These stocks could rocket on lower rates

Wednesday, 30 October 2019
Adelaide, Australia
By Bernd Struben

  • Markets
  • Don’t invest in history’s footnotes

Whilst imaginative institutions are likely to come out leaders in the next cycle, others risk becoming footnotes to history.’

McKinsey’s Global Banking Review

I don’t think people understand how big the bank unbundling could be.’

Ryan Dinse, Exponential Stock Investor

Today, overnight our time, the US Fed will announce its next interest rate call.

Markets are all but certain Fed Chair Jerome Powell and crew will deliver another 0.25% cut. At time of writing the odds stand at 94%.

I’ll go with the herd on this one.

Powell may offer some modestly hawkish forward guidance. Meaning he’ll leave investors wondering if his latest rate cut could be the last, barring any major economic downturn.

But with another cut almost fully priced in, failure to deliver on expectations would see a sharp selloff in US — and global — markets.

Rightly or wrongly, Powell would bear the brunt of the blame for the evaporation of billions of dollars in paper wealth. Not to mention the torrent of public abuse his boss would be sure to unleash.

Trump is already priming that pump on Twitter. In a tweet sent earlier today, he wrote:

“Over in Europe and Japan they have NEGATIVE RATES. They get paid to borrow money. Don’t we have to follow our competitors?” @Varneyco Yes we do. The Fed doesn’t have a clue! We have unlimited potential, only held back by the Federal Reserve. But we are winning anyway!

If Powell delivers a third consecutive 0.25% rate cut, as expected, it will bring the benchmark US rate to 1.75%. That’s down from 2.50% just four months ago.

That could be enough to send US markets back into record high territory, from whence they slipped on Tuesday. Though it almost certainly won’t be enough for Trump. Until Americans are getting paid to borrow money he’ll keep turning the screws on his own Fed Chair appointee.

It’s a different world in the US. All the more so under Donald Trump. Can you imagine Scott Morrison tweeting that RBA Governor Philip Lowe is clueless? It would be political suicide.

Lowe has his own rate cut decision coming up next Tuesday. I’ll be taking that day off for ‘the race that stops the nation’. That’s a state holiday in Victoria, where Port Phillip Publishing is headquartered. But I don’t expect to miss any bombshell announcements from the central bank.

The cash rate is already at a historic low 0.75%. Having said Australia won’t toy with negative interest rates, Lowe has been urging the government and private industry to do more of the heavy lifting.

With few signs that either government or industry is racing to heed his call, another cut could be on the cards in early 2020. That would bring the cash rate to a paltry 0.50%. And that would be yet more bad news for Australia’s embattled banks.

More, after the markets…

Markets

Overnight, the Dow Jones Industrial Average closed down 19.30 points, or 0.07%.

The S&P 500 closed down 2.53 points, or 0.08%. That leaves Monday’s close as the new highwater mark to beat.

In Europe the Euro Stoxx 50 index closed down 3.60 points, or 0.10%. Meanwhile, the FTSE 100 lost 0.34% and Germany’s DAX closed down 2.09 points, or 0.02%.

In Asian markets Japan’s Nikkei 225 is down 80.98 points, or 0.35%. China’s CSI 300 is down 0.53%.

In Australia, the S&P/ASX 200 is down 46.82 points, or 0.69%.

West Texas Intermediate crude oil is US$55.48 per barrel. Brent crude is US$61.59 per barrel.

Turning to gold, the yellow metal is trading for US$1,487.73 (AU$2,168.37) per troy ounce. Silver is US$17.81 (AU$25.96) per troy ounce.

One bitcoin is worth US$9,425.95.

The Aussie dollar is worth 68.61 US cents.

Don’t invest in history’s footnotes

Australia’s big banks are in stronger shape than many of their international peers. European banks, for example, are being pushed to the brink with the EU’s negative rate policies.

Nonetheless, global management consultants McKinsey’s annual Global Banking Review report should be a wakeup call for the Big Four. And their investors.

The report, titled ‘The last pit stop? Time for bold late-cycle moves’ reveals that almost 60% of global banks are operating at unprofitable levels.

The report highlights ultra-low interest rates and a sluggish adoption of rapidly evolving technology as the biggest threats to traditional banks.

That’s certainly already the case here in Australia.

The big banks balked at passing on the RBA’s last 0.25% interest rate cut in full. Over the noise of jeering pollies, the banks explained they have other costs to cover, atop of their own borrowing rates. And with rates down in the subbasement, they’d be shooting themselves in the foot cutting much further.

If Australia’s cash rate does drop to 0.50% next year, which looks likely, it will only spell more pain for the banks.

Then there’s the technology revolution. One the banks have been perilously slow to engage with.

From The Australian:

According to McKinsey, banks only set aside 35 per cent of their IT budgets to innovation and reinvention strategies, whereas fintech players spend more than 70 per cent.’

With the artificial intelligence (AI) revolution well and truly underway, those are pretty damning statistics. And the quoted percentages come from the bank’s innovation and technology (IT) budgets, no less.

That’s why small-cap analyst and tech specialist Ryan Dinse forecasts a major shakeup in the Aussie banks’ once comfortable oligopoly:

Australia’s banks are no longer a protected species when it comes to competition.

A swarm of sly little upstarts are coming to cut the Big Four’s lunch.

Unlike our Big Four, they’re not stuck with dated ‘70s technology, costly branches and old-fashioned notions of customer service.

They’re at the cutting edge of technology.

And I think they’re ready to explode onto the market and disrupt every single aspect of Australian finance.

When Ryan spots big disruptions on the horizon, his first thought is how to best capitalise on it. Then he gets to work.

That work, to date, has turned up seven stocks Ryan believes have the most potential to ‘explode onto the market’. And explode in share price.

They’re part of his ‘Great Bank Unbundling’ portfolio. And at time of writing five of those seven stocks are showing gains, with the top recommendation up 106.4%.

If you’d invested in each of the seven stocks when Ryan recommended them, you’d currently be sitting on a gain of 22.1%. And all of those tips are from 2019, with three of them recommended only last month.

But according to Ryan, that’s only the beginning.

For all the details, you can read Ryan’s complete report here.

Cheers,
Bernd