Three Three Three

Three elements to watch with higher interest rates in Australia

Equity 6 minutes to read
Jessica Amir

Australian Market Strategist

Summary:  Bye-bye ‘lower for longer’ interest rates, hello higher for ‘higher for longer’. If you are invested or investing, you need to know the Reserve Bank of Australia will likely continue to rise rates higher than most expect in 2022, especially as Australia’s central bank flagged that ‘extraordinary support is no longer needed’. This will cause markets shocks, and two different cohorts of stocks to move in opposite directions. So, here are the three elements to watch, given rates could sit at over 3% at the end of 2022.


The RBA ripped off the interest rates band-aid for the second time in over a decade, rising the official interest rate by 0.5% yesterday (vs market expecting a hike of 0.25%). This takes the cash rate to 0.85%. The RBA decision was more aggressive than most thought; so it spooked the Australian share market; punishing stocks that traditionally suffer in higher interest rate environments; which is why the Australian Technology sector fell back down to two-year lows, and now collectively is 42% lower than its peak, the Consumer Discretionary sector fell to two-year-lows and is now down 24% from its high, while the Australian Property sector fell slumped to a new year-low, and is down 21% in total from its November high.

The bottom line is, the market (or consensus) estimates, will probably continue to get rate predictions wrong, which will cause more volatility. So to get ahead, consider devising a simple checklist (or use ours below) of why we think the RBA will likely rise rates more aggressively. Secondly, consider looking at or investing in those potentially winning sectors, and maybe consider your exposure to those sectors that will likely continue to slide lower as rates continue to spike in 2022 (given the Australian economy is strong enough to stand on its own) .

Rate hike checklist

Consider what the RBA will be looking at month-on-month, ahead of their next meetings, so you can get ahead of the curve. Take yesterday’s RBA interest rate decision meeting for example; we knew they would have factored in the following;

  • Consumer facing inflation is rising and could likely continue, fueled by raw prices rising. Month on month, compared to the last RBA meeting to yesterday’s they would have observed; the oil price had risen 15%, pressuring petrol prices up. Gas prices rose 28%, pressuring up power bills. The wheat price gained 5%, hurting food prices. (Separate to that, the RBA would have observed the Australian dollar gained 4%.) All of these price measures are reflected upon at bank meets and are expected to push up for the rest of 2022. Excluding that, Australia’s Energy Regular thinks utility prices could rise up to 14% this year from July. All this supports our view of higher for longer inflation, which means you could expect the RBA to be more hawkish at next month’s meeting and so on. For more on price inflation refer to our quarterly outlook and daily commentary.
  • The RBA looks at economic indicators- which are strengthening. Better than expected economic news gives the RBA ammunition to rise rates. Of late a triple whammy of greater than expected economic news has been released. Recall Australia’s economy grew stronger than expected in Q1, Australia produced record Australian export income, and Labor’s childcare policy was pledged - which will see mums and dads return to the workforce (adding to the already full-employment picture, which will add to wage pressure- .i.e. wage price inflation).

The icing on the cake will come from, Australia’s biggest commodity consumer, China, coming out of lockdown. A big first step was when Shanghai, China’s most populated city and its business hub, came out of two-month lockdown last week (June 1). This caused key commodity prices to rise to fresh highs (oil, iron ore, copper for example).  The next question is, as commodity demand grows again, will it put pressure on commodity prices? We think so. This means Australian export income will likely rise to another record high, and the AUD will likely be supported. Also consider if China reopens later this year, our services sector (which adds 70% to GDP) will likely get a boost. This breeds better economic fire power and gives the RBA yet more ammunition to rise rates. For weekly updates on China click here, or follow our daily commentary.


Potential winners of higher rates?


When it comes to investing with higher rates and yields in mind, it will likely pay to be invested in those companies that are beneficiaries and or contributors to inflation; energy, mining, and agriculture securities. In addition to that, as rates rise, yields rise, so insurance companies will likely be supported higher as well. Insurance companies for example, like Suncorp, QBE and IAG for instance could potentially see their profits rise by 20% if rates rise in line with consensus (up to 3% this year).

 

Potential losers of higher rates


On the downside, as highlighted above, tech, property, consumer spending stocks will likely continue to face selling pressure as rates rise more than expected. And in this brand new cycle, banks will likely continue to fall too.
Why? Well despite, record high employment, consumers are faced with record inflation. Consumers also have to cop higher interest rates, at a time when they’re borrowing and saving less. Property lending has fallen, household savings are dropping and Australia’s property boom will end. Banks are already facing margin (profit) compression, and now they face bad debts increasing, delinquency rates rising and losing more lending business as householders are forced to reluctantly sell their homes. This will add further pressure to property prices falling

 

Disclaimer

The Saxo Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-sg/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Capital Markets or its affiliates.

Saxo Markets
88 Market Street
CapitaSpring #31-01
Singapore 048948

Contact Saxo

Select region

Singapore
Singapore

Saxo Capital Markets Pte Ltd ('Saxo Markets') is a company authorised and regulated by the Monetary Authority of Singapore (MAS) [Co. Reg. No.: 200601141M ] and is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms & Risk Warning to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products such as Margin FX products may result in your losses exceeding your initial deposits. Saxo Markets does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Markets does not take into account an individual’s needs, objectives or financial situation.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-sg/about-us/awards.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website are not intended for residents of the United States, Malaysia and Japan. Please click here to view our full disclaimer.

This advertisement has not been reviewed by the Monetary Authority of Singapore.