For months now, I've been racking my brain to try and understand the impact that Australia's record low interest rates will have on our economy.
The RBA's decision to lower the official cash rate to 2.25% earlier in the week came about because it continues to believe the AUD is overvalued and unemployment will go higher, in the wake of falling mining investment.
A lower interest rate is meant to support Australians with their mortgage repayments, spur on investment and increase confidence – making us spend more, thus supporting the non-mining sector.
However Australia isn't the only one trying to do such a thing. Canada, Europe, the United Kingdom and even the mighty USA are each facing their own set of problems.
I think this has provided the impetus for some financial commentators to suggest we may see a much lower cash rate in the foreseeable future, as the RBA continues to encourage falls in the Australian dollar.
Now, the bearish commentators could be right or they could be wrong. After all few so called, "experts" expected the RBA to lower rates earlier in the week.
But regardless of whether rates rise or fall from here, one thing is for sure, the outlook for the domestic economy is anything but rosy.
What it means for your share portfolio…
Given the outlook, investors need to be very mindful of what stocks they are placing their money into.
The big banks – Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), National Australia Bank Ltd (ASX: NAB) and Australia and New Zealand Banking Group (ASX: ANZ) – are vulnerable to an economic slowdown, although their current share prices do not reflect it.
Here's why…
Regardless of whether or not they've performed exceptionally well for investors in the past – remember we don't drive our investment vehicle looking through the rear-view mirror – their performances are a product of a 22-year streak without a recession, record-high household debt levels and a stable regulatory environment.
It wasn't so long ago, in fact it was less than 15 years ago, when the big banks were in dire straits and some were looking like going bust.
But this article isn't directed to current big bank shareholders who presumably bought in at much lower prices than today (give yourselves a pat on the back, you've earned it), it's directed at current buyers.
As highlighted above there are many reasons why the banks are not a buy right now.
Here's my top three reasons why you should avoid following the herd into big bank stocks throughout 2015:
- They're not cheap – normally that's enough to dissuade any prudent investor.
- The economic outlook is far from ideal – this includes a frothy property market, record low bad debts, rising unemployment and burgeoning household debt levels.
- Bank stocks also go backwards – The following graph shows the big banks' share prices throughout 2008.
Source: Google Finance. Click to enlarge.
Foolish takeaway
Low interest rates coupled with an expensive property market make dividend-paying shares a one-stop shop for investors chasing a passive income stream. However the usual suspects – the big banks, Wesfarmers Ltd (ASX: WES) and Telstra Corporation Ltd (ASX: TLS) – are not a good place to park your money right now.
Sure they'll likely do well in 2015 (as speculators and yield chasers run rampant), but I firmly believe there will come a much better time to buy these blue chips. It might not be this year, or next, but it will come.
They say, patience is a virtue. I say, patience doesn't lose you money. If something seems too good to be true, it generally is.
