David Bassanese

The “surprise” decision by the Reserve Bank of Australia to cut interest rates this week has mixed implications for the overall equity market outlook. But it does re-affirm two key themes I have been emphasising for the past year – go for yield and companies with offshore earnings exposure.

The downbeat outlook for the economy as reflected in this past week’s Mid-Year Economic and Fiscal Outlook suggest the Reserve Bank of Australia may well cut interest rates in the New Year – despite the recent declines in the Australian dollar.

With global equity markets continuing to rise, more and more investors are starting to fret that the party might be about to end sometime soon. As the saying goes, however, equity prices tend to climb a “wall of worry” – as long as there’s at least a vocal minority worrying about the market, chances are that prices will keep moving higher.

The trend is your friend in financial markets, but investors also need to be wary when a strong consensus emerges on the likely price direction in any one market. To my mind, bond yields and share prices now seem most vulnerable to a shift in currently consensus bullish sentiment, though this may well entrench the other consensus trade of selling the Australian dollar and gold.

If we’re not careful the nervous nellies that continually worry about Australian house prices risk talking the economy into an even more serious downturn. In repeated public speeches in recent weeks, Reserve Bank officials have hinted that – along with ASIC – it is considering imposing credit lending controls for investors, especially in Sydney and Melbourne.

Gold prices had a long a glorious run during the commodity price upswing and then during the early stages of global economic recovery from the 2008 financial crisis. But along with the commodity prices and the Australian dollar more broadly, gold prices peaked around mid-2011, and it has largely been one-way traffic downward ever since.

There is a sea change underway across the Australian investment landscape, and investors need to be ready to capitalise on the emerging new trends.

As has been the case in Japan, the decision by the European Central Bank to ratchet up its monetary stimulus program will do little to improve the region’s ailing domestic demand outlook. The move is best seen as yet another round in the “global currency wars”, in which one economy tries to boost its own exports at the expense of others.

Despite steady improvement in the United States economy, Fed officials and market analysts still talk of the first official US interest rate hike not taking place until “sometime next year.”

The Australian economy is not in a great place right now, as a lack of competitive pressure in many sectors is adding to inflation, while a lack of growth drivers is keeping unemployment relatively high.