Dividend cuts the theme for 2020

The slowing global and domestic economy over the past year continues to create challenges for the Reserve Bank of Australia (RBA) and the Government. Policy makers will need to remain alert and deliver additional effective and timely stimulus to address the challenges ahead. This creates opportunities for investors as they reflect on their return expectations across the various asset classes and their risk tolerance.  In short, investors will need to anticipate even lower yields in the year ahead including dividend cuts. 

The International Monetary Fund (IMF) has consistently downgraded global growth for calendar year 2019 from 3.7% over a year ago to 3% earlier this month. This will be the slowest economic pace since 2008-2009 creating challenges for investors. 

The ongoing slowing global economic activity is not being helped by the trade war between the US and China, the largest and second largest respective economies globally. The supply chain disruption has impacted trade flows and it can always escalate further whereby slowing global trade even further. Globally, these trade tensions and geo-political events impact business conditions and sentiment. Further, the ongoing Brexit drama will impact both the UK and EU economy. This uncertainty looks set to continue for now despite the many fatigued Brexit watchers. Hence, global central banks will continue to deliver even further accommodative stimulatory policy to help cushion the downside risks to global growth.  

Slowing global trade is not ideal for the Australian economy which is effectively a resource (bulks, metals), energy and food exporter. However, the services part of the Australian economy has been expanding over the past decade whereby education, tourism and financial services are becoming significant parts of the economy and should hold up well with a lower AUD.

Also, some of the past private sector investment is also helping in a number of ways. The very large CAPEX investment in our resource sector over the past decade was a very significant stimulus to the domestic economy at the time and while the resource investment boom is behind us, the export orientated resource sector will benefit from this investment for decades to come. The dividend for this investment will continue for some time. Further, the government will benefit from the corporate profits that are increasingly derived from this investment.

The housing construction boom that followed the resources boom is now well behind us. The sharp fall in dwelling investment over the past three years has been driven in part by tighter credit conditions for investors (prudential regulation), broader tighter mortgage lending conditions post the Banking Royal Commission and household confidence to name a few. Going forward, there will be some additional stimulus measures that will be required to cushion the downside risks. 

The recent recovery in median house prices in the major Melbourne and Sydney markets are welcomed to help sentiment recover following recent rate cuts, however house prices have come off very elevated levels. While house prices are a very emotive topic, the fall in median prices from the highs seen a few years ago has partly addressed some of the extreme housing debt liabilities ratios that the Australian market has been known for by global investors.

On the fiscal side, the tax cuts have been the single largest household income boost for some time. It is effectively higher incomes with immediate effect. Interestingly, it appears that most of this tax cut has not flowed through to retail sales, as household have preferred to retire debt and increase savings. Additional targeted fiscal stimulus would be required in the year ahead and one would anticipate some announcement post the Federal Budget in May 2020.  

Further, the independent Fair Work Commission increase of the minimum wage to 3.0% annually  earlier this year (following the 3.3% and 3.5% increases the following two years) were timely. These cumulative increases in recent years are significantly larger than inflation and will transfer into the broader economy. It would be expected that these “greater than CPI” increases will continue in 2020.

Also, the boom in government supported infrastructure spending (both at the federal and state level) will continue to absorb some of the softening housing for some time. With the 10-year government bond yield now just below 1.15%, bond yields are broadly around historical lows to fund future projects. Clearly, the current low rate bond environment requires fiscal discipline at all times, which is monitored by the various global rating agencies.  

On the monetary policy front the RBA looks set to drive the cash rate even lower from the current historical low of 0.75% to 0.5%. Many commentator point out that the marginal benefits of lower rates diminish. This is a valid point however the stimulus is still required and Australia is finally catching up to challenges that other key economies have been dealing with. The lower rates will support the labour market and help encourage further investment. It will also support the current long standing SMSF investments in equities for the dividend (that will be cut) and the very precious imputation credit. The subdued inflation conditions and slowing global growth allow for even lower rates going forward. This will be additional relief for households with existing mortgages who are  effectively pre-paying their debt at a faster rate. A further boost for household savings. 

