After a strong March quarter, it feels like the yield chase theme is getting towards an end – or at least a long breather during April.
Interest rate futures markets are currently expecting a further two interest rate cuts from the RBA which will take the cash rate to an unbelievable 1.75%. While that may well occur, it is hard to see much more. US rates, and potentially those in the UK as well are expected to rise sooner rather than later. Without the stimulus of a greater number of cuts than the market expects, or upside surprises in economic indicators or company earnings, it would seem to be difficult for stock market and property prices to move much further upwards in the near term.
There is one potential beacon of hope for stock markets, and that comes in the form of the performance of resource stocks, which could well surprise on the upside. The mining environment is not getting better, but at least it does seem to be getting less worse. While it remains difficult to get excited about iron ore, many other commodities and energy stocks, and the companies that service them, could see some improvement from the current dismal outlooks priced in.
We do expect some volatility in stock markets this year, perhaps soon. It may well come in the form of a 10-15% market correction, particularly in the US market which has still to get through the psychologically important first interest rate rise. While there is plenty of historical evidence suggesting stock markets do not fall drastically when interest rates start to rise, we still expect a short term adjustment in the US as reality sets in and huge bets by hedge funds and other leveraged traders on continuing market boom are unwound.
Such a correction would, in our view, be healthy at this point and it is hard to see our local market escape unscathed from such an event.
We will likely take this as an opportunity to add to our equity investments if indeed it does occur.
