article 3 months old

Of Banks And Trump

FYI | May 24 2017

By Peter Switzer, Switzer Super Report

Playing the Trump trumping — don't forget this lesson!

The Trump slump and the bank levy bashing has taken around $50 billion off shares in the local setting this month, so the big question is, how do you play this new phase of the market?

My colleague Paul Rickard’s work has shown that April brought a comeback of the mid-cap stocks but small-cap stocks will be still struggling. Big-cap stocks have not lost their popularity, but their momentum going higher is slowing down. And since the bank levy, the banks will be a big drag on the top 20 index.

Fairfax’s Clancy Yeates has done the numbers on the banks’ fall from grace. “From its 2017 peak on May 1, the ASX 200 banks index has fallen 9.9%, and shares in ANZ Bank, Westpac and National Australia Bank have each fallen 10% or more, known as a ‘correction’ in financial market jargon. CBA is down 8.5% from its May high.”

The key questions to be comfortable about (in order to answer my first question about how you play stocks now), is to know how the banks will deal with the levy and will President Donald Trump survive?

I have no doubt that the banks will beat the levy, so this pullback in share prices will only create a buying opportunity. You have to recall that our banks also went up with the Trump victory and his talk of greater banking deregulation in the USA had a positive effect on the market’s opinion of our banks, for God knows what reasons!

I could speculate that if US bank deregulation bolstered US and world growth, which is believable, then the Oz economy benefits. And that means good news for the local banks.

I know the outlook for the local economy is mixed but I’m in the camp of the RBA, Treasury and many economists, who think we will grow at high 2% to 3% plus rates over the next few years. If we’re right, being long banks (especially when they’re bought at more inviting prices) is an OK strategy.

It’s more the case if you’re a dividend-seeking investor.

We often get derailed by short-term market players, who make a lot of noise and get a lot of attention.  A few weeks back, I told you that Bell Potter’s Richard Coppleson advised that we sell the banks, which became the headline. However he also threw in that he thought they’d be higher by year’s end.

I think his analysis is still valid and even though I suspect bank share prices go lower from here, it might be wise to work out what buying now will yield you.

Let’s take ANZ, which is now at $28.50, but was at $32.95 on May 1! Assuming the bank kept its dividend at $1.60, on $28.50 that’s a yield of 5.6% before franking credits kick in.

The lower the share price goes, the higher the yield will be. And even if they cut their dividend (which I don’t expect), it would still be miles better than term deposit rates. Plus, there are capital gains ahead, so you don’t have to over-think your bank play.

As Donald Trump is not out of the woods, bank share prices could go lower but I’m not expecting any Armageddon scenarios.

The bank levy is a pain for bank shareholders, but the Poms have coped with it. There it’s 0.18% rather than our 0.06%.

Sure, bank reporting was not as good as was hoped, but this covered a period of time when the economy was subdued and interest rate rises from the banks had not well and truly kicked in.

What we’re seeing right now is markets getting too excited before reporting and then being too disappointed when their hyped up guesses prove to be a little bit wrong.

I know some market smarties say Vice-President Mike Pence (as Trump’s replacement armed with the same policies of tax reform, deregulation and infrastructure) could excite the stock market, but it would come after a Trump impeachment that could send stocks markets into a tailspin!

I don’t want that, even if it created another great buying opportunity. I’d rather a rap on the knuckles for Donald, he learns the protocol of being President and we get on with the job of making America and stock markets great again!

The run up to May and May itself has brought the following bad news:

  • North Korea nuke threats and Trump aggressive responses.
  • Trump getting hopping mad on Syria.
  • Trump and Russian revelations of what was classified info.
  • Trump sacking his FBI boss.
  • Trump and impeachment talk.
  • The bank levy.

And all this has come when overall economic and earnings data in the USA and even Europe says it’s wise to remain long stocks.

I won’t be buying now but if I did, I wouldn’t expect to lose much more before a turnaround in stocks happened. The timetable for Trump’s problems will be the key determinant but I can’t believe that someone as smart as Trump in business could run the risk of doing anything that could ruin his biggest and most successful play ever!

I’m having a battle between what my head says and what my gut feels, so I’m keeping my fingers crossed, knowing if Trump prevails and beats any potential impeachment challenges and he gets his tax reform across the line, then we’re off to the races!

By the way, the Republicans have to get the tax changes up or else they will be dead meat when the mid-term elections come up, which happens on November 6 next year. If the Democrats win because Donald has screwed up, then he or his replacement will be a lame duck.

This won’t be good for the USA, the world economy and our stock market.

Peter Switzer is the founder and publisher of the Switzer Super Report, a newsletter and website that offers advice, information and education to help you grow your DIY super.

Content included in this article is not by association the view of FNArena (see our disclaimer).

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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