What areas of the market perform well if the RBA drops rates?
Low interest rates, or free money as we often call it, has arguably been the main contributor to the impressive bull market for US stocks post the GFC with it almost raining buybacks i.e. companies using money, often borrowed at low interest rates, to buy the companies own stock sending the shares higher. In 2018 over $US1.1 trillion was spent on buybacks with many predicting the number will be higher in 2019. My concern when I look at the chart of the Dow below is company directors are buying back their stock today saying its cheap after the markets already rallied ~400%.
MM believes the RBA will cut once this year with Melbourne Cup Day our best guess – the general market is looking for 2 rate cuts.
We could have included a few other sectors like resources, golds and the tech space but we have stuck with the more commonly acknowledged stocks / sectors that historically enjoy low rates.
Healthcare stocks
The healthcare sector has endured a meaningful correction in 2018 /9 and while a lower interest rate environment will help we would be adopting a sell into strength attitude as opposed to buying the recent sharp correction.
MM is long ResMed (RMD) & Healius (HLS) in the sector with current target prices around $15.50 and $3.20 respectively
ASX200 Healthcare Sector Chart
Telcos
No change here, we like Telstra even though its dividend may not be what it once was it’s probably now sustainable at 5.8% fully franked + they are reinvesting back into the business for future growth. A stock that many continue to dislike however worth noting that it has rallied ~26% from the $2.60 low.
MM is bullish TLS initially targeting ~$3.50.
Telstra (TLS) Chart
The Yield Play
The classic “yield play” stocks like Sydney Airports (SYD) and Transurban (TCL) feel fully priced as they remain around their all-time highs but until the central banks tailwind is removed it feels unlikely that any meaningful pullback will unfold.
We believe portfolios should contain a strong yield focus but an open-minded outlook on stocks may lead to better returns e.g. Estia Health (EHE) mentioned earlier.
Sydney Airport (SYD) Chart
