6 February 2000
I WAS slightly but not unpleasantly surprised by the 0.5 per cent rise in short-term interest rates. It clears the air, allowing the RBA to adopt a neutral stance.
An immediate instinct of many people will be to fix the interest rate on loans. Expect advertising on this because you are paying a premium to reduce uncertainty and the banks will receive a higher margin.
A distinction must be made between interest rates on short-term money and those on 10-year bonds. A rise in interest rates at the short end is positive for bank earnings. Banks will follow the CBA's lead in passing the rise on, but their cost of funds has already gone up so their margins will benefit.
Rising short-term rates subdue an economy. Bond market investors are the undertakers of the investment world. They are happiest when the economy is slowing down or dead because this implies lower inflation, which makes their real return higher. This is why 10-year bond yields have fallen since the RBA announcement.
It will mean a small increase in the cost of money for gearing in to shares. This rate rise increases the theoretical prices of the options I sell by about 2pc a year. In addition, I suspect a flatter yield curve is worth about 3 to 5pc more to the value of bank shares. And that's why I'm relaxed about the rate rise.
More perplexing is the rise and rise of News Corp. It seems local pooled fund managers are holding the shares at about 90pc of index weighting. If they go up, they outperform people who haven't got them. If they fall, they outperform index funds. The interim result is expected to be disappointing but US investors are making the running. News Corp is running on rumour and innuendo about the potential of its asset base, fuelled by comparable valuations on Internet stocks and potential deals.
As in 1987, it is the quintessential bull market stock. The difference this time is that far from being dragged up with it, conventional shares are falling in a bear market.
How long will this process continue? We are seeing the third most extreme difference in 100 years. One day, convergence will occur. In 1987, News Corp fell about 75pc. It may not be as much this time, but it will not be pretty. No wonder fund managers are shaking their heads.
Australia's largest company is also one of its least understood. No professional likes investing blindly, but who can ignore it?
I've bought a few near-dated call options as a synthetic way of covering the upside without exposing clients to the full downside risk.
* John Aldersley is the Managing Director of Direct Portfolio Services Limited, a professional funds manager. John Aldersley and DirectPortfolio may have an interest in securities mentioned above. Neither John Aldersley nor DirectPortfolio provides specific stock advice. For information about DirectPortfolio, register at our website at www.directportfolio.com.au, send an email to info@directportfolio.com.au or phone 0299296700.
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