In summary, a combination of household income growth (tax cuts, wage rises above inflation rate), the ongoing large scale infrastructure programs, even lower cash rates and a lower AUD all combine to help cushion the global slowdown and help drive investment and confidence going forward. Risk assets (equities, sub investment grade bonds, hedge fund alternatives) have delivered very strong returns year-to-date (circa 20%). Investors have effectively received two years return in the first ten months of the year. A lower return expectation is advisable and some profit taking is prudent. Dividends will be cut and volatility will become more elevated unless global policy stimulus is even more pre-emptive and aggressive. With higher volatility anticipated your reaction to your investment portfolio is behavioural. For the long term investor (greater than five year time horizon) they will still need to be invested through the cycle ahead despite some challenges ahead.  

George Boubouras

CIO  |  Atlas Capital
Director  | Salter Brothers Asset Management (SBAM)

Plenty of fiscal stimulus heading the economy’s way

The slowdown in the global and domestic economies over the past year creates challenges for the Reserve Bank and the federal government.

Policymakers will need to be alert and deliver effective and timely stimulus. Slowing global economic activity is not being helped by the trade war between the US and China. Slowing global trade is not ideal for the Australian economy, which is effectively a resource (bulks, metals), energy and food exporter. Increasingly, both education and tourism are becoming significant parts of the economy and should hold up well with a lower Aussie dollar. Past private-sector investment is also helping. The very large CAPEX investment in our resource sector over the past decade was a significant stimulus to the domestic economy at the time and while the resource investment boom is behind us, the export-orientated resource sector will benefit from this investment for decades. Further, the government will benefit from the corporate profits that are increasingly derived from this investment.

The housing construction boom that followed the resources boom is now well behind us. The sharp fall in dwelling investment over the past two years has been driven in part by tighter credit conditions for investors (prudential regulation), tighter mortgage lending conditions post the financial services royal commission and limited increases to household incomes and confidence — to name a few.

Going forward, there are some timely stimulus measures that will be required to cushion the downside risks. On the fiscal side, the upcoming tax cuts (for which the government clearly has a strong mandate) will provide the single largest household income boost for some time. They will effectively deliver higher incomes with immediate effect (assuming the Senate aligns). Further, the independent Fair Work Commission increase of the minimum wage to 3 per cent annually (following the 3.3 per cent and 3.5 per cent increases the following two years) is timely. These cumulative increases are significantly larger than inflation and will transfer into the broader economy.

Also, the boom in government-supported infrastructure spending (both at the federal and state level) will continue to absorb the softening housing-cycle capacity for some time. With the 10-year government bond yield now just below 1.5 per cent, bond yields are at historical lows. Clearly, the low rate environment requires fiscal discipline at all times. The RBA looks set to drive the cash rate even lower, in part to support the labour market and encourage further investment.

It will also support longstanding SMSF investments in equities for dividend and the imputation credits. The subdued inflation conditions allow for even lower rates going forward. In summary, a combination of household income growth (tax cuts, wage rises above inflation rate), the ongoing large-scale infrastructure programs, lower cash rates and a lower dollar all combine to help cushion the global slowdown and help drive investment and confidence going forward. A supportive Senate and accommodative RBA is now required.

George Boubouras

CIO  |  Atlas Capital
Director  | Salter Brothers Asset Management (SBAM)

As seen also in Herald Sun, Friday June 7, 2019.

Lower cash rates not good news for everybody


Over the past six months the market has increasingly been conditioned to anticipate further rate cuts following downgrades in both the growth and inflation outlook. The futures market has priced in 50 bps of rates cuts from the Reserve Bank of Australia (RBA) before year-end to take the official cash rate to a new historic low of 1%. Of note, the last rate “hike” was nearly nine years ago, November 2010 when rates were increased to 4.75%.

