Mr Hennessy, a consultant to van Eyk Research, said these sectors were historically the best performers when home loan interest rates were below their long term average and declining.

He said the 50bps cut, twice what many economists had been expecting, would be enough to bring mortgage rates below their long term average of 7.35 per cent from the current 7.4 per cent, even if the banks failed to pass on the full reduction.

“Diversified financials have tended to do quite well in an environment of below average home loan rates and have averaged three-month returns of 3.4 per cent in such periods,” Mr Hennessy said.

The Australian sharemarket overall has done almost as well during these periods, with three-month returns averaging 3.3 per cent.

“The extent of any outperformance by these sectors on this occasion may well depend on whether households choose to spend the extra cash from reduced mortgage repayments or accelerate the paying down of debt,” Mr Hennessy said.

He said the size of the rate cut was probably not enough to cause a major move by investors into cyclical stocks and he expected high-yielding sectors like the major banks to continue to perform well, also driven by the declining attractiveness of cash investments.
 
“This cut by the RBA is more about reducing the downside risks to the economy,” he said.

Mr Hennessy said the RBA would still have an easing bias but would wait to see more economic data before making further cuts. “The RBA will now sit back and watch how the data unfolds over the next few months, particularly consumer and business confidence, mortgage rates and the dollar,” he said.

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