Australian equity markets are ready to rebound following the RBA's rate cut this week, according to research house Lonsec.
"History shows that a period of successive rate cuts nearly always leads to a strong rally in Australian equities," said Bill Keenan Lonesec's, head of equity research.
"The two most important reasons are firstly, a lower cash rate (and yield curve) lowers the return from cash, term deposits and bonds.
"Secondly, the cost of debt is reduced which improves the disposable income of households and increases the return on equity of companies."
Lonsec said economic growth recovers as consumption and business investment improve and a softer currency (usually) boosts exports. The Australian share market rallies as company profits improve and investors switch out of low yielding cash, term deposits and debt and into equities.
Lonsec believes this easing cycle will end at 3.50% and therefore expects cash and deposits to come down by 75 basis points or more and loan rates to reduce by around 60 basis points.
Keenan said when you combine lower interest rates in the Australian economy with an improving global growth outlook, particularly in the US and Asia but also Germany, and Liberal/National governments transitioning back to each State and most probably federally by 2013, the economic and earnings outlook is suddenly a lot brighter."