The RBA cut interest rates by 25bp at 2.30pm on Tuesday, taking the benchmark rate to an all-time low of 1%, its first consecutive monthly reduction since 2012. Governor Philip Lowe cited spare capacity in the economy, employment and inflation as the reason underpinning the cut that was around 70% priced in by futures markets, with 21 of 32 economists expecting a decline of 0.25%.
In terms of house prices, Lowe said that falling property prices have prompted households to rein in spending, a significant concern given consumption accounts for nearly 60% of GDP; however, lower prices and policy easing have begun to encourage buyers back into the market, with Sydney property prices rising for the first time in almost two years in June.
While the move was expected by most – MM included - the market reaction was an interesting one and supports our thesis that lower rates are priced into stocks at these elevated levels. Even the Aussie dollar was flat on the news when all settled down – trading at US69.84c shortly after the news.
At the index level, the market was strong early – up +38 points at the highs. However, straight after the RBA cut the market dropped by 40+ points and was actually down at the lows. Banks took -22 points from the index, providing the biggest drag by a mile.
Overall, the ASX 200 added +5 points today or +0.08% to 6653. Dow Futures are trading up +32 points / +0.13%.
ASX 200 Chart
ASX 200 Chart
CATCHING OUR EYE;
Banks: Were weak today and the weakness (after a strong run) was enough to see us trim back our overweight call and move more into cash for the short term. While lower interest rates stimulate economic growth, and bank earnings are exposed to broader economic trends, the offset is around lower margins, which ultimately hurt profitability. Banks are under political pressure to pass on the full cut, however cutting rates for depositors by the full whack to protect margins is also a tough call. It’s estimated that today’s cut knocks around 3-4% off banks earnings, and when banks are weak, the index struggles.
The conundrum about holding banks is a tough one – hold because rates are low and cash is yielding next to nothing, plus of course, lower rates could underpin the economy or at least curtail any rise in bad debts, or sell because rates are going lower on the back of a weakening economy, plus when rates are this low (1%) it’s hard for banks to protect margins.
At MM, we’re like many investors out there struggling with the concept. However, ultimately there’s enough evidence after a good run to take a more conservative stance towards the banks, trim the exposure rather than sell them entirely, increase cash after the market trades near post GFC highs and see if the upcoming earnings season throws up opportunity – which we suspect it will.
Today we trimmed back CBA, NAB & WBC.
Commonwealth Bank (CBA) Chart
Speedcast (SDA) -40.8%; Remote and satellite connectivity provider Speedcast tumbled to 4-year lows today on a downgraded outlook ahead of their half year results. The communications name guided first-half EBITDA to $US60m - $US64m, around flat on the half despite including a full contribution from the Globecomm acquisition that was completed in December. Speedcast also moved the goalposts for full-year expectations, revising guidance down around 13% at the midpoint on the EBITDA line to $US140m to $US150m, corresponding to a 10% miss to consensus estimates.
The company blamed the poor guidance on a number of contributing factors, with weaker emerging markets, NBN payment delays and timing of system integrations on a number of contracts in the energy space at the top of the list, with the company calling these “non-structural” despite appearing to impact outlook as well as past performance.
Speedcast’s acquisition of Globecomm is also making investors nervous, with the company lowering expectations for the full-year contribution of the purchase by around 20% despite maintaining cost synergy guidance. A big drop – and deservedly so, it’s a big downgrade with commentary suggesting it may not be the last. Not one for us.
Speedcast (SDA) Chart
Telstra (TLS) -0.52%, fell on UBS moving its recommendation to a hold despite pushing the price target 11% higher. Telstra shares have been on a tear this year thanks to an improving telecommunications market – NBN price cuts, Vodafone/TPG merger off the cards, best-in-class option for 5G rollout and new mobile plan pricing have all worked in Telstra’s favour. They now say most of the upside has been priced in and Telstra looks a bit too frothy to be buying. There certainly has been a big swing from pessimism to optimism in the name but technically it could have further to run. We are looking for a pullback to re-enter the stock, preferably after full-year results.
Telstra (TLS) Chart
- WorleyParsons Upgraded to Buy at Goldman Sachs
- Telstra Downgraded to Neutral at UBS
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