Recent rate cuts from the Reserve Bank of Australia (RBA) will support the stability of the Australian equities market into 2013, according to Platypus Asset Management (Platypus).
Most of the factors that caused the Australian market to underperform in recent years are dissipating. Alongside this, the RBA is proactively cutting rates to counter the mining-related investment cliff, which means that confidence in the political environment is likely to be resolved via an election.
Platypus therefore argues that the key market trends in 2013 will be the continued hunt for yield and earnings dispersion.
“The economy is full of potholes, and that is true from what we saw last year and it hasn’t really changed. It’s going to be a tough year. I think, because we see continued support from the bank and interest rates, we think the market will be ok,” Platypus chief investment officer Donald Williams said.
“Obviously, owning yield over the past 12 to 18 months has been very profitable – and arguably it is over-owned now – but we think that as long as rates stay low, investors will continue to chase yield. As long as the distribution is not going backwards, companies with high yields and with yields that will keep growing will continue to garner support from the market,” he said.
He explained that the hunt for yield will continue to drive the market in the short term, but that at some point this year Platypus expects a correction of these over-owned themes.
On a longer term view, the firm anticipates that the hunt for yield could run for another two or three years, especially if Australia’s interest rates ‘normalise’ to the rest of the world.
“We are positive on the market this year, and that is mainly because we think the RBA has got with the program,” Mr Williams said.
“The rate cut [the RBA] made in October is the first pre-empted cut that they’ve made in this entire easing cycle.
“If the economy doesn’t respond to the cuts being made [this year] then they’ll keep on going until they start to get the response and data that they’re looking for. We think that will be an underlying support for the equity markets,” he said.
