David French | 2/03/2009 11:35:47 AM

This article was originally published as 'Interest rates cuts more certain as Australian growth slows. Brighter times ahead' in The Capricorn Coast Mirroron 7th May, 2008. Image sourced from http://www.flickr.com/search/?l=4&w=all&q=Sunshine+australia&m=text.

There has been plenty of negative press on the significant movements in financial markets, evident since November. Here we provide a brief rundown on recent events and on CIPL’s expectations for the future.

Since September 11th, 2001, the world has had easy access to cheap money. In the US Banks gave mortgages to anyone who wanted to buy a home. NINJA (no income no job) loans were combined and packaged up (securitised) for sale to investors around the world. Buyers included banks, superannuation funds and in some cases even local Councils. Interest rate increases in the USA led to a slowing economy, and the realisation that many of the packaged loans would not be repaid. The loans became worthless, and undermined banks’ faith in the quality of each others’ asset base. Internationally, banks stopped lending to each other, short-term interest rates went through the roof and companies found it almost impossible to refinance existing debt commitments. In response, the US Federal Reserve stepped in, and around Easter took the unprecedented step of allowing banks to swap dud assets for Federal Reserve commitments. Financial markets have now stabilised somewhat, but a recession in the US is still likely.

Chinese demand for commodity exports means that Australia’s economy has been growing strongly. We believe however, that the Reserve Bank’s twelve consecutive interest rate increases is causing the Australian economy to slow appreciably. Slowing growth suggests an easing in the interest rate cycle and we expect that the RBA is likely to start lowering interest rates early in 2009. As interest rate cuts become more certain, the share market will begin to look brighter. Based on this analysis, we believe that significant opportunities currently exist in fixed interest markets, and in interest rate sensitive shares.

The Investment Collective (AFSL 471728) is a non-aligned financial planning and investment firm specialising in providing tailored financial and investment advice for individuals and small business. Capricorn Investment Partners Limited's services include financial planning, share trading, portfolio management, insurance broking and self managed super fund administration. Additional information on services provided by The Investment Collective Limited can be found by following this link. Readers are reminded that this document has been prepared for general information purposes only, and any advice contained herein has been prepared without taking into account your financial objectives, situation or needs. Readers are advised to see their financial advisor prior to acting on any general advice.

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