Best-ever start still no victory for Aussie shares

The Reserve Bank of Australia left its key cash rate target unchanged at 1.5 per cent for a 29th consecutive meeting, as widely expected ahead of the decision. In a statement, RBA governor Philip Lowe noted the central bank “will continue to monitor developments and set monetary policy to support sustainable growth in the economy and achieve the inflation target over time”.


And in the evening, the government will unveil its latest budget, poised to end the longest stretch of deficits since 1970, according to the median estimate of economists surveyed by Bloomberg.

The S&P/ASX 200 was 0.6 per cent higher at 3.01pm in Sydney, for a sixth straight day of gains, the longest stretch since November.

“In equities, low rate expectations are driving bond proxy strength, whilst stimulus expectations are supporting the performance of both the index and the ability of some sectors to stare down growing domestic weakness,” Morgan Stanley analysts led by Chris Nicol wrote in a March 29 report.

While Treasurer Josh Frydenberg will have strong commodity prices and a hiring spree on his side when he presents the budget, there have been multiple constraints holding back the nation’s economy and stock market over the past year. Top of mind is its housing slump, which remains a major drag on consumer lending and economic growth.

With the worst property slump in decades, household wealth has dropped to the lowest level in seven years. That’s seen private consumption – which accounts for almost 60 percent of GDP – decelerate sharply.

While there are signs of stabilisation, “house prices continue to fall and the monthly drop remains sizeable”, Tamara Mast Henderson, an economist with Bloomberg Economics, wrote in an April 1 report. “This suggests uncertainty about the next direction in monetary policy will persist.”

Even so, an interest-rate cut was unlikely as labour market indicators remained otherwise solid, she said.

That’s all led to consumer staples and financials, the single largest industry within the Australian benchmark with an almost one-third weighting, performing the worst this year. The sectors have gained only about 6 per cent each.

Financials got a modest bump after the results of the banking royal commission were unveiled in February, with one of the key findings being a recommendation against structural separation. The study hung like a cloud over the shares for more than a year, and earnings at lenders going forward may be impacted in multiple ways as they face potential increased compliance, customer-compensation costs and recommendations for lower fees.

Stimulus expectations are supporting the performance of both the index and the ability of some sectors to stare down growing domestic weakness.

Morgan Stanley analysts led by Chris Nicol wrote

That said, Australian stocks look fairly cheap, with the gauge trading at 15.7 times estimated earnings in the next year, near the lowest since June relative to the MSCI Asia Pacific Index multiple, data compiled by Bloomberg show. And there are some bulls out there.

Australia’s benchmark has more room to rally, as earnings growth for the companies is on the upswing thanks to strength in the commodity markets, according to a March 27 note from Citigroup strategists led by Tony Brennan.

Elements that had caused weaker results at the nation’s companies recently could also dissipate if there was a pick-up in global growth, assuming no major disruption in expected outcomes from trade negotiations and Brexit, the report said.


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