6 Aug 2016 - Hedge Clippings

RBA winds down the cash rate, while the Bank of England goes one better, and winds back the clock.

This week's news has been all about interest rates. In fact, when you think about it, it's been all about interest rates for the past few years.

Not only did the RBA drop interest rates by a further 0.25% to just 1.5% as expected, but there is a pretty fair chance that there will be a further cut before the end of the year. If you think that's low, the Bank of England announced a similar cut overnight, taking their rate to just 0.25%, the lowest since 1694. That's A.D. 1694 just in case there is any confusion.

For those with time on their hands over the weekend, or desperate to understand what our policy makers are thinking, here's a link to the RBA's Quarterly Statement on Monetary Policy.

For comparison, casting around the world the Bank of Canada's rate is 0.5%, the European Central Bank 0%, and the People's Bank of China a whopping 4.35%. In various parts of Europe, the rate is now negative.

Those of you (us) who are old enough, might remember the scary days of mortgage rates of 18 or 19%. At that time I remember being advised by the managing director of one Australian bank that we would never see interest rates in single digits again and our lifetime. It would be unfair to name him, or for that matter single him out, but he was one of the most successful and smartest in the business - then or since.

So here we are, locked into this low interest rate, low inflation environment which seems to be spiralling, or should that be inching, ever lower.

In the short term investors in equities will welcome this as good news. Minimal returns on cash in the bank, or invested in government bonds inevitably makes equities look attractive, with the result that equity PE multiples are at scary levels.

The danger of this is that increased PE multiples are not necessarily a reflection on economic or corporate health, or in many cases the result of increased earnings. Rather they are merely a reflection of the attractiveness of dividend yields, and particularly of franked dividend yields, of 4 to 6%.

As we enter the earnings season proper, it's worth noting that YTD to the end of July the ASX200 financial sector fell 9%, so merely chasing yield doesn't always provide a positive outcome.

By comparison, the Materials Sector (dominated by BHP and Rio) gained 23%, while REITs gained 20%.

So if the outlook for interest rates for the next one, three or five years is to remain low, expect that to support equity markets, in spite of the potential volatility and capital loss that can occur. The real risk will come when interest rates start to rise, and the inflows into equities of the past few years will convert to outflows.

Not tomorrow, but when it happens look out!

PERFORMANCE NEWS

Early results for July are thin on the ground so far, but with the ASX200 up over 6% in a post-Brexit selloff - rally yo-yo, are looking positive so far.

Meme Australian Share Fund rose 7.81% in July, outperforming the ASX-200 Accumulation Index which returned 6.29%, by 1.52%.

Bennelong Long Short Equity Fund returned +1.46% in July and +15.63% for the latest 12-months.

FUND REVIEWS released this week: Pengana Absolute Return Asia Pacific Fund; Supervised Global Income Fund; Insync Global Titans Funds;

And on that note, have a great weekend.

Regards,

Chris
CEO, AUSTRALIAN FUND MONITORS

Connect with me on LinkedIn Twitter Facebook

Australian Fund Monitors are helping to raise awareness to support research into prevention and cure for cerebral palsy. For more information visit www.cpresearch.org.au or contact me by email.