A progressive capital solution for Australia’s interest rate uncertainty

After increasing interest rates 12 times in the 13 months to June 2023, Australia’s central bank has been keeping the markets guessing as to its next move.

The Reserve Bank of Australia (RBA) held interest rates at 4.1% at monetary policy meetings in July, August and September. Though the RBA warned further hikes may still be on the cards, it also indicated that it would wait to assess the full impact of its hikes to date before committing to further tightening – especially in light of a recent decline in inflation and slight rise in unemployment.^[1]

A majority of economists polled by Reuters expect there will be a further hike in November, taking the cash rate to a 12-year high of 4.35%. Meanwhile, three of the nation’s four biggest lenders say there will likely be no further hikes beyond the current position – a level they believe is sufficient to cool inflation and achieve a soft landing.^[2]

One of the main reasons the RBA has adopted a more cautious approach to tightening than central banks in other comparable countries is that most Australian mortgage holders are on variable rate loans, whereas in places like the US, fixed rate loans with terms as long as 30 years are the norm.^[3] This means the impact of higher rates filters through much faster in Australia, placing a burden on consumers and curtailing spending – which, in turn, should help curb inflation.

And clearly, the interest rate is already high enough to inflict pain on consumers, placing growing pressure on businesses. Until now, however, business confidence has remained resilient, according to a survey by National Australia Bank, even though a separate survey by Westpac Banking Corp. revealed consumers have grown “deeply pessimistic.” ^[4] Data from Equifax also indicates a rising trend of missed mortgage payments.^[5] In time, businesses too will feel the pain as sales and profitability slide further.

In this climate, progressive capital solutions like securities-based financing from EquitiesFirst could be especially attractive, providing investors a relatively low-cost, fixed-interest-rate loan.

Equity investors see more pain ahead

Unemployment will need to increase before inflation is brought to heel, according to the head of equities at an Australian pension fund interviewed for a landmark study on the outlook for global equities, conducted by EquitiesFirst in collaboration with Institutional Investor.

High interest rates will also drive up financing costs, resulting in earnings downgrades in Australia and elsewhere in Asia, according to sources interviewed for the report.

The RBA will be keeping a close eye on this, as well as inflation trends, consumer spending, labour costs and business surveys, to determine whether further hikes are prudent.

Although the market remains divided on whether Australia’s rate hiking cycle would come to an end, significant cuts are unlikely soon given the country’s core inflation, at around 6%, is well above the RBA’s target of 2-3%. The central bank has said it does not expect inflation to return to its target range until late 2025.^[6]

Moreover, the RBA cautioned that inflation could prove more persistent than forecast if wage growth is stronger than expected or productivity growth fails to recover.^[7] Australia is also due to implement legislated tax cuts, mainly directed at higher income earners, next year, which could provide an economic stimulus from mid-2024, maintaining pressure on prices.^[8] Analysts point out that these factors make it not inconceivable that the RBA could extend tightening until 2025.^[9]

Securities-based financing helps fill the gap left by the credit crunch

Companies may require infusions of working capital to cope with these near-term headwinds, but they, too, are faced with high interest rates and tight liquidity conditions.

A compelling financing solution is a securities-backed loan from EquitiesFirst. These funds can be used by investors for any purpose, including personal investments and funding company operations.

When interest rates are high and liquidity conditions are tight, securities-backed financing can be especially valuable for investors, allowing them to diversify their holdings without sacrificing the upside potential of their underlying holdings.

The EquitiesFirst x Institutional Investor report reveals that investors focused on Australia are far more concerned about commodity prices than those in other regions. This is not surprising given that commodities have an outsized influence on the local economy and currency.^[10]

Given the uncertainty about the outlook for Australia’s interest rates and its economy, it might be a good time for Australia-focused investors to hedge and diversify.

[1] https://www.reuters.com/markets/rba-hold-rates-410-tuesday-will-hike-again-next-quarter-2023-09-01/

[2] https://www.reuters.com/markets/rba-hold-rates-410-tuesday-will-hike-again-next-quarter-2023-09-01/

[3] https://www.ratecity.com.au/home-loans/mortgage-news/news-why-australian-dollar-low-here-s-interest-rates-affect-dollar

[4] https://www.bloomberg.com/news/articles/2023-08-08/australian-consumer-sentiment-slips-as-price-pressures-mount

[5] https://www.bloomberg.com/news/articles/2023-08-01/australia-extends-rate-pause-for-second-month-currency-drops

[6] https://www.reuters.com/markets/rates-bonds/australian-central-bank-holds-rates-steady-second-month-2023-08-01/

[7] https://www.rba.gov.au/publications/smp/2023/aug/overview.html

[8] https://www.abc.net.au/news/2023-08-04/rba-statement-monetary-policy-inflation-interest-rates-economy/102688084

[9] https://www.reuters.com/markets/rates-bonds/australian-central-bank-holds-rates-steady-second-month-2023-08-01/

[10] https://www.abc.net.au/news/2023-08-08/australian-dollar-hibernation-commodities-interest-rates-economy/102697018

Disclaimer

Past performance does not guarantee future returns, and individual returns are not guaranteed or warranted.

