ASX200 Financials (ex-property) – sell the rally
Posted on 16 February 2010
Starting with the more defensive, domestically oriented sectors – the financials have been enjoying the reporting season (the chart below doesn’t pick-up today’s explosive price action):
Technicals – uptrend has been broken, while longer term downtrend from 2007 peak remains afoot. MACD firmly trending lower as is momentum.
Fundamentals – banks have been making hay with widening margins and loan books. For mine, they have just attained peak earnings for the forseeable future as the housing market has topped out and there is a material risk of increasing turbulence in these loan books as we head deeper into 2010.
Conclusion – Sell the rally
2 responses to ASX200 Financials (ex-property) – sell the rally
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Hmmm…true but…while I think you’re right about the property market being near the top and loans becoming a greater problem in the future, I think there have been some structural changes which bear thinking through.
Chief among these is the demise of the non-bank lenders, who quietly died out when securitisation also hit the wall. Bank’s margins are wide as there really is no competition in the market, except for other banks – who all have much the same cost of funds and who all like to feast on fat, healthy margins. Unless we see sudden revival on a large scale of the RMBS sector of other new novel forms of getting access to cheap funds, I just can’t see the major banks being put under any competition pressure in the near future.
Also, not only have the non-bank lenders vanished, but so have some of the banks themselves – St George, Bankwest come to mind. Again less competition.
Another change, though probably less important, is the blow dealt to foreign banks, whose Australian operations aren’t going to get much attention (or funding) from HQ in NY or London as they battle their own problems at home.
Low unemployment is a boon for the banks too, although granted, when interest rates start climbing rapidly we will see a number of those first home owners fall out the tree at some stage.
Lastly, for the life of me I can’t see property prices falling soon. I know they’re overvalued, but the supply and demand factors don’t seem to care.
You are absolutely on the money in regards to structural changes – competition has vanished for the forseeable future (notwithstanding Kinghorn’s rumoured comeback). Guess the question I’m asking is whether it’s priced in. That’s what I’m trying to say about peak earnings. Margins are wide – but can they get wider? (I suppose they can in the absence of competition?) On the other hand, with credit spreads now trending wider, does that undermine bank margins that still need the global markets for funding?
The principle reason ‘peak earnings’ looks the goods to me is that I’m firmly of the view that home lending has peaked. I don’t buy into the idea that investors will step into the gap that has been left by first home buyers. I’m working on a note on it – the idea that if you give free money to people, they will simply bid up prices to factor in the free money plus the debt they would have taken out anyway. Notwithstanding the immigration driven demand, at some point prices pass the point where they are not self sustaining absent the stimulus. My fear is that the first home buyers boost/grant/bonus did exactly that. Without the handouts, the soft side on property prices is down.
Whether I’m right or wrong, I don’t see the domestic banks loan books growing from here – unless they are taking market share. Still, I take your views seriously Justin, as I have been caught being bearish too early before (as you would attest to!).