What will the RBA do in March?
Welcome back!
Well March is just around the corner and the next RBA meeting will decide on monetary policy for another month. Since September 2008 the RBA have cut rates by 400 basis points, what does March have in order for home owners, investors and the economy?
Glenn Stevens perhaps has one of the hardest jobs in Australia. Stevens has to decide if enough liquidity has been pumped into the local economy with recent interest rate cuts or if more is required to stimulate domestic demand.
The result by Harvey Norman and the halving of profit is an omen for the consumer hed Australian economy and an indication that things are likely to get much worse before they get better.
Consumer demand despite government stimulation before Christmas has failed to bounce post Christmas as households tighten belts with increasing job losses and negative sentiment affecting the economy.
The RBA boss has already indicated that he would like to sit back and assess the economy in light of all the recent economic stimulants announced by the government and any future rate cuts are unlikely to be as big as recent cuts.
I suspect we will see a cut of 50 basis points in March that will take us to a cash rate of 2.75%. Future cuts will likely continue to occur and could take us down to 2.00% in the coming months but Stevens will be monitoring the economy for worsening economic news before he pulls the trigger for big future cuts.
Wall Street hits lows of 1997
Wall Street fell overnight to a low last reached in April 1997 amid the worsening performance of the US economy.
On a seasonally adjusted basis the US GDP for October to Decelier fell by 6.2% annualised. The contraction in the US economy was far worst than first thought and reflects the pain occuring in the world’s largest economy. The decline in the GDP was the worst performance since 1982.
The Dow Jones slumped 1.66% to 7062.93 to take the loss for the week to in excess of 4% as the economy sees no end in sight to the gloom. Dragging the market lower was the performance of Citigroup and General Electric. The market also had its worst February in over 70 years as the market tumbled 12%.
ANZ announce dividend cut, who’s next?
ANZ have been the first of the big four banks to announce a cut to their dividend as the banks start to feel some of the pain that has devastated the banking sector overseas.
ANZ announced a cut of 25% to their dividend which in direct response to rising corporate debt levels. This will reduce the annual dividend from $1.36 to a little over $1 and will save the ANZ approximately $500 million.
The announcement came as the ANZ delivered an update for the first four months of the reporting year revealing a update on their current operations.
The ANZ have boosted their provisions for bad and doubtful debts to between $2.4 and $2.5 billion, this is broadly in line with industry expectations. Cash earnings were up 18% on the same period last year but the increased impairment costs drove the cash earnings down 11%. ANZ revealed they have been a beneficiary of cash inflows as income growth grew 16%.
One point of note was the 125% increase in the Asian division which CEO Michael Smith has clearly identified as the future of the company. Although the Asian division is still only small the next couple of years will be pivotal in its Asian stategy and they will have to invest throughout the downturn to ensure building a viable market share.
So now the ANZ have cut dividends, who is next? The Commonwealth and Westpac have intimated they may need to cut but I suspect NAB will be next to the table flagging a cut. Either way the coast is now clear and expect all the banks to flag a cut between 10-30% in the coming weeks.
Where will the ASX bottom?
How much more will the ASX and the leading stocks in the Australian market fall? Well this is the question virtually ever investor would love to have an answer for but one thing could be said the market will head lower in the near term.
To presume the market has bottomed would be incorrect, the S&P ASX200 index is at 3402.4 while the broader All Ordinaries index is 3353.
Many factors are likely to impact the market in the near term the least of them being global markets which have fallen more heavily in recent times than the Australian market. The Australian market has held up relatively well but that has created a false expectation for investors as some have re-entered the market.
The sharemarket is likely to head lower and 3000 is not unrealistic in the months ahead as investors realise the market will not bounce back to it’s highs anytime soon. The market will need to find it’s own levels based on forward earnings potential and an increasingly jaded investors who are feeling poor from the lose of value to their investments.
Just as in boom times investors feel wealthy from their rising portfolios they become greater consumers and splash out, the same happens in reverse when the economy is tanking and investors are losing money, they stop spending.
The next few months will test the resolve of investors and I suspect we will see a low on the S&P 200 around 2800 most likely during 2009. I don’t necessarily think like we will see a solid recovery in late 2009 like many analysts are forecasting. 2009 will be a tough year for investors.
