An investment research house has forecast the Reserve Bank of Australia (RBA) will only invoke one reduction in official interest rates this year due to the fact inflation is currently not reducing at a fast enough rate.
To this end, Zenith Investment Partners head of asset allocation Damien Hennessy predicted the RBA could cut official interest rates in November should underlying inflation land in the 3 per cent to 3.5 per cent range by the September quarter.
“With the Australian economy slowing, a cut in interest rates could come towards the end of this year and we could possibly see another cut early next year as households have definitely been hit by higher interest rates,” Hennessy noted.
He pointed out long-term inflation expectations had not changed despite the solid performance of the United States economy, which in turn has prompted the Federal Reserve to delay any interest rate reductions in the immediate future.
However, he recognised the comparisons in monetary policy measures between the US and Australia must take into account the differences in mortgages, whereby the domestic market is not dominated by fixed rate arrangements.
With these economic conditions in mind, Zenith head of portfolio solutions Steven Tang revealed the asset classes the research house is favouring from a portfolio construction perspective.
“We are positioned for a soft landing, but also conscious that there is a risk of no landing. We are focusing on those asset classes that aren’t as expensive as the US share market, including global small companies and emerging markets,” Tang said.
“We are also biased to quality stocks, which we think will be better placed than the stock market more broadly for any slowdown. Quality companies are characterised by low debt, stable earnings growth and other metrics, such as strength of balance sheet, which will make them more resilient to slowing economic growth.
“Within our defensive assets, we are moderately underweight interest-rate-sensitive bonds. Instead, we’ve been investing in higher-quality credit lending to strong borrowers, which again has been beneficial, and this provides investors with a level of protection in a downturn.”
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