The Loewy Blog Edition 5

Here is our current view of the economy and forecast of various trends:-

Interest Rates Borrowing

We are seeing various forces at play. A genuine increase in bank’s cost of funds which they are passing onto business and non-housing loan products. The days of old margin and unused line fees are gone. Any business loan with a margin of less than 2% plus BBSY represents an excellent deal in today’s market.

Term Deposits

Although value seems to be at the 4-6 months rate between 5.5 to 5.6%, we see further pressure on these rates going down in the short to medium term.

Foreign Exchange

Pressure is growing on the RBA to stem the rise of the $A. Will they enter the market as Brazil, Switzerland and Japan has done or will they decrease interest rates to stop the flow of hot money to Australia and hence the increase of our exchange rate. 84% of Australian Government Bond debt is now held by offshore entities and institutions. There are now murmurs from the RBA that the $A is overvalued especially as sentiment and forecast declines in our terms of trade will be forthcoming. In our view we predict a trading range of $A/US .95 -1.05 in the next 6 months with the pressure on the downside against the $A.

Share Market

We are starting to see an appetite for non-cash products (i.e. other than term deposits and bonds) starting to be sought as continued strength in the USA and Armageddon fears of Europe somewhat subside and stabilise. Initially, these monies have been invested in notes and bonds but we now see the beginning of a small trend turn from investors towards equity. We therefore see some upside in this sector in the next 6 months and later periods subject to global volatility in Europe and USA remaining at current levels. Two other factors will also be at play.

Short Term – if interest rates continue to decline (on term deposits) Medium/Long Term – The eventual advent of increased compulsory superannuation from 9-12% will eventually have a positive impact on the share market as this surplus cash will need to be placed into the market. (Wealth Management companies and the banks will be the largest beneficiaries of these placements.) - Although the strength of China will decrease there is still ample domestic demand in China albeit this will occur at much lower levels of demand.

Real Estate

Sydney clearance rates are at about 56%. An orderly clearance of stock is occurring at reduced prices at the upper end above $2 million at about 15-25% below peak values. We don’t see any large increase or decreases envisaged on properties up to $750,000. Residential yields will be stable and eventually be greater than term deposit rates. When this occurs, pressure on prices will be on the upside. In our view the past historical gains of 10-15% per annum won’t be seen for a number of years. Inflation plus 2% will be excellent capital growth rates for the next few years for residential real estate.

Tom Loewy

Disclaimer – The material contained in this newsletter does not constitute advice. DPL & Co Pty Ltd 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.