24/03/2015
CLSA's Christopher Wood says interest rates could drop to zero | afr.com
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Home / Markets / Market Data / Interest Rates
Mar 19 2015 at 12:20 PM | Updated Mar 19 2015 at 4:03 PM SAVE ARTICLE | PRINT
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CLSA's Christopher Wood says interest rates could drop to zero
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CLSA chief strategist Chris Wood: 'It's not whether interest rates go up, it's whether Australian interest rates go to
zero.' Photo: Chris Stowers
A CLSA analyst who told investors to sell US mortgage securities
before the subprime disaster says interest rates in Australia will
be less than 1 per cent within two years and could even go to zero.
Christopher Wood, who is the managing director and chief
by Matthew Cranston
strategist of the broking firm, is sceptical of both the impact and
likelihood of a change in US monetary policy. This is despite the
US Federal Reserve dropping the word "patient" from its statement on Wednesday,
signalling an increase in interest rates by June, the first in nine years.
"It's not whether interest rates go up, it's whether Australian interest rates go to
zero," Mr Wood said in an interview with The Australian Financial Review. "I think
less than 1 per cent within the next two years. They are going to end up a lot lower
than people still imagine."
The most recent Bloomberg survey of economists indicates an average interest rate
forecast of 2 per cent for the end of the year and the first quarter of 2016.
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CLSA's Christopher Wood says interest rates could drop to zero | afr.com
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Economists and strategists have been making huge calls on interest rates and
currencies in the last few months, with Bank of America Merrill Lynch economist
Saul Eslake saying interest rates in Australia would head back up to 2.5 per cent by
February next year.
On Wednesday, Federal Reserve chairwoman Janet Yellen said while the word
"patient" had been removed from the bank's statement on monetary policy, indicating
a possible increase in US interest rates, the bank would not be "impatient" – signalling
the bank was not in a hurry to lift rates either. Mr Wood, known for his colourful forthright language, believes investors who expect
interest rates to go up are backing the Fed's ability to normalise monetary policy.
However, he is betting the United States will not be able to do this. "This is not going
to be a normal cycle – there is nothing normal about it," he said.
DIFFICULT POSITION
In Australia, Mr Wood said, the drop in gross domestic product means the Reserve
Bank of Australia needs to keep cutting interest rates, but it is caught in a difficult
position.
"The issue from Australia's central bank standpoint is that it doesn't want to cut
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24/03/2015
CLSA's Christopher Wood says interest rates could drop to zero | afr.com
interest rates because of the housing market which, from a value point of view, is
overextended," he said.
"You do have asset price rises driven by Chinese buying. But the bank is under
pressure to cut rates, so I think it will have to come down to macroprudential controls
and they are very political."
Mr Wood, famed for telling investors in 2005 to sell out of subprime securities, is in
Australia to meet with major fund manager clients. He expressed relief that on his
yearly visit he found fund managers had changed their minds about where they saw
interest rates heading.
"When I was in Australia 15 months ago everyone thought that interest rates had
bottomed and were going up. But now there is greater awareness among fund
managers that it is going to stay lower for longer." Mr Wood also has bad news for the Australian dollar. He expects the local currency to
be trading in the US60¢ to US70¢ range by this time next year. "The [Aussie] is still
overvalued," he said. The star stock picker is underweight on Australia because of the structural changes in
the economy following the fall-off in mining and resources activity. However, he is
still reasonably happy with Australian banks.
"The Australian banks are incredibly expensive but as long as they keep giving the
dividend yield they will stay at that value," Mr Wood said.
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CLSA's Christopher Wood says interest rates could drop to zero | afr.com
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