Missed the Rally in Bank Stocks?

Published at Jan 16, 2017, in Features

Aussie bank stocks have had an impressive two month run, recording their strongest rally in over six years.

The biggest of the Big-4, the Commonwealth Bank (CBA), is up 18.3% since November 9. The NAB has gained 20.6%, while Westpac and ANZ have each recorded double-digit gains.

It should be noted that historical data in terms of earnings performance and/or share trading patterns should not be used as the basis for an investment as they may or may not be replicated. Those considering this stock should seek independent financial advice.

So what’s behind the sudden popularity of bank stocks?

The run can be largely attributed to the November 9 US election of Donald Trump. Most of the gains came in the week right after the election result – NAB jumped over 10% in that week alone.

Trump hasn’t been shy about taking credit either. On December 27 and 28 he claimed, via Twitter (of course):

“The world was gloomy before I won – there was no hope. Now the market is up nearly 10% and Christmas spending is over a trillion dollars.”

“The U.S. Consumer Confidence Index for December surged nearly four points to 113.7, THE HIGHEST LEVEL IN MORE THAN 15 YEARS! Thanks Donald!”

However, let me note, markets love certainty. The simple fact of knowing who will be President provides a measure of stability. Historically, when the economy isn’t in a recession, as was the case in 2008, markets have more often than not risen between Election Day and Inauguration Day.

That said, market reactions immediately after an election have no correlation with its performance over the President’s term. Back in 1928, the S&P 500 soared 13.3%, more than after any other election, after Howard Hoover was elected. Yet just eight months after the Inauguration came the most devastating stock market crash in US history, followed by the Great Depression.

This time around though Wall Street firms are expected to be amongst the big winners of the new government. Trump has said his policies will support Wall Street and that that the new administration will bump up infrastructure and defense spending, and relax regulations. Of course, there is no guarantee that his policies will be passed, yet the market has embraced his promises so far.

Moving on from the election result, the Federal Reserve are widely expected to continue raising interest rates this year. Higher interest carry over to higher interest margins for banks.

Further, the US bank earning season got off to a good start last week on Wall Street. JPMorgan and Bank of America each reported solid fourth quarter results, which brings optimism to the wider sector.

That enthusiasm has carried over to the local financial sector too. Yet it’s not just US events that have sent local banks higher.

Last year local bank stocks were kept in check due to uncertainty around potential new rules requiring banks to hold higher levels of capital reserves – that is, keeping more money on hand in case things go bad.

But following the US election, expectations have shifted. Many now expect that new global banking rules won’t require Australian banks to up their reserves.

That’s good news in the short term, but doesn’t help the fact that there are growing macroeconomic risks facing the banks.

In a report released today, global ratings agency Fitch, downgraded its outlook on the Australian banking sector to ‘negative’.

Fitch highlighted that rising household debt – mortgages primarily – in relation to income, leave borrowers increasingly vulnerable if there is a slowdown in the economy, or a rise in interest rates.

Banks have recently began raising interest rates on their fixed rate mortgages and on investor loans. The NAB explained that their reason for doing so was that funding costs ‘remain elevated’. This too could help cool the overheated property market, which is already seeing discounts from developers in a number of apartment markets.

Fitch also expects lower bank profit growth and increased risks to the sector from a greater than expected slowdown in China’s economic growth, which carry over to Australia’s economy.

Going forward, you have to wonder whether the good times can continue.

I’m not too optimistic. Initial optimism over Trump’s win has been already factored in, and local banks are looking shaky should the economy hit a bump.

And while you may not want to sell, I wouldn’t be loading up on bank stocks, expecting this rally to continue for long.

S3 Consortium Pty Ltd (CAR No.433913) is a corporate authorised representative of Longhou Capital Markets Pty Ltd (AFSL No. 292464). The information contained in this article is general information only. Any advice is general advice only. Neither your personal objectives, financial situation nor needs have been taken into consideration. Accordingly you should consider how appropriate the advice (if any) is to those objectives, financial situation and needs, before acting on the advice.

Conflict of Interest Notice

S3 Consortium Pty Ltd does and seeks to do business with companies featured in its articles. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this article. Investors should consider this article as only a single factor in making any investment decision. The publishers of this article also wish to disclose that they may hold this stock in their portfolios and that any decision to purchase this stock should be done so after the purchaser has made their own inquires as to the validity of any information in this article.

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The information contained in this article is current at the finalised date. The information contained in this article is based on sources reasonably considered to be reliable by S3 Consortium Pty Ltd, and available in the public domain. No “insider information” is ever sourced, disclosed or used by S3 Consortium.

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