Banks slump as investors turn to miners; RBA minutes

Hello and welcome to the On the Money podcast. It's Tuesday, the 22nd of July. I'm Stephanie Yousaf filling in for Ricardo Gonçalves. Today, the ASX ended pretty flat, only up 0.1% after a second day sell-off in the major banks. I'll have more on that a little later with Todd Hoare from LGT Crestone.

Stephanie Yousaf

But first, the Reserve Bank has revealed the reasoning behind its decision to keep interest rates on hold at this month's board meeting, saying that lowering interest rates for a third time in 4 meetings would not be consistent with its strategy of easing monetary policy in a cautious approach. For more, I

Stephanie Yousaf

spoke with independent economist Chris Richardson, who says an August rate cut is very much still on the table.

Chris Richardson

Chances are Australians will get another rate cut in 3 weeks' time. It still depends on next week's inflation number, but there's a bit of wriggle room on that. You don't want that to be a bad number, but the most likely thing, another rate cut on the way.

Stephanie Yousaf

Do you agree with the cautious approach that the RBA is taking?

Chris Richardson

I'd have been happy to cut rates at the meeting they had a couple of weeks ago. But it's not a huge thing either way. Economies are super tankers; they turn really slowly, and you can get a bit excited about the speed with which central banks like our Reserve Bank need to act.

Stephanie Yousaf

The board spent quite a bit of time discussing international economic conditions, especially US tariffs, and said that it could be quite some time before we see the full impact of them. What does that mean for rates, especially with that cautious approach? Could that potentially translate to less interest rates over time?

Chris Richardson

The Reserve Bank remains pretty worried about some of the silly stuff that's happening internationally. They think those dumb things can cause damage. Chances are that if they do, that's

Chris Richardson

more likely rather than less likely to result in interest rate cuts. But so far, the world economy is hanging together in part as governments around the world spend a bit more by way of insurance against the dumb things that are happening.

Stephanie Yousaf

As you mentioned, the quarterly CPI figures are out next week. It's the data that RBA loves. What do you expect it to show?

Chris Richardson

So the key number in the middle of next week will be that inflation number. If it is about 0.75% in underlying terms in the last few months, that will be the green light for a rate cut in a few weeks. If it's higher than that, though, homeowners should start to sweat a bit.

Stephanie Yousaf

What everyone wants to know is how many interest rate cuts do you think we'll get this year?

Chris Richardson

It looks pretty likely we'll get a cut next month, we'll get another one in November. It's a more open question by the time 2026 rolls around. Might be another one then, but heaps depends on what happens internationally. It's a pretty volatile world out there.

Stephanie Yousaf

That was independent economist Chris Richardson.

Stephanie Yousaf

To the markets, and the ASX 200 has gained only 9 points, closing at 8,677 points. It opened the day as high as 0.5%, but strong gains in healthcare and materials were offset by a second day of heavy selling off in banking.

Stephanie Yousaf

As investors move from banks to miners. For more, I spoke to Chief Investment Officer at LGT Crestone, Todd Hoare.

Todd Hoare

I think you could almost make the case that very little has happened. As you pointed out, if we look at where we started the day and where we are today, we're essentially flat.

Todd Hoarel

Beneath the surface, I think you are starting to see some bifurcation within the market. So CBA, which was responsible for so much of that FY25 performance and actually FY24 performance as well,

it's now off 10% from its highs. The major banks are 3 to 7% lower over the course of the last month, and we're seeing that continue again today. So I think for large caps, even though it looks like the market hasn't done much, if we look at what's happening at a sector level, there is actually quite a bit happening, and from a bank perspective,

Todd Hoare

those companies, when they do start to sell off, there's only a few places that they can go. Companies that are big enough to be able to handle that market cap. And they're your companies that you're seeing perform today. Companies like CSL, BHP, Rio, Fortescue, they're all seeing some stronger performance today. A bit of a continuation of what we've seen over the last several weeks. That really is this rotation from financials to resources and just to some of the laggards

Todd Hoare

over the course of the last 12 months. The other part of the market that we are seeing do reasonably well is small caps. It's probably a fraction premature to suggest that small caps are doing well because of a genuine change in style and preferences. That small cap end of the market for Australia in particular, that's where a lot of those resource companies reside. So it is probably just symptomatic of this

Todd Hoare

rotation from financials to resources and small caps being resource dominant, it's getting caught up in that. The RBA

Stephanie Yousaf

has released the minutes from this month's board meeting, and it noted that it could take some time before we see the full effect of Donald Trump's tariffs, and that members knew they'd be upsetting the markets by bucking those expectations for a rate cut.

Stephanie Yousaf

But that lowering rates wouldn't be consistent with their cautious approach to easing. What are your thoughts on that?

Todd Hoare

I think the minutes were clearly striking a very cautious tone. Notwithstanding the fact that ultimately, the RBA has said that tariffs will be disinflationary as countries such as China and the rest of the world redirect those tariff-impacted exports to places like Australia.

Todd Hoare

I think there is clearly a disinflationary bias. I wouldn't go as far as to say that the RBA was conscious of market pricing. They acknowledged that there were precedents for the RBA to go against market pricing and go against consensus expectations, but I think I'd be loath to suggest that was front of mind, or even back of mind for them.

