The fourth quarter is traditionally a strong period for global equity markets. Here's a closer look at four reasons why the ASX 200 could see a rally just in time for Christmas.
Interest rates are at record lows
The Reserve Bank of Australia (RBA) cut interest rates by 25 basis points to 0.75% on 1 October. The rationale behind the rate cut was to support employment and income growth, while ensuring that inflation levels are within the medium-term target.
A low interest rate environment inflates the equity market as borrowing costs are cheaper and a lower discount rate is applied when valuing shares. This also helps bond proxy shares that possess an inverse relationship between the risk-free rate and its share price. The likes of Sydney Airport Holdings Pty Ltd (ASX: SYD), Transurban Group (ASX: TCL) and REITs (real estate investment trusts) are likely to benefit.
The Australian dollar is at record lows
The Australian dollar is currently at a 10-year low of 67 US cents. This is beneficial for many sectors including:
- Gold producers such as Evolution Mining Ltd (ASX: EVN) and Newcrest Mining (ASX: NCM), which benefit from a rallying Australian-dollar gold price
- Companies with operations overseas, from biotech giant CSL Limited (ASX: CSL) to Australian wine producer Treasury Wines Estate (ASX: TWE)
- Commodities such as iron ore, thermal coal and other metals also benefit from an easing dollar. Good news for the likes of BHP Group Ltd (ASX: BHP), Fortescue Metals Group Limited (ASX: FMG) and Rio Tinto Limited (ASX: RIO).
Commodity prices are stabilising
I believed the iron ore rally was over when the world's largest iron ore producer, Vale SA, received court approval to resume its iron ore production. A slowing global economy and weak economic data added further insult to injury.
However, in the short term, China has maintained a steady level of steel production, which is vital for buoying the iron ore spot price. Its central bank has announced that it will implement a prudent monetary policy and increase the strength of counter-cyclical measures to support the economy. This has seen the iron ore spot price rebound above US$90 per ton, which spells good news for our miners.
The housing market is improving
Factors such as the Liberal election victory, interest rate cuts and easing lending restrictions have seen the return of optimism to the housing market. Home values have increased and buyers are stepping up. This is vital for the most important sector in the ASX – banks and financials.
Foolish takeaway
There are many factors that could contribute to a potential rally for the ASX. However, the elephant in the room, the US–China trade talks, could easily swing the market in either direction – a risk that could potentially derail any hopes of a Christmas rally.
