How low rates and stimulus lifted Aussie equities through 2019

2019 will be remembered as a year in which a lot of stimulus entered the Australian market.

Not only have we experienced three rate cuts from the RBA, with the cash rate down to 0.75% (and the potential for further reduction early next year), we have witnessed the effects of tax stimulus as well as some increase in fiscal expenditure. Overseas movements have also had a beneficial impact on the local market, with the increase in support from central banks being positively felt here.

The combination of these influences explains why the Australian market has performed so buoyantly, running especially hot and delivering a strong year of returns.

However, there are some issues coming through in the market which haven’t been so favourable.

For example, although interest rate-sensitive sectors (such as infrastructure and REITs) have been performing very well as a consequence of these rate cuts, the banks, with their net interest margin - the difference between the term deposit rates and their mortgage rates - have come under pressure due to declines in the latter.

Elsewhere, lower yields have meant that investors have been forced out of traditional income-generating asset classes (such as term deposits) and into higher risk areas such as equities in an attempt to maintain cash flow from their investments.

Looking ahead, we'll have to wait and see what form the next leg of the Reserve Bank’s stimulus package will take, but also, rather importantly, whether company profits can start to rise again as we move through into 2020.

Despite a significant rally in the market over the course of the past year, profitability largely failed to respond in-kind, and analysts will be watching this space closely throughout the holiday period. If we arrive at February without any improvement, investors may need to moderate their outlook.