Equities ready for comeback
The Reserve Bank of Australia's (RBA's) most recent interest rate cut could spur a comeback in the Australian equities market, according to new research by Lonsec.
Referring to historical data, Lonsec head of equity research Bill Keenan said that a period of successive rate cuts nearly always led to a strong rally in Australian equities.
Specifically, he said that a lower official cash rate often meant a lower return from cash, term deposits, and bonds.
"Secondly, the cost of debt is reduced which improves the disposable income of households and increases the return on equity of companies," he added.
He said the taste for consumption and business investment would improve as investors switched out of low-yield cash and term deposits.
According to Lonsec, returns from cash and deposits will drop by 75 basis points if the cash rate continues to ease from 3.75 per cent to an expected 3.50 per cent low.
Considering the lower interest rates in the Australian economy - allied to an improving global growth outlook, particularly in the United States, Asia and Germany - the economic and earnings outlook for Australian equities was a lot brighter, Keenan said.
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