The Loewy Blog Edition 2

Welcome to our next edition of the Loewy Blog.

Banks have rushed to slash longer term dated deposits during the current week. Two year deposit rates are down by an average of 40 basis points and 3 year deposit rates down by 40-50 basis points. What is interesting and an extremely rare phenomenon is that short term rates i.e. 3-9 months are now greater than longer term deposit rates.

This is also being reflected in borrowing rates where 3 year fixed rates are now around 6.4-6.5% and variable rates still around the 7% mark.
What does this tell us?
The banks are awash with cash. APRA the bank regulator, reports at the end of June that cash held was just under $500 billion up $34 billion from a year ago or a 7% increase thereon.

This has further increased during the last few weeks as stock market volatility has seen further monies pour out of the market and into term deposits. So the banks are awash with funds with very little demand from borrowers in an expected extended period of tepid, slow and anaemic growth.

The implications are if you want to stay in cash as part of your long term investment strategy, consider locking in term deposits for 2-3 years now. As in our view there appears to be pressure for rates to further decline so locking in now maybe a prudent consideration as part of your investment strategy. (Ensure any exit charge in case of an early unwind on the deposit is minimized, as each bank has a different policy thereon).

For borrowers, as seductive as a 6.4-6.5% fixed rate is, there is now a strong possibility that rates will further decline so that the fixed rate in 6-12 months may well drop below this.

As a rule of thumb, any 3 year fixed rate below 5.5% should be snapped up as on any long term historical curve, this is cheap money.

Assuming declines in interest rates, both borrowing and deposit rates over the next year, this will ultimately lead to some buffer and floor for real estate prices (as residential yields will get close to 5%) and also in the case of high yielding good dividend stocks 7-8%.

Eventually as interest rates decline and investors are in cash, ultimately they will require a better return and yield and hence we will see some return back to other popular asset classes.

The above assumptions are predicated on unemployment levels staying at around 5-5.5% if unemployment levels rise north of 6% and upwards this will further cause pressure on all asset classes other than cash.

Tom Loewy

Disclaimer - The material contained in this newsletter does not constitute advice. DPL is not responsible for any action taken in reliance on any information contained in this newsletter. Anyone reading the newsletter should not act upon material contained in this newsletter without appropriate consultation.