The interest rate cuts by the Reserve Bank of Australia to 1.25 per cent a is positive for the Australian equity market, particularly real assets, according to Martin Currie investment team.
The team said the yield spread for Australian equities to the 10-year bond was at the highest level since the global financial crisis, which encouraged investors to favour Australian equities.
Particular opportunities were to be found in income-generating assets with strong free cashflow and reasonable returns on invested capital such as real assets like utilities and infrastructure. Other opportunities were available in consumer staples and discretionary sectors which would benefit from the RBA’s cuts.
“We believe that the best opportunities are currently income generating assets with strong free cash flows and reasonable return on invested capital. These tend to be real assets such as utilities, infrastructure and retail shopping centres. Real assets are defensive, generally provide essential services and often are very dominant in their respective markets,” the Martin Currie team said.
“Companies in the consumer staples and discretionary sectors should also benefit from the combined stimulus from the RBA’s rate cuts, the government’s tax cuts and measures to stimulate housing demand. This also extends to building material companies which are leveraged to growing infrastructure spend and an expected recovery in housing construction once the current housing market stabilises and the easing of credit flows through to first and new home buyers.”
Away from Australia, the team said they were positive on China where valuations reflected the uncertainty over the US/China trade war and long-term secular growth opportunities were mispriced.