I appeared on Channel News Asia again this morning at 6:20am SGT, via Skype. My questions and my responses in the form of brief notes are below:
Q1. Will we see a year end rally on the Australian stock market?
It is quite likely. We have seen the ASX200 index for the last few months stuck in between two key levels of 5000 and 5400. It has received solid support at anything around 5000 yet it has been equally sold off at anything around 5400.
I noticed last week that in every December since 2009, there has been a strong surge higher, so there must be something special about the year end.
Based on that I wouldn’t be at all surprised to see something similar again this year however I do see some limited upside.
Q2. Australian bank stocks have been rallying since August, after a sell-off early this year. Are they back in favour, are valuations still attractive?
I don’t think they are back in favour. They have more tended to consolidate since August and stop the falls from earlier this year, rather than rallying too much higher.
One thing I have observed is that the new reality of banks determining their lending rates independent of what the RBA is doing. Recently we have seen all banks increase lending rates when the RBA hasn’t move the official cash rate.
Therefore the margins on their lending are increasing which may be why they have become a little more attractive of late.
Q3. Given continued weakness in commodity prices and uncertainty around growth in the Asian region, what’s the likelihood of further rate by the Reserve Bank of Australia?
I am reasonably confident that it won’t be this year. However anything can happen in 2016.
As we see all the time with central banks, they do take a long term view of the economic situation and avoid knee jerk reactions at all costs.
They are seeing some positive signs, especially with recent employment numbers. In their last meeting, the board members observed that the Australian economy continued to grow in the September quarter as economic activity continued to shift away from mining investment to other sectors of the economy.
Growth was expected to be between 2–3% over the year to June 2016.
Of course, all of that can change and the RBA are in a good position where they still have plenty of room to move if need be.
Q4. Australia’s main export, iron ore has fallen almost 20% over the last month, are you bearish on the Aussie dollar?
Throughout this year I have been bearish the Australian dollar and we have seen it fall quite strongly down to multi-year lows.
It has however received very strong support around the 70 US cents level for the last few months which has kept the A$ above this key level. Numerous external factors have placed selling pressure on the A$ during this time, however it has remained quite resilient.
This has probably tested my patience a little. So yes I remain bearish on the Australian dollar however this has waned over the last few months due to its resilience. As well as the RBA started to change their tune a little too.
Q5. Investors increasingly expect the US Federal Reserve to raise interest rates when it meets again next month. Is the hike priced in?
Fairly much yes. Only a few weeks ago we saw market expectations of greater than 70% of a December rise and consequently we have seen a strengthening US dollar. Gold has fallen sharply as have commodities generally.