Rate cut boosts Aussie equities outlook
Australian equities are likely to prove the major beneficiaries of the Reserve Bank's latest interest rate cut, according to new analysis released by Credit Suisse.
The analysis, released this week in the wake of the RBA rate cut, has suggested Australian equities are now likely to get a "free ride".
"At the start of the year, we thought the combination of RBA rate cuts and recovering free cash-flows would be enough for Australian equities to provide double-digit returns for 2015," the analysis said. "The recent RBA rate cut reinforces our positive view. We expect further downside for Aussie rates and further upside for Aussie equities."
The Credit Suisse analysis said that Australian equity market was not crying out for lower rates as it has done in the past and that earnings per share (EPS) had actually been growing when, ahead of a rate cut, it is usually contracting.
"We believe Aussie equities are benefitting from the free ride provided by the RBA as it stimulates to support domestic demand and help close the output gap," the analysis said. "We expect more rate cuts to come, which should further support valuations overshooting long-term averages."
The analysis cautioned, however, that there was scepticism that the pace of year-to-date gains in Australian equities would be maintained.
"We stick to our 6000 target for December-2015," it said. "Domestic investors should enjoy high single digit total returns from here. Global investors will have to contend with a currency that could depreciate a further six to seven per cent."
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