Those worried that our market will struggle to make further gains this year could find relief in the news that UBS has pulled forward the timing of interest rate cuts in Australia following yesterday's economic growth data.
This could explain why the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index has jumped 0.3% this afternoon to a fresh six-month high of 6,266 points despite the weak overnight lead from Wall Street and the disappointing GDP data that showed our economy expanded a miserly 0.2% quarter-on-quarter.
The economic expansion is below the government's and Reserve Bank of Australia's (RBA) forecasts and UBS believes interest rate cuts will come as soon as July this year – if not sooner.
Why rate cuts are good for stocks
Rate cuts are usually a boon for equity markets as it not only stimulates the economy by lowering the cost of debt for companies and consumers, but it also boosts stock valuations.
What's more, UBS thinks the RBA will deliver a 1-2 punch by cutting again in August to bring the official cash rate to a fresh record low of 1%!
"Real GDP slumped to 0.2% q/q, the weakest in over 2 years, far weaker than consensus a week ago (mkt: 0.7%) & even today after weaker partials (0.3%, UBS: 0.2%), and materially worse than the RBA (0.5%/0.6%)," said UBS.
"Indeed, after Q3 also surprisingly dropped to 0.3%, the 2H-18 collapsed to 0.9% annualised (with private demand flat), the worst since the GFC, & a 'per-capita recession'."
Rate cuts may come even before July if unemployment starts to tick up, added the broker.
Stocks best placed to benefit
Interest-rate sensitive stocks like utility company Spark Infrastructure Group (ASX: SKI) are set to benefit from this thematic, although toll road company Transurban Group (ASX: TCL) could find itself in a sweeter spot after the Victorian parliament passed the sweetheart deal to extend its toll concession for another 10 years with a generous 4.25% annual increase.
The big banks like Commonwealth Bank of Australia (ASX: CBA) and Westpac Banking Corp (ASX: WBC) are also likely to find favour as they may not pass on the full rate cut to borrowers to pad their profit margins.
Investors will also be more incentivised to buy high dividend paying stocks as the lower interest rate environment will make their yields look even more enticing.
Mining stocks like Rio Tinto Limited (ASX: RIO) and BHP Group Ltd (ASX: BHP) aren't usually big beneficiaries of rate cuts but that's changed now that these mining stocks are regarded as dividend cash cows.
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