Market News
The Australian Share Market rebounded strongly in July, with the S&P/ASX200 benchmark index finishing the month 5.2% higher, its best monthly gain since October 2011.
The Materials sector was the strongest performing sector for July, up 9.3%. Within this sector BHP increased 10.4% and Rio Tinto gained 9.8% over the month of July. These are pleasing returns following the downward spiral in their respective share prices over May and June.
The Financials sector also performed well, up 6.3% in July. Specifically ANZ gained 6.97%, CBA gained 7.27%, NAB gained 7.8% and Westpac gained 6.96% over the month of July.
We expect investors to continue investing in the big four banks for their fully franked dividend yields which is currently around double that of Term Deposits rates on offer. At 31st July 2013 the fully franked dividend yield for the “Big 4” was as follows:
ANZ 7.30%
CBA 6.94%
NAB 8.37%
Westpac 7.86%
Interest Rates
The Reserve Bank of Australia (RBA) has slashed interest rates to a record low of 2.5% at its August board meeting yesterday. The cut is the first since the RBA announced a 0.25% cut in May when the Australian dollar was above parity with the greenback.
It is also only the second time the rate has been cut during an election campaign.
RBA governor Glenn Stevens announced the cut, explaining: “In Australia, the economy has been growing a bit below trend over the past year. This is expected to continue in the near term as the economy adjusts to lower levels of mining investment.
“The unemployment rate has edged higher. Recent data confirm that inflation has been consistent with the medium-term target. With growth in labour costs moderating, this is expected to remain the case over the next one to two years, even with the effects of the recent depreciation of the exchange rate.”
National Australia Bank Ltd is still expecting an additional rate cut later in the year, likely in November, “although it could be earlier”. According to NAB “This is in line with our forecasts and suggests that, having recognised the reality of lower growth with benign inflation, more rate cuts are likely.” NAB also referred to ongoing sources of weak domestic demand and a downturn in mining investment.
Macquarie Bank believes that interest rates will be cut further towards the 2% mark by the end of the year. UBS believes the RBA still has work to do but does not expect rate cuts just before or just after the September 7thelection which rules out rate cuts in September and October. They expect the cuts to occur later in 2013 or early 2014.
Insurance Levy to Hit Banks
The Rudd Government announced last week it plans to impose an insurance levy on all bank deposits. The government plans to impose a 0.05% insurance levy on every deposit of up to $250,000 to protect depositors against collapses.
The banks said they will pass on the impost, which equates to 5¢ for each $100, to customers through reduced interest payments on deposits.
This measure will put more pressure on Term Deposit rates. With rates now only marginally above inflation figures (2.5% – 3%) investors will be forced to look to other alternatives such as the share market for a higher rate of return albeit with a higher level of risk.