Interest rates remain on hold

Happy Melbourne Cup Day!

The Reserve Bank Board met today and decided to keep official interest rates on hold at 1.5%.

The recently released September quarter inflation data confirmed that underlying inflation at 1.7% year on year was broadly in line with expectations, with fruit and vegetable price rises being offset by lower petrol prices on average. This release is probably the key determinant of the RBA's decision.

Macquarie Bank forecasts the most likely timing of further interest rate cuts to be February and May next year, as inflationary forces remain subdued.

The last RBA board meeting for 2016 will be held on Tuesday 6 December.

Next stop, US elections.

Rick Maggi

Are Bonds still worth the effort?

After 10 years stewarding the Reserve Bank of Australia through a tumultuous market and economic environment, marked by the GFC and Australia's economic rebalancing, Glenn Stevens has officially stepped down as Governor. 

All eyes will be focused on his successor, Philip Lowe, who inherits a record-low 1.5% cash rate, down from 2% one year ago and more than 5% prior to the GFC. 

How we got here is pretty well understood - weaker demand from Australia's major trading partners has contributed to lower commodity prices, slower domestic growth and inflation below the RBA's 2-3% target. On the bright side, a weakening of the currency, combined with low interest rates (which help drive house prices higher), has helped the economy remain resilient and rebalance. 

As cash rates have fallen, so too have bond yields, punishing income-oriented bond investors, and also leading some to question the role of bonds in their portfolios. And in Australia, we are lucky (again the lucky country!) by comparison given negative yields in Japan and much of Europe. 

I will leave it to Dr Lowe to prescribe monetary policy (hint: the market is pricing in some stability, with no anticipated moves over the next 6-12 months), but I would like to offer some perspective around how even at record low yields, bonds deserve your attention. And in some respects, low is a good thing! 

Let me explain. 

First, low yields on bonds need to be considered within the context of a low inflation environment. With inflation expected to hover at or below 2%, yields of a globally diversified portfolio of government and corporate bonds of between 2.5-3% should produce a positive, albeit small, inflation-adjusted return. Cash may struggle to do the same, and while dividend-paying equities may produce more income, they are also subject to much larger swings in price, particularly if the dividend comes under pressure. 

Second, and as important when constructing portfolios, what gets us excited are asset classes that diversify one another. This chart measures the rolling 5-year correlation between equity markets and changes in bond yields for both Australian and US markets. What it shows, is that even in an environment of low yields and low cash rates, bonds have continued to exhibit negativecorrelation with equities, meaning that they have continued to provide a dampening effect for investors' portfolios. 

Bonds remain an effective diversifier...

Interest Rates Steady

The RBA has resolved to keep interest rates on hold at 1.5 per cent ahead of a possible US rate hike on 21 September and the release of Australian CPI figures on 26 October.

As expected, RBA governor Glenn Stevens’ final meeting before handing over the reins to his successor Philip Lowe proved to be uneventful.

The decision to keep rates on hold was in line with market expectations, with the ASX 30 Day Interbank Cash Rate Futures September 2016 contract pricing in a 95 per cent chance of ‘no change’ to the cash rate.

UBS chief economist Scott Haslem said the RBA is likely to remain on hold for the “foreseeable future” given firm growth data, a likely lower trend in the Australian dollar and concern about financial stability.

“While inflation will remain low, core inflation is likely to drift modestly higher from here,” Mr Haslem said.

The ANU Centre for Applied Macroeconomics Analysis (CAMA) Shadow Board attached a 57 per cent probability to 1.5 per cent being the correct policy setting.

“The CAMA RBA Shadow Board clearly believes that the cash rate should not be cut any further,” said the Shadow Board. “After the RBA’s decision in August to cut the cash rate to a historic low of 1.5 per cent, there is good reason to pause.

“Unemployment fell slightly, but only because of a large increase in part-time employment. With consumer price inflation equaling 1 per cent year-on-year, well below the RBA’s 2-3 per cent target band, and wage growth a modest 2.1 per cent year-on-year, there exist little immediate inflationary pressures,” said the Shadow Board.