Australian households have slowly come to terms with the low interest rate environment over a number of years now.  Cash rates have been at historic lows since the last rate cut in August 2016 and this has been an unusually long period of steady rates. Further, the low rates impact both borrowers and savers for obvious reasons. With more rate cuts coming some investors will be forced to search elsewhere and take on additional risk for return. As for the deeply indebted borrowers, it will be some respite as they can continue to pre-pay their mortgages at a faster pace.

This of course assumes that banks will pass on all, or some of, the rate cut for borrowers. One would expect a portion of the rate cut to be passed on to enable the banks to protect them from the current margin squeeze. This will no doubt leave them in the firing line regarding optics as we are in an election year and politics is after all a brutal sport. Further, a delay in passing on the rate cut will also be a PR challenge for the banks who have been dealing with multiple challenges at once. The banking sector Royal Commission we “had to have” has delivered some unintended consequences.

Domestic economic activity has also slowed reflecting the global growth downgrades since October 2018. Business conditions have been notably softer this year after holding up well in recent years. The key exporting sectors (resources and some services such as education and tourism) and infrastructure investment (both private and public sector) are holding economic activity up and replacing some of the housing sector weakness.

At the consumer level, sentiment remains weak which has been reflected in the lack of large item purchases on the back of some negative wealth effects from the softening property sector. Despite wages actually growing ahead of inflation (CPI) on an annualised basis, the narrative does not reflect this, partly due to the lag in the recovery of wages to corporate earnings. Further, the scope for significant wage rises in a low inflation world is an issue for key developed economies globally. That is why lower mortgage payments (via rate cuts) combined with tax cuts can be an effective way to deliver household income growth.

There are some clear policy challenges ahead. The weakness of the housing market is the critical segment of the economy that needs to be managed. The RBA has engineered over many years the required slowdown it was looking for. Initially via stricter prudential standards to property investors and non-Australian residents back in the 2014-16 period. Post the banking sector Royal Commission the access to credit for new, or refinancing, loans has become significantly tighter. The one key positive is that the labour market remains tight for now.

With lower cash rates ahead, combined with some careful monitoring of the housing slowdown from the RBA, the domestic economy can steer through some key risks. Global growth is now at the slowest pace since the GFC. This will impact the degree of recovery and demand for our exports. The lower cash rates are part of the required policy to help steer our economy through a slower growth outlook. It will help those with a mortgage to service. For retirees, that unfortunately means lower term deposit rates ahead.






George Boubouras

CIO  |  Atlas Capital
Director  | Salter Brothers Asset Management (SBAM)


As seen also in Herald Sun, Thursday May 9, 2019.

Slowdown a blow, but there are green shoots for wages



While a slowdown in economic momentum is not really a big surprise, the degree of the current sharp slowdown in household consumption surprised financial markets.

The slowing economic conditions were confirmed last week with the weaker than anticipated December quarter GDP figures with the annual growth rate of real GDP now at 2.3%. Consumers holding back on spending, the ongoing impact of the drought, the tapering of the high levels of mining capex programs and the sharp downturn in residential construction all contributed to the weaker than expected numbers.

The slowdown in economic momentum has now fallen from around 3.8% annualised in the first half of calendar 2018 to around 0.9% in the second half.  Therefore the average annual real GDP for 2018 was 2.8%, a reasonable outcome. However, the sharp decline in consumption, a function of the slowing housing construction cycle, in late 2018 is clearly a concern if this trend continued.

Looking at the positives within the numbers, the price and wage readings within the GDP breakdown are rising in the second half of 2018. This is an important point to highlight as it is not getting the attention in the broader debate. The rise in profits in recent years is finally delivering on the wage front. It is a low base, but just like the recovery in the profit cycle, the early signs of sustainable wage growth is underway.

However, like many other economies around the world that are exhibiting strong employment growth, there are increasing expectations for wage growth to be higher than the current rise in inflation. This is not ideal for productivity going forward. Ultimately sustainable wage growth is a function of a strong profit cycle. While the current lag is frustrating, the momentum in wages growth is beginning to finally accelerate.

When various political and economic commentators discuss the lack of wage growth in recent years, it is fair to say that some amplify certain parts of the debate given the emotive nature of wages at the household level. It tends to be low hanging fruit and creates the predictable instant emotional reaction. Unfortunately, the current economic debate is not as rigorous as it needs to be.

