With the Reserve Bank of Australia raising interest rates by 25 basis points on Tuesday 7th February, we caught up with Brett Reynolds, the Chief Investment Officer at Tiger Brokers Australia to get an insight into what investors can expect over the coming months.
Q: Why has the RBA listed interest rates by 25 basis points once again?
Brett: Inflation is too much above the RBA’s target range, aiming to have this between 4-5% in 2024. It is currently above 7% and they need to get ahead of the curve. The RBA were too slow to start with, and the inflation is moving into other sectors.
The rate rises will cause mortgage pain, but realistically, they are returning to a normalised level.
Q: Are they likely to continue to raise interest rates?
Yes, I’d say they will head to 4% in the next 6 months.
Q: What is the impact on the Australian share market?
We are running with the resource sector. Coal stocks are generating a significant amount of cash, and Whitehaven Coal was one of the best performers last year. BHP continues to pay out a lot of cash to shareholders.
The bank sector is now doing very well. People will talk about the doubtful debts banks will take on, but the widening net interest margins for banks will receive is much more important.
The other sector that is likely to be weighed on is the Buy-Now-Pay-Later sector. As interest rates go up, the holding costs increase, which will put a lot of pressure on that sector.
Q: What opportunities does this present to investors?
I’d still keep buying the blue-chip stocks. No matter what people think, the market will continue to go from left to right. Interest rates will normalise, and as commodity prices stay high, there will be further M&A activity. We’ve seen that this week with Newmont and Newcrest. I expect a lot of M&A this year.
Q: What sectors should investors be wary about?
The tech sector is coming back in favour. There are many companies there promoting revenue and not profit. Revenue is great for growth companies, but their profitability is just not there as interest rates go higher. The interest expense just keeps increasing. I’d steer clear of companies projecting revenue growth and not actually coming into profit.
