There was a heavily-anticipated RBA interest rate cut yesterday, with the Australian central bank reducing the official cash rate by 25 basis points (0.25%) to 3.85%. In light of that, there are a few ASX shares that look very appealing to me.
As we've seen in recent times, rate cuts don't automatically mean share prices are going to rise. For starters, investors may already have expected the rate cut and factored that in with share prices in prior weeks and months.
But, there are a few ASX shares that look particularly interesting to me following the rate cut. Let's get into it.
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Rate cuts boost ASX share profitability
I think a key beneficiary of the RBA interest rate cut will be real estate investment trusts (REITs) and other similar businesses.
For commercial property owners, the rate cut may help improve the rental profits. REITs are paying materially more to lenders now than they were a few years ago when interest rates were close to zero. The rate cut could also lead to larger distributions for investors, if they stick with the same distribution payout ratio.
I'm thinking of businesses like Rural Funds Group (ASX: RFF), Centuria Industrial REIT (ASX: CIP), Charter Hall Long WALE REIT (ASX: CLW), Charter Hall Retail REIT (ASX: CQR) and Dexus Industria REIT (ASX: DXI).
Businesses involved in construction could also get a benefit from the lower interest rate including Brickworks Ltd (ASX: BKW), Mirvac Group (ASX: MGR) and Stockland Corporation Ltd (ASX: SGP).
Asset prices to increase after the RBA interest rate cut?
As a double bonus, businesses like REITs with significant assets on their balance sheet could also benefit. When interest rates are cut, it could lead to higher asset prices.
As Warren Buffett once explained:
The value of every business, the value of a farm, the value of an apartment house, the value of any economic asset, is 100% sensitive to interest rates because all you are doing in investing is transferring some money to somebody now in exchange for what you expect the stream of money to be, to come in over a period of time, and the higher interest rates are the less that present value is going to be. So every business by its nature…its intrinsic valuation is 100% sensitive to interest rates.
He noted higher rates can lower asset prices, and the reverse is true as well – lower rates can boost assets.
I'm not expecting REIT share prices to double any time soon, but I think they are well-placed to perform well in the medium-term, regardless of what happens with the global economy. I think there's a fair chance the RBA could cut interest rates again in the next 12 months.
This may help the profit of ASX retail shares exposed to discretionary spending too. However, many ASX companies' share prices seem to have already risen, such as Nick Scali Limited (ASX: NCK) and Temple & Webster Group Ltd (ASX: TPW), so they don't standout as much as REITs.
