China's continued slowdown could mean a showdown for much lower interest rates.
Already market pundits and economists have pencilled in around another half-percentage point cut on top of the RBA's recent rate decrease to 2.25%. With Australia dependent upon the Chinese economy for a large part of its exports, recent news that China's GDP (gross domestic product) may only grow "around 7%" as reported by The Financial Times last week will add to the downward pressure on rates.
One Singapore-based hedge fund is telling Australia to get ready for the kind of low, zero or negative interest rates seen in other major economies around the world. According to the Australian Financial Review, fund manager Danny Yong of Dymon Asia Capital said at a superannuation forum in Australia that this country will have to do its own "competitive easing". Other countries like the US, Japan and now European central banks have lowered rates to near zero.
Yong suggests equities will attract more investors for their higher dividend yields. Share prices should benefit as more funds are invested into them.
If near-zero rates come to Australia, Aussie investors will want to look for three kinds of companies. I have given an example of a strong stock for each.
Target Companies
– High yield with solid dividend growth
IOOF Holdings Limited (ASX: IFL), a financial services provider that offers portfolio administration, financial planning and trustee services, is a good example of a stock with a high yield of 4.7% fully franked and has a solid track record for raising dividends. More individuals and companies will want to grow their investments, so IOOF Holdings is in an attractive position to meet that need.
– Large percentage of overseas revenue
CSL Limited (ASX: CSL) is an international biopharmaceutical that has major production centres in the US and Europe for its blood-related medical products. Only about 10% of its revenue is from Australia. Earnings also benefit from a weaker Aussie dollar when overseas profits are booked. The yield is only 1.5% unfranked, but earnings are forecast to grow an average 20% annually over the next several years.
– Recession-proof industries
What do people purchase whether the economy is up or down? One thing is pizza and Domino's Pizza Enterprises Ltd (ASX: DMP) has put some incredible growth numbers on the board. Thanks to franchise expansion in Japan and the regular store growth in Australia and Europe, the takeaway pizza company raised earnings 28.1% in financial year 2014 and recent half-year results saw net profit up 44.2%. Domino's Pizza Enterprises has a strong store growth strategy for the next five years, so the story isn't over yet.
