Powered by momentummedia
nestegg logo
Powered by momentummedia
nestegg logo
nestegg logo

Invest

RBA’s rate reduction favours equity investors

By Cameron Micallef · March 06 2020
Reading:
egg
egg

Invest

RBA’s rate reduction favours equity investors

By Cameron Micallef
March 06 2020
Reading:
egg
egg
RBA rate reduction favours equity investors

RBA’s rate reduction favours equity investors

author image
By Cameron Micallef · March 06 2020
Reading:
egg
egg
RBA rate reduction favours equity investors

Following a reduction in the official cash rate to 0.5 of a percentage point on Tuesday, equities are looking increasingly very attractive, suggests a fund manager.

According to Fidelity International’s cross-asset specialist, Anthony Doyle, the gap between bonds and equities have reached a two-decade high, providing an opportunity for investors.

The yield gap (the difference between equity yields and government bond yields) has reached a 20-year high of 3.8 per cent, surpassing the previous high set in February 2009. On this measure, equities are very attractively valued relative to government bonds, despite the market hitting a record 7,162 points in February (currently 6,395 points), Mr Doyle explained.

The fund manager also highlighted the potential lack of options an even lower interest rate environment provides.

“In this low-rate environment, investors can no longer generate a positive real yield from the Australian government bond market, with the longest maturity nominal ACGB maturing in 2047 yielding only 1.39 per cent,” he said.

Advertisement
Advertisement

“Subsequently, for those investors hoping to generate a positive real yield, equities look extremely attractive. Of course, equities aren’t a free lunch, and there is some vulnerability to the yield gap compressing if earnings revisions to the S&P/ASX 200 decline as a result of the impact of the coronavirus on the global and domestic economic outlook.”

Given the bond market yields are less than the current inflation rate of 1.8 per cent, Mr Doyle argued investors will leave bonds for equities.

“The Australian equity market continues to offer a dividend yield above inflation and will likely continue to attract the interest of Australian investors keen to generate positive real returns,” Mr Doyle said.

The fund manager warns investors of rushing into the market or putting all their eggs in one basket, but instead applying basic rules of diversification.

“The key for long-term returns will be actively selecting those companies that will still be able to pay a dividend should business conditions become more difficult,” he said. 

“By being diversified, and taking the time to analyse financial statements, meet company management and assess the risk to profits in the near and long term, skilled active equity investors have the ability to continue to generate positive real returns for investors, something that is becoming increasingly difficult to do in fixed-income markets.”

RBA’s rate reduction favours equity investors
RBA rate reduction favours equity investors
nestegg logo

Forward this article to a friend. Follow us on Linkedin. Join us on Facebook. Find us on Twitter for the latest updates
Rate the article
author image

About the author

Cameron is a journalist for Momentum Media's nestegg and Smart Property Investment. He enjoys giving Aussies practical financial tips and tricks to help grow their wealth and achieve financial independence. As a self-confessed finance nerd, Cameron enjoys chatting with industry experts and commentators to leverage their insights to grow your portfolio.

Join the nestegg community

We Translate Complicated Financial Jargon Into Easy-To-Understand Information For Australians

Your email address will be shared with nestegg and subject to our Privacy Policy

About the author

Cameron is a journalist for Momentum Media's nestegg and Smart Property Investment. He enjoys giving Aussies practical financial tips and tricks to help grow their wealth and achieve financial independence. As a self-confessed finance nerd, Cameron enjoys chatting with industry experts and commentators to leverage their insights to grow your portfolio.

Join The Nest Egg community

We Translate Complicated Financial Jargon Into Easy-To-Understand Information For Australians

Your email address will be shared with nestegg and subject to our Privacy Policy

Why we’ll keep delivering for our communities in the face of COVID-19

alex

As Australia tries to keep pace with a rapidly changing business and social landscape in the wake of COVID-19, Momentum Media is leading the way delivering essential content to our communities, writes Alex Whitlock, director of Nest Egg.

Read more

From the web

Recommended by Spike Native Network

Website Notifications

Get notifications in real-time for staying up to date with content that matters to you.