The Loewy Blog Edition 7

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

Interest Rates – Borrowing

Current rates on residential security 2 - 5 years fixed at approximately 5.5%

Variable rate around 5.8 – 6%

Our view is the central RBA will further cut rates by 50 basis points by March next year. This is based on continuing problems in Europe, tepid US growth although some positive signs are emerging and a continued slow down in China.

The threat of decreased mining investment and continuing pressure on unemployment levels in the next 12 months will also impact in the reduction in interest rates. Excellent opportunities will exist in the next few months to lock in fixed interest rates at emergency / GFC type levels.

Term Deposits

Current 3- 9 month rates are between 4.5 - 4.6% and 1 – 2 year rates are almost the same. We see further downward pressure on these rates going forward and predict a drop of between .5 -.7% over the next 6 - 18 months on the above rates.

Banks are still awash with funds so no pressure to increase term deposit rates. Westpac predicts a cash rate of 2.5% for an extended number of years.

Sharemarket

We continue our prediction of a flight from term deposits to quality high yielding dividend shares. There has been a shift of money out of defensive positions to bonds, hybrids and strong high yielding dividend stocks in the last few months.

As there are no envisaged large profit increases in these companies and the increases in their stock value is purely attributable to a lift in price earnings valuations and the desire to get yield.

In our view, a point of resistance will be reached on this an other blue chip stocks at an all ords level of around 4800 – 5000, as given no profit increases in the short term, the price valuations will again start to look stretched and profits may start to be taken off the table by institutions. Thus any investment in banks, Telstra, etc. must be based on yield expectation and not necessarily on growth expectations and proceed with caution.

Foreign Exchange

We continue to predict a narrow range of the USD / $A of between 1.01 to 1.05.

Real Estate

Sydney clearance rates are currently around 65%. Housing sentiment is rapidly improving as some growth in prices is starting to be experienced.

Stock up to $600,000

Continued good clearance rates are being experienced and strong prices. Prices will continue to be strong as interest rates continue to decline as long as employment stays relatively stable.

Investors are starting to return to this segment of the market with yield at 4 – 4.5%, we see continued strength at this end of the market.

$600,000 - $1.5M

Our feedback from agents is activity is returning to this end of the market, with the reduction in interest rates and investors returning. In our view we have seen a bottoming of this end of the market, unless there is large unemployment returning.

Above $1.5 to 3M

We’re starting to see a bottoming in this end of the market, and increased clearance rates on properties.

Above $5M

No real change, price pressure and difficulty selling stock.

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.