While the annual wage growth rate in Australia is now just over 2%, and confirmed to be growing from the recent national accounts, there are other parts of the income debate to be considered. Income tax cuts combined with lower interest rates (ie. lower mortgage servicing costs) are also important factors to reflect on the total household income. While falling house prices are not ideal for wealth effects going forward, there are good signs of reasonable growth in household income via wages, tax cuts and lower mortgage servicing costs. Further, any signs of a further severe slowdown in the housing cycle potentially impacting employment, will result in the RBA delivering additional stimulatory rate cuts.

The income debate must also include the minimum wage which was increased by a healthy 3.5% mid last year by the independent Fair Work Commission. The strong profit recovery can sustain this increase and it may do so again this year. The independent process looks like it is delivering to households that need it most.

While wealth effects will be challenged well into 2020 on the back of falling house prices, there are some signs that total household incomes are starting to consolidate following fiscal (tax cuts), monetary (lower mortgage rates), wage growth (improving profit cycle) and the higher than CPI increases in minimum wage via the independent commission. However, expectations at the household level are high and while they do not set policy, they appear to be demanding greater income growth than the economy can sustainably deliver.





George Boubouras

CIO  |  Atlas Capital
Director  | Salter Brothers Asset Management (SBAM)



As seen also in Herald Sun, Thursday March 14, 2019.

Thoughts of RBA rate cut a scenario few saw on horizon



The downgrades in both the Australian growth and inflation outlook by the Reserve Bank of Australia (RBA) last week have amplified the prospect of a potential rate cut later this year. Who would have thought that with cash rates at 1.5%.

The RBA shift to a neutral policy setting stance is telling in that the commentary and forecast downgrades communicate that the RBA can see some elevated risks rising from the housing slowdown. This outlook obviously impacts valuations across all asset classes. Afterall, markets are effectively pricing in future prices and interest rate setting expectations are critical in establishing where markets should trade going forward.

A downgrade to consumption would not surprise many as the two largest housing markets, Melbourne and Sydney, have continued to come off their lofty peaks of 2017. Weaker equity markets in 2018 have also led to perceptions of negative wealth effects. Not the best combination for sentiment at the household level.

Despite business condition (in aggregate terms) holding up, it is clear Australian households are holding back from large item purchases.  Unfortunately, the current slowdown to the housing cycle for Australia is occurring with a global backdrop of slowing economic activity. The two downgrades to global growth by the IMF since October have reflected the slowing emerging markets from a year ago, and also the slowing China economy.

Europe is also slowing considerably and they have issues leading into Brexit and there will be  implications for confidence. It will be in their interest to try to be a little more accommodative to the difficult wedge that Britain is currently in. A hard Brexit is bad for both. However, it will be relatively worse for the UK. The predictable hard line coming out of Brussels remains problematic.

On the positive side, the China stimulus that started last year is progressive and very targeted. The stimulatory fiscal and monetary policy will help cushion the slow down and continue to help drive volume growth in our resources. This is good for Australian export volumes. However, 2019 looks like a lower global and domestic growth pulse and this will imply caution for investors. Of note, the Australian 10-year bond has rallied strongly year to date and is now yielding a very low 2.1%. A clear sign of slowing conditions and little signs of price pressures. Rates this low will be tempting for Canberra to increase borrowing. Ultimately, debt funded projects need to be a very disciplined process. This can be challenging for some.

The US economy is set to be the big contributor to global growth for 2019. Growth in the largest economy has been strong over the past year and US earnings have reflected this. In broad terms it appears that US growth will expand again this year but at a slower pace vs 2018. Therefore, anticipate an even lower AUD. This will act as a stimulatory driver for our economy and exposure to USD assets or Australian companies with USD earnings will be positive.

The RBA have signalled some challenges ahead given the continued housing sector slowdown. Infrastructure spending programs currently underway will help. The message is clear – if the housing sector slowdown worsens and impacts employment, rate cuts will likely follow. Something we all thought unlikely a year ago.