Rick Maggi

Interest rate cut (finally)...

For the first time in 12 months, the Reserve Bank of Australia (RBA) has announced it cut the cash rate by 25 basis points to 1.75 per cent.

The RBA's decision to cut the official interest rate comes after a surprisingly low inflation figure of 1.3 per cent year-on-year was released last Wednesday.

The ASX futures market has been pricing in a 50/50 chance of a rate cut to 1.75 per cent versus 'no change' since the release of the inflation figures.

With a target inflation rate of between 2-3 per cent, concerns about a lack of growth in the Australian economy spurred by the low Consumer Price Index readings appear to have forced the RBA's hand.

Last week's low inflation numbers had made a May rate cut likely, despite the fact that the federal budget is on the same day.

For more information, contact Rick Maggi on 9382 8885 or rickmaggi@westmount.com.au.

01/02/16: DON'T LET A TOUGH START TO THE YEAR SET THE TONE

Last year global sharemarkets were hit by a range of worries including a slowdown in Chinese growth, rising US interest rates and slumping commodities prices.

However, despite the global market sell-off over the last few weeks, we expect conditions to somewhat improve during 2016, with global growth continuing and interest rates (monetary policy) remaining highly accommodative.

Interest rates... Interest rates are expected to remain low in 2016, and in Australia they might even go lower. The reality is that growth, while improving in some quarters, is still relatively constrained.

While the US Federal Reserve may raise rates a little further, they are likely to be extremely cautious as they wouldn't want to inadvertently derail the progress being made in the US economy.

Elsewhere around the world we're likely to see further easing, particularly in Japan, Europe and China. On the home front, Australia will continue to perform below potential and that is likely to encourage the Reserve Bank to cut interest rates again.

In short, there will be a lot of incentive for investors to look beyond cash and bank deposits where returns are going to remain very low for some time. For example, global share returns are expected gain in the vicinity of 7%-9%, according to AMP Capital.

Australian property market. The Australian property market is basically slowing down. However, the various capital cities and regions have been performing quite differently from each other, with price declines in Perth and Darwin, modest growth in Adelaide, Hobart, Canberra and Brisbane, and significant strength (at least in recent years) in both Sydney and Melbourne.

The slowdown has been in Sydney and Melbourne with negative house prices and lower auction clearance rates taking hold over the last three months, primarily due to the government's push to slowdown bank lending through tougher lending requirements and higher interest rates. These factors have combined to dampen investor sentiment and the downturn is expected to accelerate into 2017. That said, we don't see a property crash coming either.

Implications for investors? The combination of okay global growth, still low inflation and easy money remains positive for growth assets. But ongoing emerging market uncertainties combined with Fed rate hikes and geopolitical flare ups are likely to cause volatility.

> Global shares are likely to trend higher helped by a combination of relatively attractive valuations compared to bonds, continuing easy global monetary conditions and continuing moderate economic growth.

> For shares we favour Europe (which is still unambiguously cheap and seeing continued monetary easing), Japan (which will see continued monetary easing) and China (which will also see more monetary easing) over the US (which may be constrained by the Fed and relatively high profit margins) and emerging markets generally (which remain cheap but suffer from structural problems).

> Australian shares are likely to improve as the drag from slumping resources profits abates, interest rates remain low and growth rebalances away from resources, but will probably continue to lag global shares again as the commodity price headwind remains.

> Commodity prices may see a bounce from very oversold conditions, but excess supply for many commodities is expected to see them remain in a long-term downtrend, so patience is required.

> Very low bond yields point to a soft return potential from sovereign bonds, but it’s hard to get too bearish in a world of too much saving, spare capacity & low inflation.

> Commercial property and infrastructure are likely to continue benefitting from the ongoing search by investors for yield.

> National capital city residential property price gains are expected to slow to around 3-4%, moving into negative territory during 2017 as the heat comes out of the Sydney and Melbourne markets.

> Cash and bank deposits are likely to continue to provide poor returns, with term deposit rates running around 2.5%.

