Question 1: In relation to the cut today in US interest rates, several commentators referred to the “dot plot” and how that suggests further rate cuts. What is the “dot plot”?
Answer: Four times a year, the members of the US Federal Open Market Committee (the FOMC, or that part of the US Federal Reserve that sets US interest rates) provide projections on the most likely outcomes for economic growth, inflation and unemployment. They also project US interest rates (the short term rate known as the “Fed Funds Rate”). These projections go out for 3 years.
It is called a “dot plot” because the interest rate projections are released to the market as a table of “dots”, with each dot representing the view of 1 member of the FOMC. There are 19 members, so there are 19 dots. Projections are made for the end of 2024, end of 2025, end of 2026, end of 2027 and longer run.
From the dots, we can see that the majority of members (not all) expect another 50bp of cuts by end of this year, another 1.0% by end 2025, and a further 0.5% by end 2026. They expect a long run Fed Funds rate of just under 3.0%.
It is worth pointing out that historically, the “dot plot” has not been a great predictor of US interest rates.
Question 2: Does the Fed’s decision to cut US rates make an interest rate cut more likely in Australia?
Answer: It certainly adds to the pressure. Central banks around the world (US, UK, Canada, NZ, Europe etc) are cutting rates, so it will become harder for the RBA to remain an outlier.
Inflation, however, is proofing to be much stickier in Australia and the RBA will need to see this moving in the right direction. Our next major inflation reading is the quarterly CPI due on 30 October, with the RBA due to meet the following Tuesday (Melbourne Cup Day). Some Economists are forecasting this to be the day. The majority feel that we won’t see a cut before next year.
Question 3: Ramsay Healthcare (RHC) is the lowest it has been in over 5 years. CMC claims it is 28% undervalued. Today’s price $39.87, 5 Star rating, strong buy. Your recommendation please?
Answer: I think you will need to be very patient because the stock is out of favour with the market.
It is battling higher costs/softer demand for services in Australia, sustained interest expense and has significant overseas hospital businesses where performance is underwhelming, in part due to tight Government regulation on fees and pricing.
According to FN Arena, all the major brokers have “neutral” recommendations (no “buy” or “sell” recommendations). The consensus target price is $48.48, about 20.8% higher than the last ASX price of just over $40.00. The range of targets is a low of $43.40 through to a high of $58.00.
A long term buy. In the short term, however, I sense you can do better elsewhere.
Question 4: What do the brokers say about Ansell (ANN), which has been on a strong run?
Answer: Protective industrial equipment and medical glove manufacturer Ansell has rallied strongly since its financial results which came in a little better than expected. Guidance was raised. Following the rally, the brokers feel that Ansell is now fully valued.
According to FN Arena, the consensus target price is $28.71, about 9% lower than the last ASX price of $31.54. The range of targets is a low of $24.14 through to a high of $32.50. There is 1 “buy” recommendation and 4 “neutral” recommendations.
