Credit Suisse said at the start of 2015 it believed the combination of rate cuts and recovering free cash flows would be enough to drive growth in Australian equities.
The RBA's decision on Tuesday to cut the cash rate by 25 basis points to 2.25 per cent – bringing rates to an “historical low” – “reinforces” this positive view, argued Credit Suisse.
“We expect further downside for Aussie rates and further upside for Aussie equities,” a statement from Credit Suisse said.
“Aussie equities are benefitting from the free ride provided by the RBA as it stimulates to support domestic demand and help close the output gap.
“We expect more rate cuts to come, which should further support valuations overshooting long-term averages. However, we are sceptical that the pace of year-to-date gains will be maintained,” the statement said.
Credit Suisse also pointed out that interestingly the Australian equity market was not “crying out” for lower rates like it had done so in the past.
“We find that 12 months before previous RBA rate cuts, ASX 200 reported EPS had declined by an average of five per cent,” the statement said.
“However, this time around, the RBA cut rates after a 12-month period of anaemic but still positive EPS growth.
“Similarly, DPS growth over the 12 months preceding previous rate cuts has averaged a disappointing one per cent. But this time around, ASX 200 companies have grown DPS by a more impressive four per cent,” it said.
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