All Ords Report 09 June 2015
Who’s betting on another RBA cut? The RBA’s current stance appears as though there is no hurry to make another cut.
Either way, I believe the most important point is not whether the cut occurs, as we could spend all day debating whether this is likely in 2015. What is important though, is how well are you positioned for when rates eventually rise?
You can be certain in these times that the banks will endeavour to maintain their margins on the funds they lend out, which means that when the cash rate rises, the banks are likely to raise the interest rate on your loan by at least the same amount.
Historically, after the cash rate hits a bottom the rise can be quite rapid. For example, in January 1964 the cash rate stood at 3.02 %, however by June 1966 it was 4.48%. In November 1967 the rate was 3.66% and by June 1970 it was up at 6.12%. One of the most dramatic moves occurred following the January 1973 low at 3.86% and by August 1974 it was 9.47%. What I am showing you is that in eighteen months to around three years following a low in the cash rate we could see a rise by 1.46% to 2.46%, or worse, by as much as around 5.61%.
My main concern right now is for new home buyers particularly. Perhaps this is you, or your adult children, who have had to save hard to get into the property market, only to find that a couple of years down the track the RBA decides to put the wheels in reverse and hike the cash rate, which drives up lending rates.
Unfortunately, what most people do when rates fall is to pay less towards their loans, instead of keeping repayments at a higher level to pay off the loans faster. The government website called Money Smart has a number of calculators, including a mortgage calculator that may prove useful to you. It will show you how much you will save if you continue to pay your loan off at a higher rate and how long it will take to pay it off.
Remember, if you leave the extra cash in the bank rather than paying down debt you are more likely to spend it, which means you are giving up your ability to pay off your debt sooner. Understandably, if you prefer to always have ready cash handy to cover something unexpected you could create your own cash buffer. This you could sit in a term deposit, or an at call account, to make it easier for you to cover the cost of an unplanned bill, or a family medical expense.
To help you weather any future change in the cash rate, I suggest that particularly new home owners would be wise to factor in at least an additional 1.0% towards your repayments, and stay ahead of the game. Therefore, if your current home loan rate is 4.25%, pay 5.25%.
For those still building up the cash for a deposit, with cash rates so low this is the right time to really put your savings plan into second gear, otherwise it is likely to take a long time just to build the capital you need. This was the predicament a friend of mine found himself in many years ago. So he put the money into some really solid blue chip stocks paying good dividends and in a few years he had the money he needed.
Now not everyone knows where to start, and the market can seem very daunting when you don’t have the knowledge. However, you can speed up the process by doing two things; you can get the knowledge that is in my head by reading my book “How to beat the managed funds by 20%" and sign up for my express course, Trading Mentor, which will give you the basics and a foundation for success in the share market.
So what do we expect in the market?
Last week the Australian market took a more bearish tone, having closed at 5506 points on Friday. This was in contrast to last week’s strong rise, being closer to 5800 points. I did indicate that if the All Ordinaries was to fall again this month it is likely to stabilize above 5500 points, which is what we may now be seeing.
Looking back at what has occurred, since the high in April of 5963 points, the market has been down for around seven weeks, which historically can occur on a yearly basis, however generally the All Ordinaries is unlikely to fall more than 8 weeks before it bounces and begins to rise. Given this, I will be looking for the market to start to stabilize after next week.
The more you become familiar with the market the more you will notice how the All Ordinaries will often be down in May and/or early June before rising again, and some of the best rises have occurred in around July, August, and through to September.
At the moment the media are focused on the economy here, which according to Joe Hockey is doing well. Not wanting raise a flag in support of the Treasurer, however I believe that we need to be realistic about growth given the commodities slump that has had such a significant impact on Australia’s earnings and the economy as a whole. Therefore, isn’t slow growth in this period to be expected?
Of course, concerns about Greece have continued to plague global markets and this is creating volatility. So while Greece is playing a game of cat and mouse with creditors the big hedge funds are seizing the opportunity that this uncertainty brings. Remember that perception is everything in the share market but eventually the reality will be known by everyone. So expect the markets to be a little jittery until then.
Now as I have said before, Greece wasn’t likely to go away anytime soon. The real question to ask is how much of an impact is all of this likely to have on the Australian economy, well very little in my opinion, however when the social mood is uncertain in the short term it can create a few waves.
As always, the important thing to remember is that there will always be some political or financial issue that can slow our market down in the short term, however, long term the market has continued to rise. As long as you have a plan and stop losses are in place to minimize your risk on the downside you will remain ready to take advantage of the next rise, which will occur when the uncertainty clears.
Setting a simple stop loss is easy when you know how, and is designed to preserve your portfolio capital in the event of a market fall. However, not everyone wants to learn to manage their own portfolio. Many people prefer someone who already has the knowledge to do it for them. If you would like to talk to someone about having your portfolio managed by my team and I, you are welcome to call my office today on 1300 742 738 to find out how.
Dale Gillham is Chief Analyst at Wealth Within