Listed investment company WAM Capital expects interest rates to fall in the next 12 to 18 months, a move that will eventually boost equity valuations and economic activity.
"I believe the east coast in Australia is in recession at the moment," WAM Capital chairman and portfolio manager Geoff Wilson said.
"To me it's logical that interest rates are cut over the next 12 to 18 months."
Wilson's comments came after the company yesterday reported an operating profit after tax of $20.4 million for fiscal 2011, and a 25 per cent increase in dividends to 10 cents per share.
WAM Capital's portfolio, which has 43 per cent in cash, increased nearly 18 per cent in the year to June.
Wilson said he remained cautious due to market uncertainty.
"Consumer sentiment in Australia has recently declined to levels not seen since the global financial crisis on the back of uncertainty resulting from the European and United States debt worries and confusion about the impact of the proposed carbon tax," he said.
"We note bond markets are now pricing in interest rate cuts over the next 12 to 18 months, a scenario we agree with and believe is needed to stimulate the broader economy, excluding mining.
"A drop in interest rates will help stimulate economic activity, lead to an expansion in price-earnings ratios and move money away from term deposits into higher risk assets, namely equities.
"This scenario will provide a more positive outlook for equities."
Banking group Westpac said that it expects interest rates to fall by 1 per cent, starting with a reduction of 25 basis points in December and the remainder through 2012.
"Interest rates are too high in Australia given the state of the non-mining sectors of the domestic economy and a downward adjustment is required to avert a damaging round of contraction," the company said in an economic report on 15 July.
The Reserve Bank of Australia has lifted interest rates from 3 per cent to 4.75 per cent over the period from April 2009 to November 2009.
