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All Ords Report 09 August 2016

Following the decision by the RBA to once again cut the cash rate to an all-time low of 1.5 per cent, debate rages as to whether the banks should pass on the entire value of the cut. But why are we pointing the finger at the banks?

Itís easy for politicians to do that. Why are we not asking whether the RBA ought to have made the cut at all?

Firstly, while banks must provide a service to the community, they are also listed companies responsible for making a profit. Average two year earnings forecasts for major banks are now at low single digits. So either the banks donít pass on the cut now or they start raising fees and borrowing rates, or cutting dividends to shareholders.

Iíd like to think that the RBA board knows what itís doing by continuing to cut to record lows. Now Iím not an economist, however I question whether a small cut like 0.25 percent will really make much difference to our economy.

Are they looking for the tipping point that drives more cash into investments like shares and increases consumer spending? Both consumer spending and the share market have already been rising.

One interesting point is, the cash rate was at 4.75% in 2011 when the AUD was above parity with the USD, and as successive cuts in the cash rate occurred, the AUD moved lower to bottom at $0.683 in January this year. But the RBA has made two further cuts to the cash rate this year and the AUD moved higher. It has risen by around 11.5 per cent since the low in January. So perhaps further cuts are not having the desired effect anymore.

As a share market analyst who studies market cycles and the social mood, the collective are still fearful, otherwise cash would be pouring into equities. However, it takes years for the masses to throw off the pessimism of a major market correction, partly because negative commentary continues to depress the underlying mood, so many people remain in cash longer than necessary.

The untrained masses are looking for evidence of boom times before they will put their money in. Everything must be looking rosy and companies have to be making bumper profits before most put their toes in the water. Savvy investors know to act differently.

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I believe this action by the RBA is likely to be seen in history as overkill in terms of the economy, or largely moot as far as the AUD is concerned.

One thing is clear, the cut to the cash rate has given our big banks a chance to increase their margins.

What do we expect in the market?

Having achieved a high of 5691.8 points on 1 August 2016, the Australian share market (All Ordinaries Index) is taking a well-earned break from the recent strong rise. Last week, short term profit takers began closing out trades, however, our analysis indicates that the sell-off is likely to be temporary given the bullish way the market has unfolded over the past few months.

The All Ordinaries Index has already broken a number of important milestones, including the 5350 point level, which it broke strongly through in May, and is now setting the scene for a much longer rise.

Our analysis indicates that the moves of the market over the past twelve months are Ďnormalí, including the current pull back in share prices which may persist for a few weeks. However, a strong close above 5700 points will indicate the market is moving up to challenge the 2015 high of around 6000 points. If this occurs, our medium term target of 6200 to 6400 becomes very real.

The US market has already broken to a new all-time high and I believe that over time our market will follow. A good sign for the Australian market would be to see a corresponding strong move on the Hang Seng (HSI).

As the cash rate drops to what I call critical levels, the share market is likely to continue to rise and more people will choose to put less of their future savings into term deposits with a bank and more into shares and property. Those with lots of cash in the bank already are realising that they are only just treading water by leaving it there.

Dale Gillham is Chief Analyst at Wealth Within

All Ords Chart 09 August 2016

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