Stick to your investment plan as rates head south
We look at what this week's historic cut in interest rates might mean for investors and how Morningstar and a few other commentators intepret the RBA's actions.
After this week's historic cut in interest rates, we look at what they might mean for investors and how Morningstar and a few other commentators intepret the Reserve Bank of Australia's actions.
Unless you've been living underneath a rock, you'll know by now that Australia's official interest rate of 1 per cent is now at its lowest level ever.
You may also have heard that this rate may yet have further to fall, with many commentators tipping it will fall to 75 basis points before the end of 2019.
But it's less clear exactly what this means for Australians.
Though many market watchers – and this includes individual investors – may feel the need to respond in some way to the events of the past week, our view at Morningstar is to wait.
Remember that investing is a long-term pursuit. As Morningstar Investment Management UK's CIO Dan Kemp has said previously: "sit tight and remember that most investors make too many decisions rather than too few."
Referring to the current situation, Brad Bugg, head of multi-asset portfolio management for Morningstar Investment Management Australia, believes investors are making a mistake in expecting rates to remain low over the longer-term.
"We think the market is pricing these very low interest rates out into the future – 10, 15 years and beyond – but we think eventually rates will normalise and go back to levels higher than they are."
Following are some of the other viewpoints that stood out in my over-crowded inbox this week.
These individuals make various statements about whether or not the market has already priced in the RBA's decision, pronouncements about what the cut really says about the state of Australia's economy, and what it means for the RBA's inflation target.
Morningstar's head of equity research, Peter Warnes, suggests this week's move by the RBA "smacks of panic".
"It suggests cutting rates is a means to an end, but central bank actions over the past nine years, cutting rates and swamping the financial system with liquidity have not improved global economies a great deal," he says.
He questions the efficacy of the RBA's cuts given they won't necessarily trigger a material rebound in business investment or hiring intentions.
Morningstar subscribers can read Warnes' views in full in the latest Your Money Weekly and Forecast 2019-20.
Warnes' views are in some ways echoed by economist Stephen Koukoulas, who laments the RBA having delayed the move until now, while declaring it is "better late than never".
He believes the current rate of GDP growth - 1.8 per cent - is a long way from where it needs to be, and that the RBA is now playing catch-up, having had the chance to cut rates back when they were really needed in 2018.
AMP Capital chief economist, Shane Oliver, believes the RBA has only been forced to move on rates now because of slower economic growth due to the combination of falling house prices and rising unemployment.
"While it doesn’t admit it, the downturn in growth over the last year and emerging signs of an uptrend in unemployment have likely played a big role in its decision to cut rates," he says.
Bonds, house prices
Commentators are also carefully parsing the RBA's words – though the lengthier minutes of the latest meeting aren't due until later this month – in gauging the likelihood of further cuts.
Chris Rands, a portfolio manager with fund manager NikkoAM, suggests the short statement that accompanied this week's rate cut means the RBA will hold off on further cuts, focusing on the words "if needed" in a paragraph about monetary policy contained in the statement.
As a fixed income manager, he's focused on the interplay between interest rates and bonds. He notes that bond yields have risen slightly since the cut on 2 July.
While noting that bonds seem to be losing some of their momentum, he says the RBA has merely met market expectations in the latest move.
Oliver compares the effect interest rates have on savers versus mortgagees - who lose and win, respectively.
He also tips a slight boost for Australian companies, especially those with export-heavy businesses, with lower rates keeping the dollar lower.
And as always in Australia, housing also rates a mention: Oliver thinks the cuts should help the housing market reach its nadir, though they won't spur another boom.
Koukoulas views housing more as a secondary factor contributing to economic growth than something that will strengthen or weaken based on the RBA's interest rate decisions.
He's also been closely watching the government's tax cuts – which have now passed the Senate – and the impact of global market conditions on the domestic economy.
Where to now?
Nikko's Rands thinks further rate cuts are needed to get bonds moving meaningfully lower, but doesn't expect the RBA will cut rates as low as 0.75 or even 0.5 per cent, as many seem to expect.
On the other hand, AMP's Oliver expects rates will hit 0.5 per cent by mid next year, because the recent cuts aren't sufficient to drive stronger growth.
Koukoulas believes the market is pricing in a further cut before the end of this year – though isn't sure whether this is enough, dependent on the external factors mentioned above.