Get ready for the rebound

With some luck the Reserve Bank's three interest rate cuts since November last year should help produce a sustainable recovery in Australian shares.

With some luck the Reserve Bank's three interest rate cuts since November last year should help produce a sustainable recovery in Australian shares.

The performance of Australian shares affects not just those with direct shareholdings, but just about everyone through their superannuation funds' typically high exposure to Australian equities.

Australian stock prices, excluding dividends, have been pretty much flat over the past year, but have performed more strongly since the start of this year, up about 7 per cent. While cuts to interest rates can help sharemarkets, there are other factors at play.

Sectors such as retail and manufacturing are struggling, and consumer confidence remains low, with consumers reluctant to take on debt.

The constant shedding of jobs and higher costs for things such as utilities and insurance don't help.

Foreign holders of Australian shares pull their money out rapidly whenever the outlook on global economic growth turns gloomy because the performance of Australia's resources-dominated economy is closely tied to the demand for its resources. The high Australian dollar has also been working against higher Australian share prices as it makes Australian shares more expensive for overseas buyers.

But last week's 0.5 percentage point rate cut immediately caused the value of the Australian dollar to fall against the US dollar, thereby making our shares a bit cheaper for foreign buyers.

Lonsec's head of equity research, Bill Keenan, thinks Australian shares could be ready to rebound. He thinks last week's rate cut, and likely further cuts to come, could see the Australian market, as measured by the All Ordinaries Index, reach 5000 points by the end of the year from about 4500 now.

"History shows that a period of successive rate cuts nearly always leads to a strong rally in Australian equities," he says.

Lower rates should help economic growth and a lower dollar should boost exports. Lower interest rates on cash, term deposits and bonds should cause investors to switch out of these investments into shares, he says.

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