important to discuss.
Clear Focus. Better Solutions.
China’s lack of transparency often sends the wrong signals to the rest of the world. We all know that China’s economy has slowed, but is it heading towards a bust, or is this yet another false alarm? Read more here
Clear Focus. Better Solutions.
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
Clear View. Better Focus.
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)