What the economy needs

One analyst shares his views on what the economy needs.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Tim Radford, a global analyst for Rivkin, believes that for the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) to climb above the 5,000 point resistance level, overseas investors must once again see value in Australia's high yielding plays. He believes this will only occur if the dollar begins to recover.

When the Reserve Bank of Australia decided to lower the official cash rate to 2.75% in May, the Australian dollar plunged. Whilst this came as much a much needed bout of relief for exporters such as our miners, it did not fare well for some of Australia's highest yielding stocks – particularly the banks.

This is because, with the Australian dollar sitting at around US$1.03 (after having hit a high of US$1.06) at the beginning of May, Australian stocks were very attractive to foreign investors, where gains could be realised on both appreciation in stock value as well as in the currency exchange rate.

With high levels of turbulence throughout the global economy and record low interest rates around the world, foreign investors saw value in Australia's defensive high-yielding companies. Through this trend, Commonwealth Bank (ASX: CBA) overtook mining heavyweight BHP Billiton (ASX: BHP) to become Australia's largest company by market capitalisation. Meanwhile, between the market's lows in June 2012 and May this year, ANZ (ASX: ANZ) and NAB (ASX: NAB) both saw 57% gains whilst Westpac (ASX: WBC) appreciated 74% – the highest of any of the banks.

However, as the dollar depreciated, foreign investors ran for the door, causing each of the banks to depreciate in value significantly. Radford believes that the Australian economy will rely on the banks to continue their recovery in order for the index to remain above 5,000 points. For that to happen, confidence must be restored in regards to the strength of the dollar to make these high-yielding plays more desirable once again. If not, he suggests that the index could instead head back towards its June levels of around 4,700 points.

Foolish takeaway

Whilst the banks make up an enormous portion of the ASX 200, the economy largely relies upon their strength to be driven forward. However, for investors focused on the long-term, the banks are unlikely to outperform the market at their current prices. As such, it may be worth looking elsewhere to put your hard-earned money to work.

The Australian Financial Review says "good quality Australian shares that have a long history of paying dividends are a real alternative to a term deposit." Get "3 Stocks for the Great Dividend Boom" in our special FREE report. Click here now to find out the names, stock symbols, and full research for our three favourite income ideas, all completely free!

More reading


Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned in this article.

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »