From Jonathan Bayes, Investment Consultant, Bentleys Wealth Advisors.
Interesting and significant week, mmm.
I think it’s far more of a significant week than the +0.7% rise in the ASX200 might imply at a headline level.
Major Bank Levy (MBL) a landmark event
For those of you that haven’t read my Federal Budget piece, I would encourage you to do so, since I think this week’s introduction of a Major Bank Levy (MBL) encapsulates in one fell swoop everything that is problematic in this nation’s economy and share-market.
Like Mother Hubbard’s cupboard, Australia’s bag of financial tricks is bare.
The Major Bank Levy (MBL) is an unashamed grab for cash, and a finger in the overflowing dyke of financial excess that this country has accumulated over the past 10 years.
We have long argued about the risks of having all of one’s eggs in one basket, and that the sheer size of Australian banks as a proportion of domestic superannuation portfolios was cause for concern.
This week’s surprise levy of $6.2bn on the profits of Australia’s 5 largest banks demonstrates precisely these risks, and will strip investors of 5% of their annual income for the coming 4 years.
Worse still, is that now introduced, there is every chance that this levy remains in place long after the initial 4 years it has been slated for, particularly if the Labor opposition win next year’s election.
Think about that for a minute.
Australian Banks comprise around 30% of the ASX200 by market capitalization, meaning that if the average investor mirrored this weighting (and many have much more) then he/she just had 1.5% of their annual income effectively cut.
Not only does the 5% profit impact put at risk future dividends (NAB and WBC in particular; ANZ have already rebased their dividend and CBA is likely sound), it also cuts the bank’s ability to accrue much needed equity capital at a time when banking regulators are continuing to implore financial institutions to solidify their capital bases.
Australian Banks have now reached their zenith, and with housing most certainly on the turn I fully expect this week’s 3-4% falls across the major banks to continue.
The broker UBS seem to agree and published a strategy note this week which detailed just how good Australian banks have been to investors over the past 20 years, and how the tide was turning.
It’s important for context.
They note that Australian banks have returned 12.6% per annum for 20 years, miles in advance of the +3.5% annual gains from their global peers.
The banks have been able to provide investors with these incredibly good returns because Australia has enjoyed a whopping 9% financial system credit growth (over twice the economy’s growth rate, and this is how our debt is accumulating), and within that a phenomenal 11% annual growth for two decades in housing credit.
It is unsustainable.
As a guide for clients, we are currently running significant UNDERWEIGHT positions in Australian banks in our model portfolios and can’t see that changing for sometime.
A further knock to Australian investors this week was the continued collapse in commodity prices, with coking coal falling a further -20%.
Having been rocket-fuel on the upside in 2016, falling iron ore and coal prices now render much of the Australian mining sector prone to earnings downgrades.
When you add the banks, miners and Telstra (TLS) together, you have 40% of the Australian share-market by value.
Looking forward over the coming few years it is hard to be hugely inspired by the outlook.
On the broader economic front, the Budget was constructive on infrastructure. The plan is timely and will go some ways to offsetting the impending residential construction downturn afoot.
SEEK (SEK) – to the moon
SEK is now up over 20% since we recommended the share in mid-February and we are thrilled with the bounce.
We think the market is excited by the prospects for its offshore business, notably Zhaopin in China.
We would caution that stocks rarely go up in a straight line, so we wouldn’t be surprised to see SEK consolidate in the near-term, however we fully expect SEK to be knocking on the door of $20 in the coming 12 months.
On the whole markets are looking a little tired and you can’t magic away the fact banks revenues were already struggling well in advance of this week’s tax slug.
Markets are hanging in there on account of continued strength in global economic growth and the unwinding of pessimism relating to adverse French election outcomes.
We feel like there is scant value around in the current market on the whole, notwithstanding the likes of Healthscope (HSO), Blackmores (BKL), Mantra (MTR).
I would expect that the winter months see the ASX200 consolidate 5% or so lower.
Have a great weekend.
The Organisation of Petroleum Exporting Countries (OPEC) meet in 2 weeks to discuss further cuts to supply.
The meeting in Vienna will aim to underpin the oil price which continues to fall in light of excess production.
A reminder that the agreement to cut production back in November led to a 15% rise in the oil price in a mere 3 days so it will be interesting to see what transpires here.
It is likely OPEC will extend the duration of the agreed upon cuts but will not cut production levels further.
In recent days, major oil producers such as Iraq, Kuwait and Algeria have expressed support for the extension of last year’s cuts. Meanwhile, Russia a non-OPEC member, has also backed the continuation for production cuts given stronger demand was needed to break the current ceiling on prices.
Elsewhere, the French election went the way pundits expected with Emmanuel Macron becoming the youngest President of France since Napoleon.
His political movement, En Marche, received nearly two thirds of the overall vote. Macron’s internationalist pro-EU policies will now focus on rebuilding European unity citing last year’s Brexit as a breakdown of a strong partnership.
For more information on the above please contact Bentleys Wealth Advisors directly or on 02 9220 0700.
This information is general in nature and is provided by Bentleys Wealth Advisors. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information.