With Aussie interest rates falling to 2% this year, there are inevitably going to be a number of losers. That's especially the case since rates have never been so low, with them averaging over 5% in the last 25 years. As such, savers and individuals seeking an income from their capital may find it more challenging to beat inflation in the long run.
Of course, there are also set to be a number of beneficiaries from falling rates, too. The banks and other lenders should benefit from an increased demand for new loans, with the cost of servicing a loan set to fall. Furthermore, a falling interest rate should also boost the economy and lead to rising business and consumer confidence, thereby improving the outlook for corporate earnings and, crucially, for asset prices. Meanwhile, a low cost of credit should also lead to reduced defaults for banks and mean that asset writedowns are kept to a minimum.
As such, buying shares in lenders such as Commonwealth Bank of Australia (ASX: CBA) and FlexiGroup Limited (ASX: FXL) appears to make perfect sense at the present time. For example, CBA was able to increase its bottom line by 12% last year and this has allowed it to continue to increase dividends at a double-digit rate. This means that CBA now offers a yield of 4.8% (fully franked), which is higher than the ASX's yield of 4.6% and should make a real difference to the incomes of its investors.
Furthermore, CBA also has a relatively low beta of 0.79. This means that its shares should be less volatile than those of the wider index, with a price change of 0.79% being anticipated for every 1% movement in the ASX. And, with earnings rising by 12% per annum during the last five years, CBA has an excellent track record of growth that could be enhanced by an increasingly loose monetary policy.
Meanwhile, FlexiGroup offers significant potential at an appealing price, with its forward price to earnings (P/E) ratio standing at just 8.8 (using forecast earnings for the 2016 financial year). This indicates that its shares are hugely undervalued and that, even if its forecast growth rate of 11% in the current year is downgraded, it has a sufficiently wide margin of safety to still beat the ASX – as it has done over the last five years (by 100%).
In addition, FlexiGroup has an excellent track record of increasing its financial standing, with cash flow per share rising at an annualised rate of 24.6% during the last five years. This may provide it with the scope to make acquisitions, with a bid for Fisher & Paykel being mooted. And, with dividends set to rise by 11% in the current year, it could yield as much as 6.5% should its share price remain at its current level, which would further help investors in the stock to overcome a low interest rate.
