Who benefits from the Interest Rate Cut?

Do you believe successful investing requires identifying the next big trend or correctly predicting one idea that will see you beat the market over the coming year?

I’m talking about things like predicting when we hit peak oil, or what the next big technology innovation will be or any other lofty ‘big call’.

Here’s the problem: there’s no certainty about how, or when, ideas like these will play out.

So it’s important that you don’t get carried away with any one big investment theory. It’s good idea to take a step back and evaluate the now. Consider what’s going on today that will make you money.

Think about what larger trends we are in the midst of and buy into the opportunities they create, rather than trying to predict what’s to come.

So what‘s happening around us today that could present investment opportunities?

Looking to yesterday’s news, you see that the RBA cut its benchmark interest rate for the first time in 17 months, from 2.50% to 2.25%. The RBA is worried about the outlook for economic growth in the year ahead.

RBA Governor Glenn Stevens said:

Overall, the Bank’s assessment is that output growth will probably remain a little below trend for somewhat longer, and the rate of unemployment peak a little higher than earlier expected. The economy is likely to be operating with a degree of spare capacity for some time yet.’

It seems that the Aussie dollar’s recent fall hasn’t been enough to offset the decline in terms of trade due to the recent slump in commodity prices.

This isn’t great news if you’ve got cash sitting in the bank. Term deposit rates will no doubt continue to drop — they barely beat the inflation rate as is.

Home owners and real estate investors can’t complain. The standard variable mortgage rate is expected to drop to 5.7%, while discounted variable rates are likely to fall to 4.85%, according to RP Data. That’s the lowest mortgage rate since 1968.

And the rate cut does open up a lot of other investment opportunities.

A lower interest rate is great news for not only homeowners but also housing construction. Real Estate Investment Trusts (REITs), especially those with exposure to the residential sector, are worth considering. And they pay decent dividends at a time when it’s hard to find income.

But property is not the only winner. The interest rate cut drags down the Aussie dollar, as we saw yesterday, when the Aussie dropped to 76 cents against the US dollar. This presents loads of opportunities.

Companies with overseas revenues will get a boost. Take Macquarie Group [ASX:MQG] for example, which makes more than half of its money overseas. The stock jumped 2.3% yesterday after the RBA’s announcement.

The weaker dollar is also good news for exporters such as manufacturers and farmers. And lower energy prices will further help the manufacturing and agricultural sectors. Tourism operators are winners too, as the weaker dollar makes Australia a more affordable holiday destination.

A cut to interest rates can be both good and bad news for retailers. Consumers, or home owners more specifically, will have lower mortgage repayments, which means more cash in their pockets. The downside is that the lower Australian dollar makes the cost of foreign made goods more expensive. Look for companies that source their goods locally.

As for the banks, lower borrowing rates spur demand for loans. Yet this isn’t great for their bottom line, as it pressures their profit margins. However, the banking sector jumped yesterday in response to the news. That’s because as term deposit rates fall, dividend paying stocks, such as the banks, become more attractive to investors. The big four all ended the day higher, and Commonwealth Bank [ASX:CBA] hit a new record high.

This rate cut will help the struggling mining sector. The resource sector has had a horror year, with slower Chinese growth and weaker demand for our commodities, not to mention the massive drops in commodity and energy prices. Lower interest rates will help offset these challenges, as they drag Australian dollar lower. The lower dollar means higher revenues for miners when they sell commodities overseas.

I explore opportunities like these in the Albert Park Investors Guild. Click here to hear about my favourite ways to generate income in this time of record low interest rates.

Meagan Evans
Investment Director, Albert Park Investors Guild

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Markets and Money offers an independent and critical perspective on the Australian and global investment markets. Slightly offbeat and far from institutional, Markets and Money delivers you straight-forward, humorous, and useful investment insights from a world wide network of analysts, contrarians, and successful investors.

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