Day: January 17, 2021

RBA warns that low rates don’t come without cost

Glass piggy bank with coins and stethoscope in shape of a heart inside

As every saver (and mortgage holder) would know, interest rates have never been lower. One of the hallmarks of the government’s response to the coronavirus recession last year was unprecedented monetary policy. Interest rates were already at ‘record lows’ before the pandemic. But as the economy ground to a halt last year, the Reserve Bank of Australia (RBA) found new meaning in that phrase. As it stands today, the official cash rate is sitting at just 0.1%, which is, for all intents and purposes, zero.

According to the RBA though, this new meaning for ‘record low’ wasn’t enough. It also implemented, for the first time in Australia’s history, a new quantitative easing (QE) program. This is what some investors call ‘printing money’. QE involves the RBA purchasing government bonds. This is intended to boost liquidity in the financial system as well as to keep real interest rates as low as possible.

A happy side effect is that it helps Australians (investors in particular) ‘feel richer’ by inflating asset prices as a result. Assets like property and yes, the S&P/ASX 200 Index (ASX: XJO) and ASX shares. If we feel richer, we tend to spend more money, which in turn helps economic growth.

Sounds great, right?

Is the RBA’s QE free money?

Well, as we all know, there is no such thing as a free lunch.

According to a report in the Australian Financial Review (AFR) today, the RBA is on the watch for some not-so-positive side effects from its recent monetary action. The report claims that “confidential analysis” by the RBA reveals that the central bank is on “high alert” for a “credit-fuelled asset bubble” caused by ultra-low borrowing costs.

The analysis notes that the RBA’s view is that high unemployment is currently the largest threat to the economy, and that low rates are currently helping prop up savings and demand, as well as depressing the Australian dollar, thus nullifying this threat.

However, the RBA analysis also warns that, “a permanent 1 percentage point cut in the overnight cash rate would increase real house prices 30 per cent after about three years… If the interest rate reduction was temporary, house prices would rise 10 per cent over three years.”

It just so happens that RBA governor Dr Philip Lowe has stated that he “doesn’t expect” interest rates will rise from their current levels for “at least” 3 years.

For the meantime, the report states that:

[The RBA views] high unemployment as the biggest risk to the economy, balance sheets and medium-term financial and macro stability, and lower interest rates can help reduce this risk… Unless there is evidence of a sharp jump in credit growth and risky lending – which it does not presently see – the RBA is relatively comfortable with rising house prices.

At the same time, the bank acknowledged that “some risks may increase due to low interest rates”.

No free lunch indeed!

Where to invest $1,000 right now

When investing expert Scott Phillips has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for more than eight years has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

Scott just revealed what he believes are the five best ASX stocks for investors to buy right now. These stocks are trading at dirt-cheap prices and Scott thinks they are great buys right now.

*Returns as of June 30th

More reading

Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

The post RBA warns that low rates don’t come without cost appeared first on The Motley Fool Australia.

from The Motley Fool Australia https://ift.tt/2M4bQuz

Risk vs uncertainty: why one is a lot worse

Weighing up risk and uncertainty is everyday business for share investors.

But is there a difference, and what can you do about each?

Fortunately for The Motley Fool readers, SG Hiscock portfolio manager Hamish Tadgell this week settled this question once and for all.

“Risk is something you can price, based upon assumptions that you make,” he said in this week’s Ask A Fund Manager.

“Uncertainty is events that you can’t really price, because by its nature it’s uncertain and it [just] happens.”

For example, one risk is the chance of international and state borders opening up for travel. Investors considering buying Qantas Airways Limited (ASX: QAN) shares will be pricing this in when they decide how much to pay.

If you think border closures will last a couple of years, you will want a decent discount. While investors who are confident that travel will return to normal this year will be more confident about paying a few cents extra.

Uncertainty refers to unpredictable events that can’t be accurately or practically priced in.

COVID-19 is the prime example. This time last year no one would have known just a few weeks later economies would be shut down and share markets would be in freefall.

Tadgell told The Motley Fool that knowing the difference was critical to how his fund dealt with some crazy times in 2020.

“The question is how you deal with uncertainty – so our plan through COVID has been very much to look to buy strong, quality companies which have corrected, or which we think are looking more attractive,” he said.

