By Joanne Tran
Fund managers are tipping that this week’s widely expected interest rate cut from the Reserve Bank of Australia will broaden out the sharemarket’s rally to the more rate sensitive sectors, including property stocks and retailers.
When the RBA meets on Tuesday for its first board meeting of 2025, financial markets are pricing in an 88 per cent chance of some rate relief, dropping the cash rate from 4.35 per cent to 4.1 per cent. That’s largely because of a favourable quarterly inflation report, which showed core inflation inching closer to the central bank’s 2 per cent to 3 per cent target.
It comes as the ASX banking sector has primarily driven the sharemarket’s gains in the last 18 months to record highs, helping to offset declines in the big Australian miners, who have all been hit by falling commodity prices and a lacklustre outlook for China.
After index heavyweight Commonwealth Bank – which has already sealed a 7 per cent jump so far this year – Westpac and the National Australia Bank have been two of the biggest drivers of the ASX’s rally.
The Australian Financial Review surveyed fund managers to see how they are playing the central bank’s hotly anticipated decision.
Matthew Haupt, Wilson Asset Management portfolio manager
While we expect the RBA to cut by 25 basis points at its meeting, we think the easing cycle will be quite shallow, unless there are further shocks to the system.
In terms of equity positioning, RBA rate cuts could be a marginal negative for bank net interest margins maintaining historical experience. Indeed, reporting season suggests that several banks are already experiencing margin pressure. We are currently underweight banks.
RBA rate cuts could support domestic consumer and housing exposures, but selectivity is key, given that a shallow rate cut and soft domestic demand may still pose challenges to earnings.
Andrew Mitchell, Ophir Asset Management portfolio manager
We are expecting the RBA to cut rates tomorrow. The start of a rate-cutting cycle should benefit interest-rate-sensitive sectors of the economy, such as housing and domestic consumer goods exposed stocks.
With rate cuts on the horizon, we like Real Estate.com and Breville Group for housing, and consumer goods stocks leveraged to an RBA cutting cycle. While Nick Scali had a mixed update at its recent result, we expect improvement here. Temple & Webster and JB Hi-Fi, including its Good Guys business, look to be firing early in 2025 and should also get a shot in the arm from rate cuts.
Brittany Isakka, Spheria Asset Management analyst
In the past 12 months, we have increased our exposure to real estate investment trusts, including Abacus Group and Cromwell. A lot of the sector has been trading below net tangible assets and any rate cut is a positive for the industry. Lower rates should be supportive for cyclically exposed companies that have been out of favour with the market for the past few years.
Simon Brown, Tribeca Investment Partners portfolio manager
While the RBA did not lift rates to the extent of other banks, inflation indicators suggest easing from current levels may be in order. As it stands today, we think the quantum of cuts will be limited by the stickiness of core inflation.
Recent press around rate cuts has already triggered consumer confidence to some degree, so it’s important for the market that the RBA follows through with cuts. While it’s arguable within consumer-facing sectors that equity market multiples are anticipating a pick-up in growth, it is earnings per share growth that drive markets, and better growth should see appreciation. REITs are certainly approaching the end of a tough period, with deep discounts to net tangible assets providing attractive entry points.
Shawn Lee, SG Hiscock portfolio manager
There is a good case to expect a pretty shallow easing cycle, given the mix of tight labour markets, inflation that is still at the higher end of the band, and forthcoming election spending. As a result, we are cautious not to get too carried away with the potential for an outsized stimulatory effect off the back of a few rate cuts.
We do, however, expect the property and consumer discretionary sectors to attract greater investor attention.
Headwinds in the property sector are easing, with rate cuts potentially turning the momentum positive. An increase in transactions above book values and moderating interest costs should narrow the sector’s discount to net tangible assets and allow underlying valuations to gradually recover.
Additionally, increased disposable income from lower mortgage rates, combined with tax cuts and other government subsidies, could stimulate consumer discretionary spending.
Given the expectation for a shallow easing cycle, we expect retailers offering smaller “treats” such as fashion and hospitality could see a more immediate benefit than those selling larger ticket items such as motor vehicles.
Philip Hudak, Maple Brown-Abbott portfolio manager
Ahead of pending domestic interest rate cuts, we have been reducing our exposure to defensive, quality and information technology-exposed companies that have performed well but are now “crowded trades” and being priced for perfection.
We have been recycling capital into under-appreciated value and cyclical companies that are expected to experience an improved earnings outlook. We also expect renewed interest in interest-sensitive companies and turnaround candidates that have recently lagged, including Domain Holdings and Tyro Payments.
Nick Sladen, LSN Capital portfolio manager
Over the past six months, we’ve reduced the fund’s exposure to expensive growth stocks and increased exposure to domestic industrial and healthcare companies that we expect to benefit from an uptick in economic activity as the interest rate easing cycle begins.
Maas Group is well-placed to benefit, with improving economic activity in regional markets to support its construction businesses, while its commercial and residential exposure will also benefit from an interest rate cut.
With inflationary pressures also easing, any improvement in economic growth will see stronger demand for commodities, so we have invested in MAC Copper and Capstone Copper to capitalise on the emerging supply and demand production imbalance.
Will Granger, Airlie Funds Management portfolio manager
A rate cut would be good news for any company selling things to the Aussie consumer, and we own a number of such beneficiaries, but over the long term we think you want to own businesses that don’t just benefit from rate cuts.
It’s worth noting that the future trajectory of rates is unclear. If we rewind back to 2021, the RBA itself was predicting the cash rate would remain at 0.1 per cent until at least 2024, and yet the cash rate ended 2023 at 4.35 per cent.
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