I suspect the Prime Minister of Greece got some interesting phone calls from world leaders this week as he single-handedly caused global markets to tumble. There’s absolutely no way Greece will be a having a referendum on the 50% debt haircut, and if they did, chances are nobody would turn out to vote!
The problem is the markets are very twitchy after having just rallied between 15% and 30% and any sign of delay in the European rescue package has short-term ramifications – most of which have played out this week.
The Greeks need to remember that they lied their way into the EU, cheated with the help of Goldman to stay in the EU, and now the world is helping them stay in the EU.
I strongly suspect the rest of the world won’t put up with any more rubbish from them and hopefully in six months time we won’t have a peripheral fishing hamlet running daily global financial market sentiment.
But in amongst all this negativity was some genuinely positive Australian news from the Reserve Bank of Australia (RBA) on Tuesday. I was at a restaurant in Sydney’s Eastern Suburbs when the rate cut to 4.5% was confirmed and everyone cheered. The funny thing is, I suspect the vast bulk of people in the restaurant didn’t even have a mortgage!
While I see most commentators describe the RBA’s 25 basis point rate cut as a one-off, we think that is completely wrong. We believe the ‘neutral setting’ described by the RBA is between four and 4.25%, meaning you will get another 25 basis point rate cut in December and potentially another one after that in February. The RBA never has, and never will, move in 25 basis point brackets only.
The good news is it appears that carry traders in the Australian Dollar were surprised by the rate cut, with the Aussie down to US1.034¢. While we all like the high Aussie for overseas travel, the fact of the matter is it has clearly damaged Australia’s international competitiveness in a wide variety of sectors, but particularly in inbound tourism, education, agriculture and manufacturing.
Personally, I think the best thing that could happen to the beleaguered East Coast economy is a series of rate cuts and a falling Aussie dollar.
As interest rates fall in Australia, you will see marginal global money leave our fixed interest markets. Carry traders have been investing in some of the highest interest rates in the world and an appreciating currency. In fact, the Aussie dollar’s gain has made them way more than the underlying interest rate. As the currency changes directions with interest rates, you will see money leave our fixed interest markets and I believe through time that will drive the Aussie dollar down to the US95¢-100¢ range. This would be good for Australian equities, but particularly for foreign earners.
Our strategy remains to switch from the fixed interest yield ‘bubble’ to fully franked equity yield, particularly as the Big Four banks go cum their final dividends (the period when an investor can buy a stock in time to receive its dividend).
We also remain positive on Australian discretionary retailers because we feel two rate cuts before Christmas and a falling Aussie dollar (that is, less competition from offshore websites) will make Christmas sales better than expected.
Today is just another day we will use global macro weakness to look for bottom up stock specific value.
And with the bank reporting season under way, let’s end with our latest recommendations for bank stocks:
Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.
Also in the Switzer Super Report
- JP Goldman: How Europe will affect us
- Alia McMullen: The consequence of borrowing from your SMSF
- Tony Negline: How to bring foreign retirement savings home