“But also look to buy quality, cyclical stocks that are leveraged through a recovery, which we think will benefit. And then thirdly, look to sell out of things that we think are going to struggle to recover, or are going to be impacted from COVID permanently.”

Tadgell cited Aristocrat Leisure Limited (ASX: ALL) and SEEK Limited (ASX: SEK) as 2 stocks his team bought that were in the first category.

Somewhere in between risk and uncertainty

There are shades of grey in between though.

Fintech Tyro Payments Ltd (ASX: TYR)’s troubles this month could be interpreted as either.

The company’s card payment terminals were “bricked” en masse, forcing its small business clients to only accept cash from their customers or defect to a rival provider.

The problem could not be fixed remotely. So Tyro and its terminal supplier have had to physically collect defective devices and return them after repair.

Those who say that was “uncertainty” would argue that no one could have foreseen all those devices to suddenly crash out of action.

Then those who argue it was a manageable “risk”, like short seller Viceroy Research, would say that the event was inevitable because Tyro didn’t have sufficient business continuity processes in place.

Tyro’s shares have been in a trading halt since Viceroy’s report on Friday morning. The fintech’s management are currently busy working out a response — where we’ll find out whether they think it was a risk or uncertainty.

These 5 Cheap Shares Could Be Set For Huge Gains (FREE REPORT)

We hear it over and over from investors, “I wish I had bought Altium or Afterpay when they were first recommended by The Motley Fool. I’d be sitting on a gold mine!” And it’s true.

And while Altium and Afterpay have had a good run, we think these 5 other stocks are screaming buys. And you can find out the names of these stocks in the FREE stock report.

*Extreme Opportunities returns as of November 14th 2020

More reading

Tony Yoo owns shares of Qantas Airways Limited. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of Tyro Payments. The Motley Fool Australia has recommended SEEK Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

The post Risk vs uncertainty: why one is a lot worse appeared first on The Motley Fool Australia.

from The Motley Fool Australia https://ift.tt/2XMq5XM

Leading brokers name 3 ASX shares to buy today

blackboard drawing of hand pointing to the words buy now

With so many shares to choose from on the ASX, it can be hard to decide which ones to buy.

The good news is that brokers across the country are doing a lot of the hard work for you.

Three top shares that leading brokers have named as buys this week are listed below. Here’s why they are bullish on them:

BHP Group Ltd (ASX: BHP)

According to a note out of Macquarie, its analysts have retained their outperform rating and lifted the price target on this mining giant’s shares to $51.00. The broker made the move after marking to market commodities prices for the December quarter. In addition to this, the broker commented that it expects the copper price bull run to continue. This should be supported by a sky high iron ore price. The BHP share price is trading at $45.26 this afternoon.

Fortescue Metals Group Limited (ASX: FMG)

A note out of Ord Minnett reveals that its analysts have upgraded this iron ore miner’s shares to a buy rating with an improved price target of $29.00. According to the note, the broker has also marked to market its commodity forecasts. Ord Minnett is expecting a bumper result from Fortescue in FY 2021 and is particularly attracted to its strong free cash flow generation. This is expected to lead to generous dividend payments in the near term. The Fortescue share price is fetching $24.82 on Monday.

IDP Education Ltd (ASX: IEL)

Analysts at Morgan Stanley have retained their overweight rating and $24.00 price target on this student placement and language testing company’s shares. According to the note, the broker believes IDP Education is in a strong position for growth once the pandemic passes. This is due to pent up demand and the lessening of competition. In addition, the broker notes that a potential deal between IDP Education and the British Council regarding the distribution of the IELTS could be a big positive. The IDP Education share price is trading at $19.96 today.

Where to invest $1,000 right now

When investing expert Scott Phillips has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for more than eight years has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

Scott just revealed what he believes are the five best ASX stocks for investors to buy right now. These stocks are trading at dirt-cheap prices and Scott thinks they are great buys right now.

*Returns as of June 30th

More reading

James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of Idp Education Pty Ltd. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

The post Leading brokers name 3 ASX shares to buy today appeared first on The Motley Fool Australia.

from The Motley Fool Australia https://ift.tt/2M4sRVO

ASX dividends: Are miners the new bank shares?

asx growth shares represented by question mark made out of cash notes

The ASX and the S&P/ASX 200 Index (ASX: XJO) have long held a reputation as very income friendly for investors. Whether it’s our unique system of franking, or just a healthy love of a good dividend paycheque, the ASX is well-known for prioritising income over growth.