> The downtrend in the $A is likely to continue as the interest rate differential in favour of Australia narrows, commodity prices remain weak and the $A undertakes its usual undershoot of fair value. Expect a fall to around $US0.60.

This update is published by Westmount Financial/Westmount Securities Pty Ltd (ABN 42 090 595 289/AFSL 225715). It is intended to provide general information only and does not take into account any particular person’s objectives, financial situation or needs. Because of this, you should, before acting on any information in this document, speak to us and/or a taxation/finance professional.

01/01/16: Here's to You...

When we look back at the things that helped make 2015 a great year, our warmest and fuzziest feelings come when we think of you, our client.

So thank you for choosing Westmount. Here's to another prosperous, healthy, exciting year full of possibilities!

The Westmount Team

17/12/15: IS THIS The official end of the GFC?

After much delay and much warning, the Fed has finally raised the Fed Funds rate from a range of 0-0.25% to 0.25%-0.5%. The move signals confidence in the ongoing recovery in the US economy after the crippling effects of the Global Financial Crisis. More importantly, the language of the Fed was sufficiently dovish with regard to future rate hikes.

At the time of writing, the ASX200 has gained almost 100 points, on top of the previous day's 118 point rebound, and BHP shares are up over 5% - a major relief to for investors who watched the local bourse fall in each of its six prior sessions.

04/12/15: A constrained year for investors

As the end of 2015 draws to a close, it's a good time to take a look at the year we've had, but also consider what the year ahead might look like. With the US economy accelerating, and Chinese growth slowing, we're moving into less familiar territory, potentially unnerving inexperienced and seasoned investors alike - so going forward you'll need to keep your wits about you.

AMP Capital's Dr Shane Oliver provides an excellent overview of 2015/16. Read more here

Rick Maggi Westmount Financial Clear Focus. Better Solutions.

01/09/15: Interest rates on hold

But for how much longer?

The Reserve bank board met on Tuesday 1 September and kept official interest rates on hold at 2%, continuing to assess the impact of the two rate cuts earlier in the year.

Lack of business investment No doubt the RBA board would have discussed at length current weak commodity prices impacting our national income, the lack of business investment as well as two key developments that arose earlier in August. These include the recent devaluation of the Chinese currency and the weak Australian unemployment report.

Unemployment rate Previous RBA commentary indicated it considered the unemployment rate profile was around 6%. However the other key development in August was that the unemployment rate jumped to 6.3%. A higher unemployment rate is also a catalyst for an inflation downgrade, due to weak wages growth.

Business conditions and confidence The NAB business confidence survey for August pared back the post Budget gains, however both conditions and confidence are suggesting a turnaround in the non-mining economy, with conditions varying greatly across industries. The confidence index is still positive and holding around average levels.

Macquarie Bank is of the view that the combination of the Chinese currency devaluation, a weakening labour market and excess capacity in the economy all support the case for a further rate cut in November. The next RBA board meeting will be held on Tuesday 6 October.

Rick Maggi Westmount Financial Clear Focus. Better Solutions.

28/08/15: Busting the bond myth

Rate expectations...

The decline in interest rates to historic lows in recent years has led to anxiety among Australian investors about what will happen to their fixed interest holdings when overnight interest rates begin to rise.

This apprehension is based on the conventional view that longer-dated bonds underperform in this type of rising interest rate environment.

Dr Steve Garth provides another perspective in Cuffelinks.

Rick Maggi Westmount Financial Clear Focus. Better Solutions.

03/02/15: RBA cuts rates by 25bps, shares rally

An 'insurance policy' for growth...

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%.

Rick Maggi Westmount Financial

02/12/14: Interest rates remain on hold

Where to from here?

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.

Rick Maggi Westmount Financial

30/10/14: Punchbowl removed: The end of 'Quantitative Easing'

End of an era… 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).

Rick Maggi Westmount I Financial Solutions

19/10/14: Comment: FOFA amendments disallowed

Should you care?

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 now 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, their families, 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.

Rick Maggi

17/01/14: The Year Ahead

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