Shane Oliver, head of investment strategy and chief economist with AMP Capital, said Australian shares should benefit from interest rate cuts, with expectations that the share market will continue a recent rally and trade higher by the year’s end.
“Deposit rates are likely to fall further in the year ahead, even though the size of the decline will lag that of the official cash rate given bank funding reasons. As a result, the attractiveness of bank deposits for investors will continue to deteriorate,” Mr Oliver said.
“But the Australian share market is likely to be benefit as lower interest rates eventually boost housing activity and retailing,” he said. “Key sectors likely to benefit from lower rates are retailers, building materials and home builders.”
This view will be welcomed by superannuation investors, who have faced many years of share-market losses and disappointing investment returns.
“While shares might see more short-term volatility, they are likely to provide positive returns on a 12-month view. Reflecting reasonable growth prospects, medium-term returns of around 10 per cent-plus per annum are likely, or 11.5 per cent-plus if franking credits are allowed for,” Mr Oliver said.
George Boubouras, executive director and head of investment strategy and consulting at UBS Wealth Management, said lower interest rates on cash deposits would push investors towards riskier income-producing assets, including equities.
“The general theme is that lower interest-rate expectations imply income-generating securities are increasingly in demand,” Mr Boubouras said.
“The cash-rate futures are currently pricing in 2.5 per cent by June 2013. Therefore, exposure to quality investment-grade corporate bonds, some listed debt and hybrids, plus quality dividend stocks will continue to be in demand,” he said.
Mr Boubouras added that with government bond yields so low – the 10-year bond yield is currently around 3 per cent per annum – Australian equities “remain cheap” versus bonds.
“Australian equities offer consistently attractive quality dividends versus other global markets. The franking is just a bonus. Lower rates going forward another positive driver,” he said.
