Yesterday's decision by the Reserve Bank of Australia (RBA) Board to cut interest rates further to a new record low of 1% shocked very few people in the markets – but what does it mean for your share portfolio?
The ASX continues to soar in 2019
The S&P/ASX 200 (INDEXASX: XJO) index edged higher on Tuesday as the lighter-weighted sectors such as real estate pushed higher but failed to impact on the overall index.
However, the ASX posted its best 6-month start to the year since as far back as 1992, with the S&P/ASX200 closing out the first half of 2019 19.1% higher last Friday.
There's been a number of factors that have pushed domestic equities higher to start the year including lower rates, a rebound in the property market, the 2H18 market plunge and the Federal election.
So while markets are humming along nicely, ongoing tensions between the United States (US) and Iran, and the ongoing trade war between the US and China loom as key factors to domestic performance in the second half of the year.
How will interest rates impact on my portfolio?
With interest rates being further reduced to 1% from already record rates, for the second time in as many months, it's likely that investors won't be too keen on investing in fixed income instruments at the moment.
Like yourself, all investors are keen to maximise their returns and rarely like to sit back and let a low-yield stock continue to dominate their portfolios.
It's a similar story in fixed income, with the combination of the record low rates and bullish domestic equities environment likely to see further portfolio rotation away from fixed income to capture some of the upside potential in the ASX for the second half of the year.
In my view, record low rates could also increase borrowing and boost housing prices, further accelerating growth in Australia in the next 6 months.
However, investing in equities is a long-term game and an accelerating equities market could serve as a warning sign of an overheated market at cyclical highs – so it's best to tread carefully and try to pick a few winners.
I think Commonwealth Bank of Australia (ASX: CBA) could be a good place to start, given its 14% rebound in the last 12 months with further upside as it pushes towards its 52-week high of $83.99.
