Confidence is low, the dollar is falling and the Australian economy is failing to show any firm signs of improving in the near future.
That all points to lower interest rates, for longer.
Although inflation is tipped to fall slightly in the near term, it’s still at a lofty 3% and with interest rates at just 2.5%, investors might actually be losing purchasing power by keeping their money tied up in term deposits or savings accounts.
But the stock market provides an alternative income source for passive investors coupled with the possibility of capital gains.
However, as renowned and well run as they may be, it’s still vital for investors to pay a good price for their shares. When the market inevitably falls your investment will be exposed to serious downside risk if you overpay in the first place.
Macquarie Group, our largest investment bank, is due to release its half-yearly results tomorrow. Over the next 12 months, analysts are expecting a dividend of $2.93, placing the stock on a forecast dividend yield of 4.9%. Earnings per share are also expected to rise as the bank benefits from increased investor confidence, capital market activity, M&A, and a depreciating Australian dollar.
Indeed, in the short term there could be considerable upside potential in Macquarie shares. However, buying shares in an investment bank at the top of a market cycle rarely proves to be a good idea. Waiting on the sidelines for the trend to reverse may save long-term investors some money and afford them a better buying opportunity.
Telstra Corporation is one of the best defensive companies on the ASX. It’s the leader across a number of lucrative product lines such as mobiles, fixed data and voice, pay-tv and more. With payments from the NBN Co set to total into the tens of billions of dollars over coming decades and consumers’ increasing dependence on internet-enabled devices, its dominance is likely to continue.
However, Telstra shares don’t come cheap and in fact could currently be seen as quite expensive. Keeping it on your watchlist and looking for other, less well known alternatives (see below) is probably the best course of action.
Finally, Woolworths is another stock at the top of many investors’ shopping lists. This is due to its defensive characteristics, brand strength and track record. As a result, its share price rarely treads into ‘bargain territory’.
At current prices its shares trade on a forecast dividend yield of 4.05%, but given its valuation it does not present as a suitable alternative to low interest rates. With Woolworths stock currently trading on a price-earnings ratio of 18 and earnings per share expected to grow around only 6% per year in the near term, it is unlikely to outperform the market from here.
Where to invest $1,000 right now
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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.
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Motley Fool Contributor Owen Raszkiewicz doesn’t own shares in any of the mentioned companies.
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