08-05-2013, 12:08 AM
Australia is one of the few remaining economies in the world that has reasonable monetary policies, hence for RBA to cut interest rates, it would imply that recent copycat actions amongst other desperate Central Bankers are also weighing heavily on their shoulders. TINA
Savers ditch cash in favour of equities
Vesna Poljak and Jonathan Shapiro
914 words
8 May 2013
The Australian Financial Review
AFNR
English
Copyright 2013. Fairfax Media Management Pty Limited.
Record low interest rates in Australia could bolster the prices of high-yielding equities even further, as savers ditch the relatively poor returns from cash and bonds in favour of stocks paying reliable dividend income.
The Reserve Bank of Australia's one-quarter of a percentage point cut to the official cash rate was quickly matched by reductions to the cost of borrowing as banks passed on the RBA's move. This is expected to be followed by reductions in interest awarded to savers, extending the decline in term deposit rates.
The RBA, in its statement, observed that "interest rates have already been reduced substantially, with borrowing rates approaching previous lows, and that the effects of this on the economy are continuing to emerge. Savers have been changing their portfolios towards assets with higher expected returns, asset values have risen and some interest-sensitive areas of spending have increased."
Much like the United States Federal Reserve's ultra-low rates settings and quantitative easing have pushed the S&P 500 Index to a fresh record, the RBA's easing cycle has fuelled buying in the sharemarket.
As legendary investor Warren Buffett said at his investment company's meeting last week, interest rates are to assets what gravity is to the apple. Low rates pull asset prices up and investors have seen that relationship play out. "People make different decisions when they borrow money for nothing. We borrowed money at so cheap on Heinz [acquisition] that it effects the price," he said, warning of inflation risk.
Low rates are "a smart policy but the unwind will be difficult. Whether it's the Hunt Brothers buying soap, selling is always more difficult to buying. It's like a good movie, I don't know how it's going to end," Mr Buffett quipped.
HSBC economist Paul Bloxham agreed that Australian equities are responding to looser monetary policy.
"We often think of monetary policy as only working through lowering the cash rate and there's less mortgage interest payments and therefore there's a cashflow effect, but there's also a portfolio rebalancing effect and that portfolio effect is at work.
"We're seeing households shift their funds away from lower-yielding deposits – because, of course, rates are coming down – towards higher-risk assets and higher-yielding assets like the equity market, indeed investment properties are also getting a bit of support from that," Mr Bloxham said.
"What we saw was in recent years we had a very strong flow into deposits and that's slowed down a fair bit. Of course we're seeing rising equity prices which reflect both the global upturn, the lower interest rates supporting the local business environment and also this portfolio effect in the sense that households are going to want to hold fewer deposits in an environment where interest rates are lower."
Interpreting the language of the RBA's statement, Mr Bloxham said the message was that "monetary policy is working, but of course they've cut rates as well, so it will help it work even more".
The benchmark S&P/ASX 200 Index closed at 5143.7 on Tuesday, down 0.2 per cent. It is up 26 per cent since June 1, 2012.
Stock prices of sharemarket darlings such as Westpac Banking Corp and Commonwealth Bank of Australia jumped upon the announcement of the RBA decision, before giving up some of those gains at the close.
Not all experts agree that the RBA's actions in isolation will bolster stocks.
JPMorgan equity strategist Paul Brunker said the reason why the RBA moved was because "rate cuts aren't working and the economy is struggling".
"Until we see evidence that green shoots are actually appearing and growing I don't think the market makes any headway, you need some earnings ultimately," Mr Brunker said.
The more extreme monetary policy actions of the Federal Reserve, which is buying $US85 billion a month in securities to keep rates in the world's biggest economy low, have raised concerns around how the sharemarket will fare without the Fed's support when the program is wound down.
Advocates for unconventional ¬monetary policy say that the ¬improvement the US economy would have to prove before quantitative¬ ¬easing is ¬withdrawn would compensate for the ¬artificial support that the Fed provided.
As Doug Kass of Seabreeze Capital, who was the short-seller invited to question Buffett at the Berkshire meeting last week told CNBC in the US: "we didn't realise the Federal Reserve's mandate had changed from unemployment and inflation to the Dow Jones Industrial Average and S&P 500 Index".
Unlike the US market, Australian stocks are still almost 25 per cent below their record achieved in November 2007.
Mr Bloxham said the fact that the RBA was having more of an impact in generating a portfolio response rather than say, a credit response, was merely reflective of the cycle.
"People get hung up I think looking for the same signs each time," he said.
"I think that's part of what the RBA's saying, it's saying 'if you're watching over here you're looking for the sorts of things you've seen when monetary policy's been loosened previously, well maybe you're missing that actually it's having a different effect over here, it's the portfolio balance effect'."