As an example, an ASX-based index exchange-traded fund (ETF) like the Vanguard Australian Shares Index ETF (ASX: VAS) currently has a trailing dividend yield of 2.75% (plus franking). Compare that to an American-focused ETF like the iShares S&P 500 ETF (ASX: IVV). That only offers a trailing yield of 1.52% on current pricing.

Historically, the largest drivers of the ASX 200’s income prowess have been the ASX banks. Namely the big four in Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), Australia and New Zealand Banking Group Ltd (ASX: ANZ) and National Australia Bank Ltd (ASX: NAB). In years gone by, it was not uncommon for those banking shares to consistently offer fully franked dividend yields ranging from 5% to 7%.

A banking dividend drought

But 2020 flipped that paradigm on its head. ASX banks were amongst the hardest hit shares last year, and a large part of that sell-off was likely driven by a sudden and severe drought of banking income. For the first time in decades, Westpac didn’t even pay an interim dividend. ANZ managed to, but it was delayed by several months. The dividends that the banks did manage to pay looked nothing like what investors were used to. Take NAB. In 2018, NAB paid out $1.98 in dividends per share. In 2019, that was down to $1.66. But in 2020, it was a miserly 60 cents per share all up.

On current prices, CBA is offering a trailing yield of just 3.52%, NAB at 2.53%, ANZ 2.47% and Westpac a depressing 1.46%.

Digging for dividends

But while the banks’ star has fallen somewhat, another has been rising over the past year or so. ASX resources shares have emerged as the new divas of the ASX dividend party.

Take BHP Group Ltd (ASX: BHP). The ‘Big Australian’ is up close to 34% since the start of November last year, yet still offers a trailing and fully franked dividend yield of 3.86% today. Rio Tinto Limited (ASX: RIO) is doing one better, offering a fully franked trailing yield of 4.82%. And Fortescue Metals Group Limited (ASX: FMG) is putting up a whopping fully franked 7.06% at the time of writing, despite rising almost 45% since the start of November as well.

So are miners the new banks?

Well, they certainly are right now, if the raw numbers are anything to go by. But the big question about what the future holds remains.

It’s worth noting that things are looking up for the banks as we start 2021. The Australian Prudential Regulation Authority has already removed the shackles on banking sector dividends that it imposed last year. If credit growth resumes in 2021 and beyond, the banks might well get back to paying the dividends of the past before too long. But keep in mind that near-zero interest rates aren’t exactly a turbocharger for banking growth. Only time will tell whether they can pull off a complete redemption.

Turning to resources shares once more, it’s also worth noting that these companies can only fund hefty dividends as long as commodity prices (namely iron ore) stay at the elevated levels we have seen in recent months.

Commodities, especially iron ore, are notoriously cyclical and volatile. And they can drop as fast as they can climb. Yes, iron ore is today fetching a healthy US$170 a tonne (roughly a 9-year high), rising from around US$150 just before Christmas. But it was only back in 2018 that we were seeing prices of just US$62 a tonne.

If we were to see that level again, you can bet that mining dividends would be far lower than what we see today.

Foolish takeaway

Every industry has its time in the sun, and banking and mining are no different. For the dividend investor weighing up banking and mining shares today, perhaps the only right answer is good old diversification.

These Dividend Stocks Could Be Your Next Cash Kings (FREE REPORT)

Motley Fool Australia’s Dividend experts recently released a brand-new FREE report revealing 3 dividend stocks with JUICY franked dividends that could keep paying you meaty dividends for years to come.

Our team of investors think these 3 dividend stocks should be a ‘must consider’ for any savvy dividend investor. But more importantly, could potentially make Australian investors a heap of passive income.

Don’t miss out! Simply click the link below to grab your free copy and discover these 3 high conviction stocks now.

Returns As of 6th October 2020

More reading

Motley Fool contributor Sebastian Bowen owns shares of National Australia Bank Limited. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

The post ASX dividends: Are miners the new bank shares? appeared first on The Motley Fool Australia.

from The Motley Fool Australia https://ift.tt/2KplGqF