This Week's Economic Update

Richard Hemming


Our Blue Chip Value Portfolio manager Sam Ferraro is an economist (you don’t stop being one) and first met this week’s news maker RBA Governor Guy Debelle a few years ago. He found him to be “an interesting character, who wasn’t afraid to go on the front foot”.  Don't miss out on the  Blue Chip shares Sam Ferraro recommends to buy now, click here

Debelle and the RBA and the impact for our economy

Certainly, Debelle's comments this week were most illuminating for any central banker in recent memory and has caused so far about US 1.7 cents to be taken off the value of the Australian dollar, which is a big deal. Debelle clearly set out the monetary policy tools the RBA has at its disposal. He didn’t say he would do anything, but by discussing their availability, caused the market to conclude that something is necessary. Another way of saying it is that he thinks Australia’s currency is too high because our monetary policy is too tight. A lower dollar encourages export earnings, which is vital for any small isolated economy.

RBA's yield control policy

At the moment, the RBA’s policy is one of yield control and is focused on maintaining an upper limit for 3 year government bonds of 0.25% (the US Fed Reserve focuses on its 10 year bond). The current yield on those bonds is 0.18%, indicating the market anticipates low inflation/growth prospects for Australia for the foreseeable future.
 
The policy prescriptions include, reducing the cash rate from 0.25% to 0.1%; lowering  the ceiling from 0.25%; negative interest rates; aggressively intervening in the forex market to reduce the value of the A$. The last measure is the one taken most seriously that has probably caused the A$ sell-off.

It is a fact that Australia’s monetary policy is much tighter than other OECD countries’. The RBA’s net purchase of assets such as government bonds is much lower than the average, as a percentage of the total economy (GDP).
 
Another interesting point Debelle made was that unlike the Western focus on income support mechanisms (such as Australia’s JobKeeper) China’s support has targeted industrial production and manufacturing, which in turn has boosted commodity prices.

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The take-outs for investors:

  1. There is a strong likelihood that the RBA will loosen monetary policy;

  2. The effect of loosening monetary policy will be greater in Australia because its economy has had less impact from COVID-19 than virtually all other countries (except China). The contraction in Australia’s GDP, while historically big, is a blip compared to those other countries; while China’s has been unusually strong.

  3. This validates Blue Chip Value’s overweight positions in banks and resources. The former because our economy is doing relatively well and there is a low risk that bad debts blowout (especially considering the high provisions); the latter because China underpins continuing strength in commodities prices.

It’s still early days, but BCV’s value philosophy is weathering the COVID storm nicely. If you want to protect and grow your wealth, subscribe today.

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About the Author

Richard Hemming

Richard Hemming (r.hemming@undertheradarreport.com.au) is an independent analyst who edits www.undertheradarreport.com.au, which provides investment opportunities in Small Caps that you won’t get anywhere else.

Under the Radar Report is licensed to give general financial advice only (AFSL: 409518). The author does not own shares in any of the stocks mentioned.

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