Fairfax Media Management Pty Limited
Document AFNR000020130507e9580005n
Savers ditch cash in favour of equities
Vesna Poljak and Jonathan Shapiro
914 words
8 May 2013
The Australian Financial Review
AFNR
English
Copyright 2013. Fairfax Media Management Pty Limited.
Record low interest rates in Australia could bolster the prices of high-yielding equities even further, as savers ditch the relatively poor returns from cash and bonds in favour of stocks paying reliable dividend income.
The Reserve Bank of Australia's one-quarter of a percentage point cut to the official cash rate was quickly matched by reductions to the cost of borrowing as banks passed on the RBA's move. This is expected to be followed by reductions in interest awarded to savers, extending the decline in term deposit rates.
The RBA, in its statement, observed that "interest rates have already been reduced substantially, with borrowing rates approaching previous lows, and that the effects of this on the economy are continuing to emerge. Savers have been changing their portfolios towards assets with higher expected returns, asset values have risen and some interest-sensitive areas of spending have increased."
Much like the United States Federal Reserve's ultra-low rates settings and quantitative easing have pushed the S&P 500 Index to a fresh record, the RBA's easing cycle has fuelled buying in the sharemarket.
As legendary investor Warren Buffett said at his investment company's meeting last week, interest rates are to assets what gravity is to the apple. Low rates pull asset prices up and investors have seen that relationship play out. "People make different decisions when they borrow money for nothing. We borrowed money at so cheap on Heinz [acquisition] that it effects the price," he said, warning of inflation risk.
Low rates are "a smart policy but the unwind will be difficult. Whether it's the Hunt Brothers buying soap, selling is always more difficult to buying. It's like a good movie, I don't know how it's going to end," Mr Buffett quipped.
HSBC economist Paul Bloxham agreed that Australian equities are responding to looser monetary policy.
"We often think of monetary policy as only working through lowering the cash rate and there's less mortgage interest payments and therefore there's a cashflow effect, but there's also a portfolio rebalancing effect and that portfolio effect is at work.
"We're seeing households shift their funds away from lower-yielding deposits – because, of course, rates are coming down – towards higher-risk assets and higher-yielding assets like the equity market, indeed investment properties are also getting a bit of support from that," Mr Bloxham said.
"What we saw was in recent years we had a very strong flow into deposits and that's slowed down a fair bit. Of course we're seeing rising equity prices which reflect both the global upturn, the lower interest rates supporting the local business environment and also this portfolio effect in the sense that households are going to want to hold fewer deposits in an environment where interest rates are lower."
Interpreting the language of the RBA's statement, Mr Bloxham said the message was that "monetary policy is working, but of course they've cut rates as well, so it will help it work even more".
The benchmark S&P/ASX 200 Index closed at 5143.7 on Tuesday, down 0.2 per cent. It is up 26 per cent since June 1, 2012.
Stock prices of sharemarket darlings such as Westpac Banking Corp and Commonwealth Bank of Australia jumped upon the announcement of the RBA decision, before giving up some of those gains at the close.
Not all experts agree that the RBA's actions in isolation will bolster stocks.
JPMorgan equity strategist Paul Brunker said the reason why the RBA moved was because "rate cuts aren't working and the economy is struggling".
"Until we see evidence that green shoots are actually appearing and growing I don't think the market makes any headway, you need some earnings ultimately," Mr Brunker said.
The more extreme monetary policy actions of the Federal Reserve, which is buying $US85 billion a month in securities to keep rates in the world's biggest economy low, have raised concerns around how the sharemarket will fare without the Fed's support when the program is wound down.
Advocates for unconventional ¬monetary policy say that the ¬improvement the US economy would have to prove before quantitative¬ ¬easing is ¬withdrawn would compensate for the ¬artificial support that the Fed provided.
As Doug Kass of Seabreeze Capital, who was the short-seller invited to question Buffett at the Berkshire meeting last week told CNBC in the US: "we didn't realise the Federal Reserve's mandate had changed from unemployment and inflation to the Dow Jones Industrial Average and S&P 500 Index".
Unlike the US market, Australian stocks are still almost 25 per cent below their record achieved in November 2007.
Mr Bloxham said the fact that the RBA was having more of an impact in generating a portfolio response rather than say, a credit response, was merely reflective of the cycle.
"People get hung up I think looking for the same signs each time," he said.
"I think that's part of what the RBA's saying, it's saying 'if you're watching over here you're looking for the sorts of things you've seen when monetary policy's been loosened previously, well maybe you're missing that actually it's having a different effect over here, it's the portfolio balance effect'."
Fairfax Media Management Pty Limited
Document AFNR000020130507e9580005n