When the Reserve Bank of Australia (RBA) announced in November it was reducing the cash rate to a record-low 0.1 per cent as part of efforts to stimulate the economy, Australians with mortgage debt rejoiced.
It signalled savings for families of potentially thousands of dollars each year on their loan repayments.
Better still, the RBA stated the rate would likely not be increased for at least three years.
The news was less welcome for investors with cash in savings accounts and term deposits who, faced with the prospect of earning next to no interest, began looking elsewhere for better returns on their money.
Market watchers believe this search for yield could be creating a new stock market bubble, just nine months after the ASX suffered record-breaking losses in the wake of the coronavirus pandemic.
That’s because share prices are in many instances being determined less by the performance of companies, and more by the ballooning demand for shares.
Taylor Collison stockbroker Chris Eddington says this potential bubble poses a risk to those investors turning to shares as a result of the lower interest rates.
“Some investors are paying for stocks that are at yearly highs (because they’re) chasing yield,” said Eddington.
“Those investors need to be aware that the market multiples on a number of these (stocks) do look stretched on a historical basis.”
Taylor Collison senior client advisor George Capozzi agrees. He says as a broker he has to protect his clients from excessive risk in the current environment.
“You’ve got to… make sure they are not taking extra risk to try and earn a similar return (as they were getting in term deposits), because the world has changed in terms of risk and return,” said Capozzi.
“(For example) if someone has $1 million coming out of a term deposit, and they say ‘BHP is earning a 4 per cent yield, why don’t we put it in BHP?’.
“But BHP is trading at $40, and it was $20 before. You’re taking higher risk to try and earn a return, but you’re taking higher capital risk, whereas in a term deposit there’s no capital risk.”
That’s not to suggest that people should steer clear of the stock market entirely, Capozzi said.
“There’s always opportunity to invest – we don’t look at investing as investing in the market, we look at individual companies.
“There are always good quality companies out there that are under researched or undiscovered that we can take advantage of and add to portfolios… it’s about picking the right stock rather than just saying ‘I’m investing in the share market’.
“If we’re holding onto those really good businesses that are growing over that time, when they come out the other side they become stronger because they either take market share off their competitors, or they buy their competitors and become a stronger business.”
Eddington also believes there are opportunities to put funds into the market now, but adds that his advice would be to keep some cash in reserve in preparation for a future dip.
“There may be a wobble in the market, be that trade issues with China, or a poor result with one of the vaccines, or if we see the US continue to have (COVID-19) outbreaks.
“There’s always something out there that could become an issue.”
Taylor Collison is the data partner for the InDaily’s annual South Australian Business Index, the list of the Top 100 SA businesses.
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