I’m getting greedier every time I pick up the paper. Perhaps that’s a bad sign. But everything I see suggests Aussie stocks are on track to hit all-time highs.
The market is pricing in two interest rate cuts in the next 12 months to take the cash rate to 1% with almost certainty.
It may not be tomorrow. But that’s the likely outcome as of now, based on the judgement of professional money.
That could light a spark under the stock market as investors keep chasing yield — practically the last place they can find it.
It’s not as if the world is terrible out there and earnings are going to collapse in the meantime.
I know, I know. The mainstream loves to scare you with Australia’s high debts and (supposed) teetering property market.
Today’s Profit Watch hammers the point home: Now’s a time to be buying…
The Australian ran a piece over the weekend pointing out that corporate Australia is chugging along just fine, despite low inflation, falling house prices and all the rest of it.
To quote: ‘…a majority of 100 or so companies that gave updates at the Macquarie Australia Conference largely shrugged off concerns about a further downturn.’
Is it any wonder?
The Australian labour market is strong, with unemployment at a seven-year low.
Mortgage rates are modest, relative to history…and have gone down recently as the cost of bank funding has fallen.
Any further cuts get priced into property prices…taking them up.
The only big glitch right now is the tight credit conditions imposed on the property market, blocking new borrowers.
ANZ Chief Executive Shayne Elliott said last week that his bank is being forced to turn away one in five loan applicants.
The inklings of this changing are already coming through.
My colleague, Jonathan Evans, pointed out on Saturday that the RBA and APRA are talking about cutting the interest rate ‘buffer’ requirement.
Good. Its current threshold of 7.25% is idiotic. Let me explain…
Times have changed since 2014
New borrowers are currently tested to make sure they have the capacity to pay a 7% interest rate.
It’s a ‘stress test’ of the person making the loan. Banks then add another 0.25% on for good measure, according to the broking industry.
This buffer condition was put in place five years ago.
That’s a very high bar to set, considering where market rates are currently. ABC News reports that you can get a fixed rate for three years for as low as 3.49%.
The yield on an Australian 10-year government bond is currently 1.74%.
That means the market is pricing in a world of low inflation for a decade…and certainly no rate hikes anytime soon.
Conclusion: This regulatory buffer is highly likely to drop…and allow for more qualified buyers into the housing market.
They’re likely to get a little help from government, too. Take Western Australia, for example.
It just announced a ‘targeted’ stimulus to help first homebuyers get around the bank restrictions.
WA has a government-owned mortgage lender called Keystart. It allows deposits as low as 2% and waives lenders mortgage insurance.
It’s now raising the income limits to help more people into the program.
It would not surprise me to see more initiatives like this come from the other states.
Also of note recently are the comments from the chief executive of developer Frasers Property.
He expects the property market to bottom next year…but hints that cash-rich companies like Frasers are going to benefit.
Why? They’ll be able buy up the best development sites for the next surge.
We can see this playing out on the share market right now. Homebuilder Villa World Limited [ASX:VLW] is under a proposed takeover offer from another property group called AVID Property Group.
The market knows perfectly well that the market is weak right now…but Villa World owns a good chunk of greenfield development land in the high-growth regions of Queensland and Victoria.
The implication is that there’s plenty of money on the sidelines that can be drawn out here for those with the financial muscle and strategy over the longer term.
The rational thing to do is to take advantage of the downturn if you can.
Certainly, I don’t see any massive collapse under this scenario.
It also means the Aussie economy is highly likely to keep ticking over…and potentially remove a fear that constantly hangs over the share market: An Aussie property collapse taking the ASX down with it.
We’ll see on that. But, for my money, shares are still the place to be in 2019 — with the usual dips along the way.