This Document is intended solely for accredited investors, sophisticated investors, professional investors, or otherwise qualified investors, as may be required by law or otherwise, and it is not intended for, and should not be used by, persons who do not meet the relevant requirements. The content provided herein is for informational purposes only and is general in nature and not targeted to any specific objective or financial need. The views and opinions expressed in this Document have been prepared by third parties and do not necessarily reflect the views and opinions of EquitiesFirst. EquitiesFirst has not independently examined or verified the information provided herein, and no representation is made that it is accurate or complete. Opinions and information herein are subject to change without notice. The content provided does not constitute an offer to sell (or solicitation of an offer to purchase) any securities, investments, or any financial products (“Offer”). Any such Offer shall only be made through a relevant offering or other documentation which sets forth its material terms and conditions. Nothing contained in this Document shall constitute a recommendation, solicitation, invitation, inducement, promotion, or offer for the purchase or sale of any investment product by Equities First Holdings, LLC or its subsidiaries (collectively, “EquitiesFirst”), nor shall this Document be construed in any way as investment, legal, or tax advice, or as a recommendation, reference, or endorsement by EquitiesFirst. You should seek independent financial advice prior to making an investment decision about a financial product.

This Document contains the intellectual property of EquitiesFirst in the United States and other countries, including, without limitation, their respective logos and other registered and unregistered trademarks and service marks. EquitiesFirst reserves all rights in and to their intellectual property contained in this Document. The Document should not be distributed, published, reproduced or otherwise made available in whole or in part by recipients to any other person and, in particular, should not be distributed to persons in any country where such distribution may lead to a breach of any legal or regulatory requirement.

EquitiesFirst make no representation or warranty with respect to this Document and expressly disclaim any implied warranty under law. You acknowledge that EquitiesFirst is not liable under any circumstances for any direct, indirect, special, consequential, incidental, or punitive damages whatsoever, including, without limitation, any lost profits or lost opportunity, even if EquitiesFirst has been advised of the possibility of such damages.

EquitiesFirst makes the following further statements that may be applicable in the stated jurisdiction:

The information contained on this Document is intended for persons located in Australia only and classified as a Wholesale Client only as defined in Section 761G of the Corporations Act 2001. The distribution of information to persons outside this criteria may be restricted by law and persons who come into possession of it should seek advice and observe any such restriction.

The material contained in this Document is for information purposes only and should not be construed as an offer or solicitation or recommendation to buy or sell financial products.

The information contained in this Document is intended to be general in nature and is not personal financial product advice. Any advice contained in the Document is general advice only and has been prepared without considering your objectives, financial situation or needs. Before acting on any information, you should consider the appropriateness of the information provided and the nature of the relevant financial product having regard to your objectives, financial situation and needs. You should seek independent financial advice and read the relevant disclosure statements or other offer documents prior to making an investment decision about a financial product.

Dubai: Equities First Holdings Hong Kong Ltd (DIFC Representative Office) at Gate Precinct Building 4, 6th Floor, Office 7, Dubai International Financial Centre (commercial license number CL7354) is regulated by the Dubai Financial Services Authority (“DFSA”) as a Representative Office (DFSA Firm Reference No.: F008752). All rights reserved.

The information contained in this document is intended to be general in nature, and, to the extent that it is perceived as advice, any advice contained in this document is general advice only and has been prepared without considering your objectives, financial situation, suitability of the financial products or your needs.

The material contained in this document is for information purposes only and should not be construed as financial advice, including an offer or solicitation or recommendation to buy or sell financial products. The information contained in this document is intended to be general in nature and any advice contained in this document is general advice only and has been prepared without considering your objectives, financial situation, suitability of the financial products or your needs. Before acting on any information, you should consider the appropriateness of the information provided and the nature of the relevant financial product having regard to your objectives, financial situation and needs. If you do not understand the contents of this document, you should consult an authorised financial adviser.

This document relates to a financial product which is not subject to any form of regulation or approval by the DFSA. The DFSA has no responsibility for reviewing or verifying any documents in connection with this financial product. Accordingly, the DFSA has not approved this document or any other associated documents nor taken any steps to verify the information set out in this document, and has no responsibility for it.

Hong Kong: Equities First Holdings Hong Kong Limited is licensed under the Money Lenders Ordinance (Money Lender’s Licence No. 1659/2024) and to carry on the business of dealing in securities (Type 1 licence) under the Securities and Futures Ordinance (“SFO”) (CE No. BFJ407). This Document has not been reviewed by the Hong Kong Securities and Futures Commission. It is not intended as an offer to sell securities or a solicitation to buy any product managed or provided by Equities First Holdings Hong Kong Limited and is only intended for persons who qualify as Professional Investors under the SFO. This document is not directed to individuals or organizations for whom such offers or invitations would be unlawful or prohibited.

Korea: The foregoing is intended solely for sophisticated investors, professional investors or otherwise qualified investors who have sufficient knowledge and experience in entering into securities financing transactions. It is not intended for, and should not be used by, persons who do not meet those criteria.

United Kingdom: Equities First (London) Limited is authorised and regulated in the UK by the Financial Conduct Authority (“FCA”). In the UK, this Document is only being distributed and made available to persons of the kind described in Article 19(5) (investment professionals) and Article 49(2) (high net worth companies, unincorporated associations etc.) of Part IV of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (‘’FPO’’) and any investment activity to which this presentation relates is only available to, and will only be engaged in with, such persons. Persons who do not have professional experience in matters relating to investment or who are not persons to whom Article 49 of the FPO applies should not rely on this document. This Document is only prepared for and available to persons who qualify as Professional Investors under the Markets in Financial Instruments Directive.