S&P/ASX 200 Index (ASX: XJO) shares are slightly lower in afternoon trading, down 0.21% to 6,801 points.
This week so far, the benchmark index is up 4.4%. This is almost exclusively due to the Reserve Bank of Australia (RBA)'s interest rate decision on Tuesday.
The RBA decided to raise the official cash rate by 0.25%. This surprised the market, as analysts were expecting a fifth consecutive month of 0.5% rises.
The response? Well, the market threw a party.
On the day of the RBA announcement, the ASX 200 closed 3.75% higher at 6,699.3 points. That was the best performance in more than two years.
The party continued yesterday, with another 1.74% gain to 6,815.7 points at the close.
So, could this be a turning point for ASX 200 shares, after a dismal year so far? (The index is down 10% year to date.)
Is this a turning point for ASX 200 shares?
In short, it could be.
The RBA boss indicated in a statement that the board might be happy to slow rate rises down from here.
RBA Governor Philip Lowe said:
The cash rate has been increased substantially in a short period of time. Reflecting this, the Board decided to increase the cash rate by 25 basis points this month as it assesses the outlook for inflation and economic growth in Australia.
Slowing rate rises down could mean two things that the market is likely to love, potentially leading to a turnaround in ASX 200 shares.
The first is that the RBA might be thinking they've raised rates enough to put the brakes on rising inflation in a meaningful way to this point.
The cash rate is up 2.5% over just six months, and that's aggressive in anyone's language.
What do the experts think?
As we reported yesterday, James Nicolaou of Shaw & Partners said the RBA's decision might signal that rate increases are "starting to have the desired effect".
And that's "positive for the markets and economy", he told The Australian.
Lowe made it clear in his statement that more rate rises are likely. But if they're in smaller increments, that will help people cope better with the rising cost of mortgage interest. That bodes well for the economy.
Also in The Australian, top broker Macquarie said a "bear market rally" may have already started as a result. It said this was due to the "dovish" RBA increase and weak US ISM Manufacturing data.
The broker has nominated 10 ASX 200 shares that are "more likely to outperform" in such a rally.
LGT Crestone deputy chief investment officer Kevin Wan Lum weighed in on Livewire:
From a relative value perspective, we favour Australia over offshore equity markets.
Overall, we believe the domestic economy remains in relatively good health supported by low unemployment levels, reasonable valuations relative to longer pre-COVID averages, and a less severe path of inflationary pressures.
Additionally, Australia has robust terms of trades, driven by hard commodities and energy, which we expect to at least continue in the short to medium term.
We view the US dollar as currently stretched, and expect the Australian dollar to rebound, favouring our domestic equity positioning.
Also on Livewire, Oreana Financial Services chief investment officer, Isaac Poole, said Oreana was biased toward Australian equities and quality companies.
While we think equity beta will perform OK over the next 12 months, the challenge will be for companies to hit their earnings targets in the near-term, and that will probably favour higher quality companies.
(Fun fact: 'Beta' is a measure of how reactive an ASX share is to market movements. For example, an ASX 200 share with a beta of one generally moves in line with the market. Lower than one means lower volatility, higher than one means higher volatility.)
