19 Mar Catch Me If You Can
For those of you who have seen the Movie “Catch Me If You Can” (an excellent movie by the way) you may remember the scene towards the end of the film where Carl Hanratty (Tom Hanks) catches Frank Abagnale (Leo DiCaprio) in France punching out Bank cheques on a printing press.
If you snuck a peek into the vault of either the Bank Of England (BoE), European Central Bank (ECB), or the Bank Of Japan (BoJ) today you might see some relatives of Frank Abagnale punching out Euros, Pounds or Yen as the world has gone gung ho on pushing out monies or liquidity (known as Quantitative Easing or QE) to grease the wheels of global commerce. The combined effects of these 3 QE efforts more than dwarfs the abolition of the USA’s own QE program (which ceased in late 2014).
The US Federal Reserve this week has also hinted that it may delay increasing it’s own cash rates till later in 2015 (when previous market expectations were for rate rises to begin in June) & that these increases may also be of a more muted value.
On top of this, in 2015 year to date 24 Central Banks around the world have cut interest rates with the latest this week being Sweden which has cut it’s cash rate to be -0.25 (yes you read that right NEGATIVE 0.25%). Sweden isn’t the only European nation with negative interest rates, try Switzerland (-0.75%) & Denmark (-0.35%) on for size as well as they fight a surging value in their currencies relative to the Euro and try to offset the effects of potential deflation.
Whilst we currently have the lowest interest rates since the 1960’s we also have some of the highest rates in the developed world. If you don’t believe me these are current rates on offer throughout the world running from lowest to highest
Country Overnight Cash Rate 10 Year Bond Yield
Germany 0.05% 0.19%
France 0.05% 0.47%
Japan 0.10% 0.35%
USA 0% – 0.25% Range 1.91%
United Kingdom 0.50% 1.59%
Canada 0.75% 1.32%
South Korea 1.75% 2.26%
Australia 2.25% 2.36%
So in Australia wholesale investors can currently get 2.25% parked overnight or 2.36% for 10 years (5 years is < 2%), the market expectation is that the RBA will cut interest rates further over the next couple of months. For long term fixed interest investors who in their right mind would buy French, German or Japanese 10 Year Bonds with yields of < 0.50% pa…???
So what does this mean for investors then…..
Well with the world awash with cash at present and more to come down the pike from the Europeans (The ECB only commenced a $1.7 Trillion QE program in early March) & the Japanese, don’t be surprised to see more takeover offers & monies flowing into quality Australian companies. Already we have seen Japan Post in the last 4 weeks mount a takeover offer for one of our largest logistics companies Toll Holdings at a 50% premium to it’s sharemarket price.
In a world whereby cash returns are next to zero & income yields on Australian shares may be 4% or more (with franking credits providing a further 1% – 2% in returns to Australian based investors) Australian companies are sure to appear on the radar screen of international investors – especially Japanese (with $$$ burning a hole in their pockets) & US (given that the $USD has increased in value by 20% – 25% relative to the $Australian Dollar in the last 6 months). It is likely to be this flow of liquidity, not economic growth rates, price/earnings ratios, etc. that will be pushing markets in the foreseeable future. The old saying used to be “Don’t Fight The US Fed”, now you can transplant Fed with BoE/ECB/BoJ.
Or remember what Leo DiCaprio said to Tom Hanks when he caught up with him in France
Carl? Carl! Merry Christmas! How is it we’re always talking on Christmas, Carl? Every Christmas, I’m talking to you!
This doesn’t mean that volatility in prices won’t exist, or that prices won’t continue to both fall and rise, but it is this liquidity that is driving current sentiment – stay tuned as investment markets may be talking to us more over the next few months.