George Boubouras

CIO  |  Atlas Capital
Director  | Salter Brothers Asset Management (SBAM)



As seen also in Herald Sun, Tuesday February 19, 2019.


Be aware, take some risks and remember to sleep at night



Following a volatile December 2018 quarter the negative returns globally and domestically for risk assets what does the outlook across the various asset classes look like for the year ahead?

The cash rate looks likely to remain on hold at 1.5% for 2019 by the RBA. The ongoing weaker house prices combined with the post royal commission banking landscape will continue to limit housing credit growth. Further, credit conditions have already tightened over the past year for various reasons. Those who require credit are not getting access to it or are pushed towards alternative lending arrangements at much higher rates. Given this backdrop, the prospect for higher cash rates looks very unlikely in 2019. Higher cash rates will simply amplify the negativity already underway within the housing sector.

Fixed income is the essential defensive asset class for investors. They tend to have lower correlations of returns through the cycle vs equities. Exposure to bonds is essential to lower the overall volatility of your portfolio. This includes a blend of low yielding but highly rated and defensive sovereign bond funds, investment grade credit funds and some high yield (sub-investment grade) funds. Note hybrids are not a substitute for fixed income and never will be. They are just too subordinated and exhibit many equity characteristics. Therefore are not contributing to lowering the volatility of your portfolio like traditional fixed income would.

The weakness in equity markets in the previous quarter lead to negative returns for calendar 2018, which included the dividends. This negative return trend across many developed equity markets followed the first half 2018 emerging market equity rout that started in part to the stronger USD over a year ago. Ultimately equity markets are a good indicator of future prices and therefore confidence. Afterall, the earnings have been expanding. In the case with the US the earnings cycle was actually very strong in 2018, peaking in the September quarter.

Equity market valuations are now well below their long-run historical benchmarks and are once again compelling for investors. There will be ongoing elevated equity market volatility and markets continue to adjust to global growth downgrades and the uncertainties from US-China trade wars. Going forward, earnings will be expanding at a lower rate and the elevated market volatility is reflecting this. For the average Aussie investor, they would have at least 50% of their equity exposure in global equites. Over the long-run this is an ideal way to diversify your equity exposure into markets that offer growth in sectors not reflected locally. Home bias tends to work against you over time.

Exposure to some global property and infrastructure via some well established funds will remain part of the asset allocation at much smaller weightings to fixed income and equities. Further, exposure to alternative such as private equity, venture capital and some well credentialed hedge fund managers are appropriate and all help diversify the asset allocation, particularly towards some non-listed exposure.

For the year ahead market volatility is set to remain elevated. Your risk appetite and expected returns are important. This drives your asset allocation weighting across the various asset classes. It is behavioural therefore being aware of changing market conditions and knowing your risk tolerance is important. You need to sleep at night.




George Boubouras

CIO  |  Atlas Capital
Director  | Salter Brothers Asset Management (SBAM)



As seen also in Herald Sun, Thursday January 17, 2019.


Festive season a time for reflection and re-evaluation


As we approach the Christmas holiday break there is the inevitable analysis and forecasting for the year ahead. Despite some cynics, forecasting is an essential part of the investment process and helps investors to reflect on their portfolio asset allocation, their target expected returns and how much volatility they can tolerate to achieve their financial target.

A key feature of 2018 has been the de-synchronisation of global growth activity. That is, the US economic momentum has been stronger, however, other key economies are growing at a softer pace. Hence the recent IMF downgrades of 2019 global growth to 3.7%, down from 3.9% previously.

The December quarter is obviously very important for retail sales and the period will have a notable impact to economic activity. In the US, the retail holiday season frenzy starts this Friday, the day after Thanksgiving. This is also known as Black Friday. The worlds largest economy has seen some very robust economic growth this year, in part due to the tax cuts a year earlier, and the near full employment. US earnings have also been very strong with the recent US quarterly reporting period confirming the surge in US corporate profits. However, it would be fair to say that US earnings will not grow to the same extent in 2019. The higher US rates and USD will act as a partial brake in the year ahead.

