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Hewison Private Wealth - Insights
Hewison Insights
Australian Banks

When the cash rate comes down, equity values go up

Andrew Hewison
Managing Director
12 Dec 2011

I apologise upfront if it seems we continue to sound off the value in the market at the moment, but rarely does it get better than this.

You may be wondering what has prompted the market advertisement this week??  Last week The Reserve Bank of Australia lowered the official cash rate by .25% down to 4.25%. In short, this now means that the returns from fixed deposits and other fixed income instruments just became less attractive.

If you’re invested with one of the major Australian banks, a one year term deposit will now pay you 5.20% p.a. two years 5.25% p.a; and three years 6.25% p.a. – but these returns are nothing to get excited about.

In contrast, if you invested in the underlying company itself, the average grossed up dividend you would receive is around 10.87% p.a. This is the income return alone, it does not account for ANY projected capital growth in the share price.

Only this morning I spoke with a client who said that she felt safer investing in a fixed term deposit of a major Australian bank than the underlying company itself. She has every right to feel this way due to the extension of the Government guarantee on term deposits up to $250,000 (from February 2012). However, this will not last much longer.

Under normal circumstances the security of a term deposit is directly pinned on the security of the underlying issuer. If the bank goes under, so too will the term deposit – although very unlikely in the case of our Australian banks.

However, it’s not just the banks that represent amazing income value in the market place. Telstra provides a grossed up dividend of a whopping 12.6% p.a, QBE 9.5% p.a, Wesfarmers 9.4% p.a and Woolworths 7.4% p.a.

It’s a rocky road out on financial markets. The swings in asset values from day to day are violent, but these fluctuations are based on fundamentals, as in actual company performance. If you are a long term investor (you all should be), these short term dips provide nothing more than an opportunity.

If share investment is right for you, my advice is simple:

1. Invest wisely and be informed

2. Accept that growth assets do go up and down

3. Invest with the understanding that you will not sell for 10 years, and

4. Tune out to media commentary, they pray on negativity…




Hewison Private Wealth is a Melbourne based independent financial planning firm. Our financial advisers are highly qualified wealth managers and specialise in self managed super funds (SMSF), financial planning, retirement planning advice and investment portfolio management. If you would like to speak to a financial adviser on how you can secure your financial future please contact us 03 8548 4800, email info@hewison.com.au or visit www.hewison.com.auPlease note: The advice provided above is general information only and individuals should seek specialised advice from a qualified financial advisor. The views in this blog are those of the individual and may not represent the general opinion of the firm. Please contact Hewison Private Wealth for more information.