Australia's interest rates could be set to fall again over the next 12 months. The Australian economy has been growing, but at a below-par pace for the last eight months according to the Westpac-Melbourne Institute Leading Index. The index aims to estimate the rate of future economic growth, which is benchmarked against the long-term average.
The September reading of -1.16% is the largest negative deviation from the average since 2011 and coincided with another month of no change in local interest rates from the RBA. Interest rates appear to have a significant impact on the reading.
The reading was above trend in the 13 months leading up to February 2014, which coincided with a period where the RBA dropped local interest rates by 2.25%. The September reading implies that economic growth has fallen to similar levels seen before the RBA started cutting interest rates. Some analysts consider that this, and other indicators, could mean that the RBA will need to cut rates sooner rather than later.
Investment Implications
A fall in economic growth is a negative sign for companies with revenues entirely in Australia, however a fall in interest rates will benefit companies exposed to the housing market and could push up the Australian dollar.
3 companies that could outperform are:
- National Australia Bank Ltd. (ASX: NAB) has international exposure and will also benefit from another pickup in the housing market.
- Amcor Limited (ASX: AMC) has the majority of operations in the Americas, Europe and Asia, all areas that are showing a recovery or ongoing strength in their respective economies.
- Ansell Limited (ASX: ANN) is a globally-diversified manufacturer of healthcare goods. The group's earnings are largely unaffected by economic conditions and could therefore outperform smaller local rivals.
3 companies that could underperform are:
- AGL Energy Ltd (ASX: AGK) is exposed to the local energy market, which will show negligible growth during periods of economic stagnation, and has already flagged a profit downgrade as a result of the carbon tax repeal.
- JB Hi-Fi Limited (ASX: JBH) could underperform as it only has operations in Australia and relies on consumer spending and confidence, which will be subdued if the economy slows. On the flip-side JB's could benefit from consumers having lower mortgage repayments.
- SEEK Limited (ASX: SEK) could see slower jobs growth in Australia, constraining operating margins, however the group's international earnings could cover the loss.
