A cautious Reserve Bank has shifted gears once again, but this time it took nearly everyone by surprise as it chose to sit it out on a cash rate cut – for now.
It’s rare for the central bank to go against the weight of market expectations in such a dramatic way, so either RBA governor Michele Bullock is acting with excessive caution or market economists have been getting too optimistic over how Australia is tracking in its inflation fight.
It’s a bit of both, but it’s the RBA’s call in the end.
For households and business – don’t worry, your rate cut is coming, you’ll just have to wait until next month. Or possibly September.
Heading into this meeting, markets were full of optimism. Inflation was tamed and Donald Trump’s tariffs were losing their bite. As well a 25 basis point cut for July, they were tipping the cash rate to be sitting at closer to 3 per cent by the end of this year (from 3.85 per cent currently). That would have been three rate cuts.
These hopes have tempered a little. It’s now a slower path to cutting rates. The 3 per cent destination remains, according to market pricing, but pushed into early next year. There’s at least another two cuts still factored in for this calendar year, the third now in February or March.
Bullock’s central bank is getting worried that 50 basis points of interest rate cuts so far could start to stoke inflation again. That comes even with the economy barely running at its potential.
The RBA is clearly approaching the glide path back to lower interest rates with an abundance of caution. It doesn’t want to see a situation such as in the UK or even the US, where the inflation fight has lost momentum after an even steeper round of cash rate cuts.
“We are not debating where we think directionally we’re going,” Bullock says, as long as inflation and employment remain in check. “We do see ourselves on an easing path, the question is timing”
The bank’s efforts so far have been a “sensible, cautious approach to lowering interest rates,” she added.
For this meeting, the RBA has put more stock in the monthly inflation figures than it traditionally does, which between April and May showed trimmed mean inflation at 2.8 per cent and then falling to 2.1 per cent. The monthly series is highly volatile and not as broad as the quarterly figures, but even with the May drop, the RBA didn’t like some of the low level noise, particularly around home building and durable goods.
The June quarter inflation data, scheduled for the end of this month, is likely to be in line with the RBA’s internal target, and Bullock wants to see the numbers first.
It’s a line-ball argument that could have gone either way, which really shows the RBA is building a narrative around its wait-and-see approach.
It’s already delivered 50 basis points’ worth of cuts this year and wants to see how this is playing out through the economy.
The giveaway? The Bullock says she is prepared to wait for just “a little more information” to confirm inflation remains on track to sustainably reach 2.5 per cent. That’s the finest of fine-tuning.
In another first, the RBA gave an insight into how its newly formed board works and revealed the decision wasn’t unanimous. Of the nine-person board, three voted for the rate cut, while six voted to hold. The RBA didn’t disclose how individual members voted, and Bullock wouldn’t be drawn how she cast her vote.
Even though to many Australians it feels like a slowdown is well under way, the RBA says looking at the bigger picture there are a lot of positive threads. Domestic demand is picking up despite Trump’s tariff war. The two rate cuts so far and oil price drops are adding to real household incomes, while the jobs market remains unusually tight for a sluggish economy.
Trump still represents the other big unknown for Australia, with little clarity on how the US President’s threat of a tariff regime will play out.
This uncertainty is starting to weigh on the global economy, with tariffs, as proposed, expected to slow growth over time. China is particularly vulnerable.
Add this big dash of global uncertainty onto domestic inflation and from Bullock’s position why rush at all? It’s a cautious hold. Here’s hoping the bank’s August meeting really is a sure thing.
Contrarian bet
A quick run through Platinum Asset Management’s monthly updates show why Sydney’s one-time revered investor has been so quick to embrace the advances of Melbourne hedge fund L1 Capital.
It’s been death by a thousand months. Platinum has leaking billions of dollars in outflows for more than a decade as value managers fell badly out of favour while share markets around the world boomed. The fall from grace has been even harder for a China-focused fund such as Platinum.
The argument is anyone can make money in a surging markets. Big super is bringing more management back in-house, while index investing has up-ended equity investing while all the action now going to private markets. The lack of “value” quality stock opportunities means Platinum lags in returns and has little competitive edge.
In its June update, Platinum declared just over $8bn in funds under management. In May, it had $8.33bn; in April it was $9.7bn; March came in at $10.3bn. This time four years ago it was $23.5bn. Ten years ago, it was nearly $30bn. You get the picture.
The question for Platinum is can a combination with contrarian investor L1 Capital change the course it’s been on?
L1 co-founder Mark Landau says a resounding yes. Platinum gets a reset, the combined funds pool jumps to $16.5bn and the existing investor base get access to more investment strategies, including L1’s suite of funds, including its sought after hedge fund.
“The Platinum business has enormous potential,” Landau tells The Australian. “You’ve got an incredible client base. We think they can benefit from some of the capabilities within the L1 business”. This will give Platinum investors a reason to stay for the long term, he says.
For fund investors, all comes down to performance, and here he points to L1’s track of double-digit returns across the three flagship funds. Long-short fund; the Global Opportunities fund; and high-conviction International fund.
Landau and L1 co-founder Raph Lamm will step back from the day-to-day management of the business to focus on stock-picking, including Platinum’s funds. Platinum’s newish chief executive, the former Threadneedle executive Jeff Peters, will become chief executive of the combined entity.
“Markets have been challenging globally for value investors. What we’ll try to do is bring back the focus, the care and the original founding team had in the business, and we think we can achieve that very rapidly,” Landau says.
The takeover delivers all the value to L1, including Landau and Lamm. It’s a nil premium merger, where Platinum issues new shares to L1 Capital, giving the fund manager a 74 per cent stake in the combined entity. Platinum will also tip in $170m of cash and equivalents into the new entity.
Existing Platinum shareholders will hold just 26 per cent. At current values, this represents $222m of Platinum shares being put into the new entity. In essence, Platinum is paying for access to L1’s management.
There’s a twist to the merger where future performance fees won’t be shared evenly with Platinum shareholders. Any fees from the future outperformance of the flagship L1 Capital hedge fund are capped, with windfall fees only goes to existing L1 shareholders – mostly Landau and Lamm. The L1 duo will each emerge with 33 per cent in the combined manager. They’ve committed to hold their shareholdings for at least two years.
Platinum shareholders will still need to vote on the deal, although founder and high profile stock picker Kerr Nielsen has given it his public support. Nielsen is no longer involved in the management of the firm he took to a stock market listing in 2007.
The combination continues the wave of change running through Australian funds management. Boutiques are funding it harder to get momentum as the overall pool shrinks with more funds being diverted into private markets. At the same time, blue chip names like Perpetual are fending off their own takeovers, while growth investor Magellan hasn’t recovered from the key man risk. This all comes with fees being pushed down as more goes to index funds. The game is about getting bigger and picking the value. Platinum could prove to be L1’s biggest contrarian bet yet.
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