Credit Suisse: Australian Stocks Will Rally In 2015, Helped By Lower Interest Rates

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Australian equities are set to run through 2015 with a double digit growth rate, says Credit Suisse market strategist Hasan Tevfik.

Driving this forecast are a number of assumptions, including that interest rates will remain low, or get even lower.

Credit Suisse is currently forecasting a cut in the official cash rate (currently 2.5%) in 2015, one as early as March, in reaction to low economic growth and high unemployment.

“We think there’s prospects of interest rate cuts in Australia,” Tevfik says. “And if we get a 50 basis point (0.5 percentage point) cut, the market is going to love it.”

It’s already cheaper for companies to raise funds by using debt rather than issuing more equities to shareholders. They pay around 3.5% interest on debt and new shares costs around 4.5%, which means that companies haven’t been issuing more shares.

“It makes much more sense to raise money in the debt market than the equity market,” Tevfik. “It’s going to be awesome for bankers.”

Demand for equities will come from this lack of supply.

“So this is an important reason we think prices are going to rally into next year,” Tevfik says. “There’s literally not going to be enough equities issuance to absorb this demand. Right now companies have the option of raising financing at a much cheaper rate in a debt market than the equity market.”

Another major force is self-managed super funds, which now control about one-third of the $1.8 trillion in superannuation funds.

These “Selfies”, as Tevfik calls them, already control about 16% of the Australian shares and this number will probably rise in 2015.

Tevfik says the Selfies will spend about $1 billion a month on buying Australian shares next year.

Selfies love shares because they are one of the few assets which offer income as well as the prospect of capital growth.

Australian companies are currently increasing their cash flows, by cutting costs and capital expenditure, which will allow them to pay more dividends or buy back stocks.

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