The Loewy Blog Edition 8 - 25 January 2013

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

Interest Rates - Borrowing

Current rates on residential security 2 - 3 years fixed at approximately 5.5 - 5.6%.

Variable rates are approximate 5.7 - 5.8%.

Our view has somewhat softened from further RBA interest rates cuts and easing.  The case for lower interest rates i.e. low inflation environment, high Australian dollar and softer labour market conditions are still evident but with some improvement in global conditions, predominantly Chinese manufacturing upgrades, some lift in housing prices and approvals and recent stronger commodity prices may leave the RBA to consider a wait and see approach rather than continuing interest rate reduction policy.

In our view, labour employment conditions and the softening thereon will be the fundamental factor for interest rate policy direction and whether further cuts are to be made.

Term Deposits

Current 3 - 9 month rates are between 4.2 - 4.1% and 1 -2 year rates are at about 4%.  We see minor further downward pressure on these rates going forward.

Sharemarket

The All-Ords closed on Thursday, 24 January 2013 at 4833 being a 20 month high.

We continue our prediction of a flight from term deposits to quality high yielding dividend shares.

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 for investors 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 5000 - 5200, 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

With China’s demand for commodities increasing we see some increase in the A$ / US$ value.

We continue to predict a narrow range of the US$ / $A of between 1.03 to 1.07.

Real Estate

Housing sentiment continues to grow in Sydney although tepid we see average growth of 3 – 5% this year.

Stock up to $600,000

Prices will continue to be strong as interest rates continue to decline or remain stable and 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 and return to growth of about 3% thereon, again 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

Stabilisation of prices is finally starting to occur.

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.