This week we saw the Reserve Bank cut interest rates 0.5%.
The big banks will look to pass some of this on over the coming weeks. As per my weekly newsletters this rate cut was expected so is another rate cut in the coming months.
Currently Australia has two major problems; lack of government to stimulate the economy and a high exchange rate. By cutting interest rates the Reserve Bank addressed both of these issues.
As foreign investors leave our shores in search of a better return our exchange rate drops and on the other hand everyone with a mortgage has a little more to spend at the end of the month.
The big banks are also the winners, they are able to hold on to some of the rate cut to improve their margins which benefits shareholders and employees.
I expect to see the Reserve Bank go further and cut as much as another 0.5% over the next 12-months. These low interest rates will be short lived and I expect to see them on they way back up in 2015.
The market has now moved to 4400 although dropping on Friday. 4700 is still my fair value for the market so medium-term I expect to see the market higher.
Short-term you have a couple of variables to deal with, first is profit taking. It is very tempting for the big fund managers to get nervous and lock-in some of the recent gains for the past four months. The second is seasonal fluctuations in the market, traditionally the month between May and October under perform the months between November and April.
I suspect that given the nervous nature of our market at present, we will see a pull back in May and June.
For the long-term investor simply hold quality companies for the dividends, as even at these levels the market is still cheap.
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