Todd Hoare

I do think there was an important distinction released in the minutes today, and that is that most investors thought that the on hold call last month was potentially just a function of the RBA wanting to see perhaps last week's unemployment number, perhaps next week's quarterly CPI print, maybe just to see how these tariffs unfold and the letters that Donald Trump has sent to various nations. I think that was where most investors were at.

Todd Hoare

The minutes today maybe overlaid a slightly different perspective on that, and that is that the RBA might be a fraction more unclear or uncertain on what the neutral rate of interest is for Australia. Basically, what that means is they're unsure about what is the right level of interest rate for the economy not to be too hot or too cold, almost this Goldilocks type scenario.

Todd Hoare

Maybe phrased a fraction differently, they're just a bit unclear on how restrictive monetary policy is at the moment, and that means they're going to tread a little bit more cautiously. It probably at the margin does raise the bar for an interest rate cut next month. And importantly, that quarterly CPI figure that is released next Thursday, if memory serves, probably becomes critically important for whether or not we get that August rate cut.

Todd Hoare

Given the unemployment number we saw last week, there is an expectation the market is fully priced for that rate cut. But just given the ambiguity of that neutral rate of interest from the RBA minutes, potentially next Thursday's CPI print becomes just that little bit more important.

Stephanie Yousaf

Iron ore prices have surged to a multi-month high after China announced the construction of a mega dam.

Stephanie Yousaf

Is this rally sustainable?

Todd Hoare

It's a very good question, and I think it's one that is top of mind for just about every fund manager in Australia.

Todd Hoare

It's probably a fraction premature. Obviously, the news of the day is the construction of the world's largest hydro dam out of China. And I think the inference that investors are drawing from that is that maybe China is reverting to their old stimulus playbook, which was: let's spend it on fixed asset investment, i.e. let's spend it on construction-related sectors to stimulate demand. And that is obviously very steel

Todd Hoare

intensive. And if it's steel-intensive, obviously, very iron ore-intensive. We had some very weak May and June China steel production numbers come out, down sort of 7 to 9%, and I think that underscores the need for incremental stimulus to come out of China. To date, it has been incremental at best, and it has been services-related and less construction-related.

Todd Hoare

I think it remains unclear to what magnitude China wants to go down their old playbook. They will certainly go down the path of undertaking some clear structural and supply-side reform. That actually led to some pretty decent rallies at the back end of 2015, 2016 for the miners. It was very steel-related.

Todd Hoare

I think it's probably a little unclear just how those supply side reforms would lend itself to a sustainable rally in the iron ore miners. So I think for the here and now, it really is this rotation from expensive banks, nowhere else really to go. Let's go into the miners. This hydro dam project, a little bit of incremental stimulus out of China, that's a nice narrative.

Todd Hoare

It's probably a little bit premature to say that that is the genuine reason. And therefore, we would probably suggest that at this point in time, it's not a sustainable rally. That can change, of course, but based on the evidence we have at the moment, it doesn't appear that it would be sustainable. Notwithstanding that iron ore has bounced, and that is positive for the miners from valuations that weren't overly stretched.

Stephanie Yousaf

Finally, where are the opportunities for investors?

Todd Hoare

There's several places. It obviously feels a little bit hard to find places to invest in aggregate, because if you look at the ASX 200 trading 19 odd times PE,

Todd Hoare

it is not cheap in aggregate. But I think that belies that there are a number of opportunities beneath the surface. Just as we've discussed today, this rotation from banks to other parts of the market. So we think that selling or rotating out of expensive domestic banks, which are reasonable franchises,

Todd Hoare

in a global context, become unrealistically expensive. Rotating out of domestic banks into equally high quality or even better quality global banks makes sense. Domestically, rotating into some healthcare stocks that have sold off or not done well over the past 12 months. I think one of the interesting things is over

Todd Hoare

FY25 over the last 12 months, mid-cap stocks actually did better than the broader market. Small caps, not quite as much. But if we eventually start to get two or three rate cuts come through, we do think that mid-cap, or the mid-cap sector, will probably continue to outpace the broader market. So we think that's fertile hunting ground.

Todd Hoare

And then, as I said, if we start to see some interest rate cuts come through, that really cyclical, cyclically sensitive part of the market, small caps, should actually start to do reasonably well. And then just more ad hoc, and I probably won't step into the realm of giving single stock advice. I'm not sure I'm qualified or licensed to do that to the broader

Todd Hoare

Australian public. But there are a number of high-quality blue-chip Australian franchises that have been able to compound free cash flow year in, year out for long periods of time, that are just starting to trade off 10 or 15%. These are companies that may have got a little bit expensive, maybe they were subject to some tariff-related uncertainty, and those share prices have sold off. But

Todd Hoare

invariably, their ability to compound and grow free cash flow is unchanged. So there's a few idiosyncratic opportunities we suspect beneath the surface as well.

Stephanie Yousaf

That was Todd Hoare from LGT Crestone.

Ricardo Gonçalves

This SBS on the Money podcast is provided for informational purposes only. The content on this podcast should not be understood as constituting advice or a recommendation. It is not personal advice and does not consider your personal circumstances or objectives. You should contact a licensed professional before making any financial decision.

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