Domestically, there are limited tailwinds for notable acceleration in discretionary retail sales. The well flagged fall in median house prices in the key Melbourne and Sydney markets will impact household wealth effects. The lending credit crunch currently underway post the royal commission imply lower housing finance, therefore lower building approvals. The low unemployment rate is supportive however a key driver for demand for housing, immigration levels, appears to be in line for some cuts in the year(s) ahead.

The contribution of exports and some key infrastructure projects domestically have been the main contributors to economic activity this year. Fortunately, this theme is expected to continue in the year ahead. The challenge will be for the RBA to keep the official interest rate at the historic lows of 1.5%. The slowdown discretionary retail sales, falling median house prices and tighter bank lending conditions all imply the RBA will need to be on hold for the foreseeable future. Raising rates in the next year will amplify the worsening median house prices.

The challenges for the Australian equity market in 2019 will be the higher funding costs globally for companies as the US continues to raise rates, a slowdown in our key trading partners (China) and any worsening of the trade wars which impact a trading economy like Australia.

On balance, maintaining an overweight to equities given the recent market correction, plus some quality diversified property funds, (A-REITs) and non AUD assets for the year ahead is the preferred recommendation given the balance of risks. Remember that equity markets are volatile, and your time horizon needs to be a three year plus outlook. Further, just like most years, investors should anticipate some negative return months in 2019. The recent October market correction has seen valuations become  more compelling.

When you get some time to reflect, the holiday break is a great time to thoroughly review your asset allocation. It is an ideal period to spend reviewing your whole portfolio whilst you rest and recharge at the beach. Your asset allocation needs to reflect your expected returns and your tolerance for market volatility over time.



George Boubouras

CIO  |  Atlas Capital
Director  | Salter Brothers Asset Management (SBAM)



As seen also in Herald Sun, Tuesday November 27, 2018. 

Robust greenback helps fuel continuing market volatility


The month of October has seen a spike in equity market volatility with the All Ords down nearly 10% from their highs earlier this year. Market confidence was high last quarter and the recent strong August reporting period delivered a reasonable result for corporate Australia.

Context is important and there have been a number of factors globally and domestically that have resulted in the recent elevated market volatility.  There has been a significant divergence this year between the emerging markets and the developed markets. The strong US dollar year to date has led to a very deep and prolonged emerging market rout that has worsened as the year has progressed.

The improving US economic momentum following many years of low rates, the fiscal stimulus of late 2017 with the US tax cuts and the trade wars have all combined to drive a higher US dollar and lead to an acceleration in US economic activity and therefore improving US corporate earnings. This is happening at a time when global growth momentum is slowing from the recent peak. This has been verified by the IMF which recently lowered their forecasts for global growth.

Following years of synchronised global growth (and synchronised global policy stimulus) we have moved into a period of de-synchronised global growth with the worlds largest economy, the US growing strongly and the rest of the world effectively slowing. Further, the rising US Fed Funds rate is reflecting the accelerating US economy. The resulting strength in the USD has placed significant pressure for some emerging economies that service their liabilities in USD. Further, the trade wards are starting to impact supply chains and this leads to a slow-down in global trade, impacting shipping, which further amplifies the negative impact for emerging economies.

When equity valuations are no longer cheap you tend to get a rotation from investors into more defensive assets following many years of equity gains. This occurred increasingly in the September quarter. Further, investor sentiment has been impacted with the global trade wars between the two largest economies, the US and China. With the US quarterly reporting period delivering very robust earnings numbers, while the rest of the whole is showing slowing conditions, there will continue to be a mixed investment landscape and investors beginning to doubt the appropriate valuation for future earnings. This therefore leads to increased market volatility which looks to remain elevated into 2019.

