The market chaos after the Brexit vote will not alone sway the Reserve Bank of Australia to cut interest rates on Tuesday, but the consensus is for an August cut, leading investors to rejig their portfolios for an unprecedented low interest rate environment.
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Economists surveyed by Bloomberg unanimously expect the RBA to keep rates on hold at its July meeting. But all but one of the 25 surveyed – the exception being National Australia Bank – are forecasting a cut to 1.5 per cent in August, should the Australian Bureau of Statistics deliver a weak second-quarter inflation number on July 27.
Clime Asset Management associate analyst Damen Kloeckner said investors are being forced to assess their investment strategies in the "strange and largely unprecedented environment".
"Large, liquid, high-yielding defensive stocks with high levels of debt are most likely to benefit from interest rate declines," he added.
Global sharemarkets rallied in the second half of the week after the shock Brexit result. The S&P/ASX 200 recouped all its post-Brexit losses by Friday. The promise of further monetary policy easing after the market chaos included comments by Bank of England governor Mark Carney on Thursday, leaving open the possibility for a rate cut in Britain below 0.5 per cent. In the US, futures markets have all but ruled out a rate rise by the Federal Reserve this year.
Unstoppable August cut
Not even record debt will stop another cut, UBS economist George Tharenou said. Total non-financial sector-debt to GDP in the first quarter spiked to a record high ratio of 254 per cent, and is expected to rise further in the second quarter to around 256 per cent.
"While credit/debt growth is slowing, it remains relatively fast compared to ongoing weak nominal GDP growth," Mr Tharenou said.
Household wealth, or assets minus debt, had its first fall since 2011, and was consistent with a fading "wealth effect", he said.
"This latter impact, combined with the RBA focus on low inflation/wages, as well as a weaker global growth outlook, means we still expect the RBA to cut rates by 25 basis points in August – despite the domestic leveraging cycle, with debt-GDP incredibly leaping almost 50 percentage points since 2010."
National Australia Bank chief economist for markets Ivan Colhoun said recent data, including activity and unemployment data, indicated the economy was tracking along, and they did not forecast an inflation reading as disappointing as in April which spurred the May cut.
"We probably still have the view that we need to see another shock to [the RBA's] forecast to make them move again," he said.
Stocks that benefit from falling rates
Clime's Mr Kloeckner identified a list of 10 true defensive stocks that fit the large, high-yielding, high-debt criteria and stand to benefit the most from falling interest rates.
Mr Kloeckner has identified 10 defensive stocks trading at near or below value. Defensive stocks have been among those trading on the highest premiums in this environment of low interest rates and low economic growth.
Clime's picks are Sydney Airport (with a net debt to equity of 592 per cent and forward yield of 4.2 per cent), Transurban (at 189 per cent net debt to equity and 3.8 per cent forward yield), APA Group, Scentre Group, Stockland, CSL, Ramsay Healthcare, Telstra, Amcor and Pact Group.
Ophir Asset Management portfolio manager Andrew Mitchell said he preferred companies exposed to the US dollar.
"Our view is the narrowing of the interest rate differential between Australia and the US will put further downward pressure on the Aussie dollar," he said.
"Mayne Pharma is a great way to play the weaker Aussie dollar as it makes almost all of its sales in the US."
A weaker Australian dollar, pushed lower by a rate cut, would directly translate to higher profits for companies such as Mayne in Australian dollar terms, he said.