On Tuesday, the Reserve Bank of Australia cut interest rates in Australia by 1% down to just 4.25%. This is the lowest rate in Australian since December 2001 and represents the 4th consecutive rate cut since September this year.
So with more interest rate cuts slated in 2009, what does this mean for our sharemarket and which sectors are poised to benefit from falling rates?
Falling interest rates are good news for shares for 2 main reasons. The first is that most companies like us are net borrowers of money. Interest rates falling means a fall in interest expenses and that should make it easier to make money. Secondly falling interest rates makes the sharemarket more attractive when compared with cash. More people being attracted to the sharemarket is good news for share prices since having a greater number of buyers drives up share prices. More sellers than buyers drive down share prices.
So in terms of which sectors are set to benefit most from falling interest rates, the answer would be those sectors which are most highly geared.
Property sector has been trodden down of late. This sector can really be classified into 3 distinct areas. You have your property companies that are well capitalized and will probably acquire the smaller players such as Westfield and Stockland. Then you have the property players that are trying to sell assets and are struggling such as Valad Property. And lastly you have the property stocks that have recapitalized and are suddenly moving back upwards such as Mirvac, GPT and Goodman group. The property sector is traditionally highly geared and interest rate falls are good news. There is still a danger in the category of stocks that are trying to sell assets but generally overall, the falling interest rates are good news for the sector.
The industrial sector is composed of companies that create a finished usable product such as manufacturing and construction companies. The largest industrial company in this sector is Leighton holdings followed by Brambles. This sector is suffering from the global slowdown is slated for further weakness. Although this sector is looking cheap it has the potential to fall to even cheaper levels as global growth forecasts are revised. The fall in interest rates is a positive for this sector but needs to be balanced against a global slowdown that is not yet totally priced in to the industrial sector. The industrial sector has an average debt to equity ratio of 46.4%.
The utilities sector is high leveraged with a debt to equity ratio of 52.2%. It is a sector that will benefit from the fall in interest rates. This sector is typically classed as defensive and should hold up relatively well even amidst a slowing business environment.
The good news is that most economists are predicting interest rates around 3.5% by mid 2009. So it looks like we are set to see more interest rate cuts next year. That's good news for growth assets such as property and shares but not good news for fixed interest investments.
Happy trading!
To buy or sell shares from as little as $15 per trade, go to belldirect.com.au.