SHARES

Market wrap: RBA hints at third rate cut for the year

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In the face of global uncertainty and heightened volatility the All Ordinaries Index has shown resilience given that it has risen consistently from mid-August gaining around 309 points or 4.78%.

This is a positive sign for investors with many now optimistic about the outlook for the Australian economy and the share market as a whole, which is contrary to earlier in the year when speculators were forecasting doom and gloom.

Despite the positive long term outlook, I expect the market to pullback over the coming weeks in late October or early November. That said, I expect the pullback to be short lived and nothing to be concerned about, so don't panic, adhere to sound portfolio management strategies and you will be fine.

RBA eyes further rate cuts

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While the economy has become more stable than earlier in the year and appears to be at a turning point, earlier this week Reserve Bank Governor Philip Lowe hinted at a further rate cut, which will be the third cut this year.

Slow economic growth, as a result of low domestic household spending and soft jobs data is concerning, and is likely to be the main drivers for the rate cut.

Despite this, Governor Lowe's outlook remained positive for the long term with lower interest rates, tax cuts, a depreciating AUD, higher infrastructure investment, stabilisation of the housing market and a brighter outlook for resources being the main drivers for economic growth in the coming years.

That said, the expected RBA rate cut may see the market rise slightly from here prior to the next decline, as any cut to interest rates will encourage more investors to increase their exposure to the share market in the hope of higher returns. Therefore, expect a false rise before the pullback I have been expecting unfolds.

Best performing sectors and stocks

All of the sectors were in the red this week except for Real Estate, which gained 0.86%. The Telecommunications sector was hit the hardest losing around 4%, while Energy and Materials dropped a little more than 2% and Industrials fell around 1%. Financials were close to neutral and appeared to be a little more defensive than other sectors.

The best performing stocks this week include Afterpay Touch Group gaining almost 7.5%, as the company provided an update on anti-money laundering and counter terrorism to AUSTRAC, which indicated they had not identified any concerning activity. Lendlease Group and ResMed were also up around 4.5% and 3.2% respectively.

There were some big losers this week with WorleyParsons and Whitehaven Coal down by around 7.7%. CYBG and South32 also lost more than 7%. That said, the fall on CYBG may be coming to an end, as it is expected to complete its integration with Virgin Money in the coming weeks, following the takeover last year.

While a fall of this magnitude doesn't give investors much confidence in the stock, given it has been in decline since August 2018, this merger may provide the turning point for this stock.

What to expect from the market

On Thursday the All Ordinaries Index (XAO) dropped below an important support level at 6,800 points to close for the week at 6,785.6 points. This is likely to be the start of the move down I have been expecting to take the market below 6,400 points to possibly as low as 6,200 points in the next month.

As the market takes a breather, it will create opportunities to pick up quality blue chip shares at lower prices in the last quarter of 2019 in the Energy, Materials and Financials sectors, including BHP, Oil Search and Commonwealth Bank. Therefore, investors need to be patient and rather than trying to catch a falling knife, they need to wait for the next low to be confirmed before buying.

The market is currently trading just below two important levels including the all-time high of 6,958.7 points in July 2019, as well as the prior all-time high of 6,873.2 points set back in November 2007.

Once the XAO trades above the highest point later this year, it will be in "blue sky" territory, which means further gains are likely in 2020 as the market accelerates higher.

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Dale Gillham is chief analyst for Wealth Within (AFSL 226347). He has an Advanced Diploma and Diploma of Share Trading and Investment and more than 25 years' experience in the financial services industry.
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