A weaker-than-expected first quarter consumer price index reading, a cut to the country’s interest rate, and significantly lowered inflation forecasts by the Reserve Bank of Australia (RBA) have seen the Aussie dollar return to below $0.75. This has been a boon for Aussie exporters, tourism-related stocks and earners of US dollars.
Top 20 ASX stocks with the highest correlation to Aussie dollar declines over the past year (i.e. inverse correlation to AUD/USD):
The past week has also seen the government of Prime Minister Malcolm Turnbull announce a budget and call an election it is widely tipped to win. Proposed limits to high income earners’ superannuation contributions and a dogged defence of negative-gearing tax concessions are increasingly guiding the most tax-efficient asset allocation among high-income earners.
The superannuation changes appear to incentivise high-net worth individuals to allocate excess superannuation income to their negatively-geared investment property portfolio. The changes also seem to be spurring the growth of family trusts, such that superannuation contributions can be made up to the limit for each family member in the trust. It’s difficult to know whether some of these changes may also be helping the search for high yielding stocks. Superannuation structures certainly incentivise the purchase of high-yielding stocks and their associated franking credits.
In any case, the 25 basis point cut to the RBA’s interest rate last week and the likelihood of further rate cuts later in the year have created a strong disincentive to keep savings in the bank. These developments may have created a TINA (There Is No Alternative) situation, the acronym du jour, whereby investors are just desperate for semi-decent real yields, leaving them no alternative except equities.
These structural developments could well continue to steadily play out in the market, continuing to support strong gains in high-yielding stocks.
Commonwealth Bank of Australia is sitting at a key point of technical resistance at A$78.0, and a close above this level would be a key sign of a technical breakout and will be a key level to watch.
Telstra has had an impressive May so far, gaining 6.9%. Its technicals are lining up incredibly well as it looks set to close above a key level of resistance at A$5.69. The Ichimoku Cloud has turned green, indicating it’s in an uptrend. And the price is above the nine-period average Tenkan-sen (blue line), which is above the 26-period average Kijun-sen (red line). All very bullish.