The Reserve Bank of Australia (RBA) makes its first interest rate decision of the year, and we believe the RBA will keep the cash rate at 2.00%. It appears that interest rate cuts from the RBA are finally starting to take effect on the wider economy. This bodes well for the retail space which should benefit from consumers having more discretionary income from lower interest rates. One of ’s top thematic views is that a “Spending Spree” will benefit selected retailers such as Myer (MYR.AX) which despite selling off this month, remains up +17% since 1st Oct 2015.
RBA Decision Preview
believes that the RBA will maintain interest rates at 2.00% over the near term. In our opinion, there is however a distinct possibility that the cash rate moves higher in the latter half of 2016 if employment figures continue to surprise to the upside and economic growth remains robust. This is not the consensus view with most banks and research houses picking the RBA to cut interest rates further in 2016.
The energy and materials sectors still remain the major drag on the economy. The decline in the mining boom has had a significant impact on the economy thus far. We still believe further adjustments to the sector are needed, but we should start to experience a transition away from these sectors and towards retail, agriculture and technology.
It appears that the housing market may have reached its peak in 2015. Although we don’t see a material fall in house prices in the near term, we do expect to see the sector, as an investment class, lag that of equities. Further cooling for housing demand should delay any need for immediate rate hikes.
Chart of the Moment
The recent sell-off in MYR shares seems at odds with strong retail data trends in Australia, and we believe MYR shares have been under selling pressure from speculative investors. Looking forward we believe the MYR investment case is very much intact. Retail sales in Australia have been on the upward trajectory over the past 3 months and we believe this momentum is set to continue. Consumer conditions are currently very accommodative. Interest rates are set to remain low for the medium term and low fuel and cost inflation should be supportive for retailers, in our view.