In Australia our equity valuations have not been compelling enough for global investors and local institutional superannuation funds have increased their global equity exposures vs domestic equities significantly over the past decade. Domestically SMSF are the core default investor in Australian equities, in part due to the fact of the preferential tax treatment of income for those in pension phase. The dividend and the franking will continue to be more compelling for the domestic investor for some time and they would simply need to ride out market volatility given they are invested like a value manager, over the long run cycle. The silver lining for local investors is a lower AUD will broadly act as a cushion for the local economy. For companies that receive USD earnings, they will obviously benefit even more.

As we head into year-end, global sentiment will continue to be impacted by trade wars, global de- synchronised growth, US interest rates, higher energy costs to name a few. While elevated equity market volatility will continue for some time with this global back drop, your investment timeframe and asset allocation are important and should reflect your risk appetite as you diligently work to achieve realistic expected returns.



George Boubouras

CIO  |  Atlas Capital
Director  | Salter Brothers Asset Management (SBAM)



As seen also in Herald Sun, Tuesday October 30, 2018. 

Weaker house prices imply Steady cash rates ahead


The Australian cash rate has now been at the historic low of 1.5% since August 2016 and looks set to remain there for some time. This is due, in part, to weaker house prices.  Financial markets continue to actively scrutinise the timing of the next move with implications for the economy and ultimately impacting the returns of your portfolio. Bottom line – it is too early For the RBA to raise rates domestically despite other global central banks raising rates this year.

While business conditions are trending well the challenges policymakers have is to engineer a soft housing landing. They also need to be mindful of the banks wholesale funding targets (and subsequent margin pressure) in this post Royal Commission regulatory world.

The benefits the Australian economy received from the very strong domestic big four banking system during the global financial crises (GFC) and credit crunch in 2008 is well behind us now. While it is an oversimplification, the strength of the big four bank system helped cushion some of the downside of the unforgiving GFC. However, this was also the reason they could not be such a dominating part of the economy going forward. Global funding costs for banks have been re-priced.

The demerger cycle of the major banks has been underway for a number of years. It started slowly and now the momentum has picked up with both regulatory and market reasons driving this agenda. The higher regulatory capital requirements for non-core banking business units and the higher cost-to-income were the early signs of this asset sale phase. Trustee businesses, wealth managers, fund managers, insurance and superannuation are just some of the areas the major banks have sold businesses in recent years.  This will continue.

The higher wholesale funding hurdles for the banks have also created some challenges. To maintain their net interest margins, they are pressured into raising mortgage costs to borrowers outside of the official RBA rate announcement cycle. They need to pass on their higher funding costs otherwise they are not looking after shareholders. However, the banks will continue to have a balancing act with general sentiment.

The higher borrowing costs from the banks outside of the official interest rate cycle is a key reason why the RBA is limited. Raising rates now with the housing market cooling can significantly elevate risks for the housing market. The RBA has effectively engineered a slowdown of the housing sector from prudential regulation. Requiring changes to investor vs home borrower conditions, regulatory capital adjustments and capping non-domestic residents from obtaining access to mortgages have all helped slow down the housing cycle momentum in recent years.

This has now created some existing challenges for parts of the domestic economy. The RBA would be happy to see a soft landing in the main housing markets of Melbourne and Sydney given the very strong median house prices we have witnessed over the past decade when the GFC was at full swing.

Like the regulator, global investors have always looked at the Australian housing price boom with some concern. It is clear that prices could not accelerate at the rate they did and some consolidation is a good outcome for longer term stability. Further, the robust population growth for Melbourne over the past decade will unlikely happen at the same rate again.

Engineering a soft landing for the housing sector is not a simple task. Historically it has been a very difficult proposition for regulators. The RBA have over a number of years applied various prudential processes that have worked well to date. Increasing the official cash rate now, or in the next twelve months, would not be a prudent move when house prices are falling.  The lower AUD will act as a cushion to the domestic economy.  The RBA needs to remain alert and work diligently to ensure that investor confidence remains.



George Boubouras

CIO  |  Atlas Capital
Director  | Salter Brothers Asset Management (SBAM)

Salter Brothers Asset Management Pty Limited: ABN 33 119 833 760, AFSL 308971 is the trustee of all Salter Brothers Funds.