FYI | Oct 28 2015
By Peter Switzer, Switzer Super Report
Until the banks decided to raise both home and investor loan rates, after already being forced a few months ago to raise rates to investors, I thought the Reserve Bank (RBA) would and should keep the cash rate on hold at 2%. However, as the Bob Dylan song goes: “People are crazy and times are strange, I’m locked in tight, I’m out of range, I used to care but things have changed”.
Certainly, I think times are strange and that’s why I have changed. I was locked in tight on no rate change needed for some time but this David Murray/APRA pressure on banks have made it all crazy and so I want a Cup Day rate cut.
I will look at the economics of my change of heart on rates later but let me throw in that lower rates will bring the dollar down and help stocks go higher, so there is an added reason for me to become a rate-cutter.
You might have missed this but I haven’t as I have been a big advocate of buying the dips, but since Glencore Tuesday, when my media colleagues were dragging out there “market meltdown” headlines, the S&P/ASX 200 index is up 8.8%!
That’s nearly 9% since September 28 — in a bit over three weeks!
And this is a nice prelude to a period where the stock market has a great inclination to head higher over November and especially December.
Right now the global economy is coping with the slow response of the Eurozone and Japan to quantitative easing or QE, China’s need to cut rates to stimulate growth and the US economic recovery being taken down a notch as the greenback rises.
The response of central banks is to stick with low interest rates and stock markets like that sort of thing provided that there is a belief that economic growth is coming and deflation is not on the way. Right now, the majority of investors and key stock market influencers believe the optimistic story and that’s why we’re up 8.8% in three weeks.
Christopher Swan, a strategist at UBS in the USA is a little surprised at the big post-Summer market rebound but, more importantly, he thinks it can last!
He points out that “the MSCI All Country World index, the broadest gauge of global equities, has jumped 7% percent since sentiment suddenly improved on September. 29,”, so our market has gained from great global optimism but has done a little better.
He says purchasing managers indexes, earnings and economic data in the US, Europe and Japan should underpin positivity.
But I love this UBS view on China: “We also believe the Chinese economy has the willingness and the tools to avert a dramatic slowdown in growth. Its budget is in surplus, it still has reserves of well over $3 trillion, and its one-year interest rates are at 4.6%, leaving room for the country to ease monetary policy.” (CNBC)
His final point is more telling and relevant to my argument and here it is: “Lastly, all major central banks are aggressively promoting growth. We see little danger that inflation will force them to remove the punch bowl. And equity valuations are nowhere near bubble territory. The MSCI World index is valued at less than 16 times predicted earnings versus an 18-year average of 17 times.”
Swan thinks emerging economies and those selling commodities have done better recently because they were the most battered before the rebound but he thinks they might have had their big spurt.
We often run with emerging economies because of our commodities link and so another rate cut from the RBA , (just as the big four banks are raising rates, which could easily slow up our economic recovery), makes a lot of appeal.
AMP’s Shane Oliver says if the RBA cuts by 25 basis points then a bank like Westpac might only pass on a 5 basis points cut, effectively pocketing the 20 basis points it wants for having to place more shares to please APRA. I hope he is right but we are in a historically unique period, but I hope Shane is right.
If the RBA does not cut on the first Tuesday in November, then I think it will slow down our economic recovery. If the RBA cuts, it could help stocks as it would raise the fair value calculation for the stock market, which has a tendency to influence the market.
I’m punting on a rate cut on Cup Day, so I hope Glenn Stevens puts me on a winner, which we all will share in when it creates more economic growth and helps stocks head higher!
Peter Switzer is the founder and publisher of the Switzer Super Report, a newsletter and website that offers advice, information and education to help you grow your DIY super.
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