Australian Bank Watch will increase it’s focus on the sharemarket in the coming months to monitor movements and trends that may affect the economy and sharemarket in 2009.
RBA rate cuts slowing
Glenn Stevens has signalled the RBA will carefully consider future cuts in response to the stimulus package of the Government and recent RBA cuts that have lowered rates dramatically over recent months.
Economic forecasters are still expecting rates to drop to around 2.00% from the current 3.25% but future cuts will not be made unless economic conditions clearly deteriorate further. This is something Glenn Stevens indicated in his address in response to the global economic conditions affecting the world.
Australia is stil well placed comparative to other nations currently but a substantial decline in conditions cannot be underestimated and the RBA seem focused to respond quickly should the economy continue to falter.
Westpac suffer rise in bad debts
Westpac this week revealed a dramatic rise in bad debts in the first quarter as the economic gloom hits the domestic economy and arguably the best placed Australian bank to deal with the economic crisis.
Westpac revealed a rise from $144 million to $800 million for inpairment costs resulting from the economic crisis from levels a year ago. Westpac had an bad debts of $360 million alone from three major companies, $300 million alone was from Babcock and Brown.
Westpac revealed a strong rise in revenue in the first quarter amid rising deposits which have helped reduce funding costs. The focus in increasingly turning to which bank will be the first to cut dividends. Such a decision will be punished by investors as shareholders have become use to receiving increasing bank dividends year on year.
Westpac are still perhaps best prepared to at least maintain dividends but neither bank will want to dip into capital to fund dividend payouts in such an period of credit deterioration.
CBA announce $2.57 billion first half profit
The Commonwealth Bank announced a profit of $2.57 billion, a rise of 9% in the toughest banking conditions in two decades for the economy.
The first half profit was a surprising result considering the low expectations for the domestic banking sector which is outperforming the major banks of the world.
CBA have maintained a dividend of $1.23 but flagged that future cuts may be considered based on a deteriorating domestic economy in the second half. With a tier 1 capital of 8.75% the bank is in a healthy position which will enable it to maintain a solid balance sheet but that alone will not stop higher impairment costs going forward.
The result of the remaining banks will be interesting to see if the same message is passed on that dividends are under threat, perhaps Westpac may be in a position to give a succint and accurate assessment of it’s future prospects when it reports.
Suncorp boss Mulcahy falls on sword
If you thought things could not get worse for Suncorp well this week it did as John Mulcahy resigned and Suncorp flagged a deeply discounted share issue.
With Suncorp revealing a 25 times increase in bad debts from $16 to $355 million and a discounted share issue of 37% the damage was done.
Suncorp revaled a 1 for 5 rights issue to raise $1.3 billion at $4.50, a 37% discount to the share price before closing prior to the announcement.
Suncorp profit will duly fall to $250-$270 for the half year while the interim dividend has been cut form 52c to 20c.
At its peak Suncorp was $23.29 per share under Mulcahy and will likely sink from it’s last closing price of $7.13 to around $4.50 in coming days.
NAB reveal pain of economic slowdown
NAB provided a summary of their first quarter amid the toughening financial market that is affecting the globe. NAB announced a solid quarter but the result was most impacted by rising bad and doubtful debts.
NAB revealed bad and doubtful debts were $824 million for the quarter. NAB advised $521 million was for its exposure to three unnamed companies. Bad and doubtful debts for the fiscal year to 30 September was $2.49 billion.
NAB revealed its UK operations were still profitable but conditions had worsened. NAB has maintained tier 1 capital at over 8% revealing it’s solid capital position.
RBA signal slowdown in major rate cuts
The RBA have given a clear indication that future cuts will be much more moderated and the chance of major cuts may be over with the release of their quarterly statement on monetary policy.
The rate cut this week took the RBA rate to a 45 year low. With the fiscal stimulus of recent rate cuts and the Government’s stimulus package the economy the RBA is likely to sit back and monitor the impact on the domestic economy before further cuts.
The RBA expects growth of 0.25% in 2008-09, while forecasting 1.25% in 2009-10. Perhaps even this estimate could be excessive in the global malaise continues.