Rudi’s View: ‘Cheap’ Banks, Slowing China, High Volatility

rudi-views
Always an independent thinker, Rudi has not shied away from making big out-of-consensus predictions that proved accurate later on. When Rio Tinto shares surged above $120 he wrote investors should sell. In mid-2008 he warned investors not to hold on to equities in oil producers. In August 2008 he predicted the largest sell-off in commodities stocks was about to follow. In 2009 he suggested Australian banks were an excellent buy. Between 2011 and 2015 Rudi consistently maintained investors were better off avoiding exposure to commodities and to commodities stocks. Post GFC, he dedicated his research to finding All-Weather Performers. See also "All-Weather Performers" on this website, as well as the Special Reports section.

Rudi's View | Dec 07 2018

By Rudi Filapek-Vandyck, Editor FNArena

I feel like the come-back kid who cannot down his tools, even after he has publicly announced he will. Holidays are beckoning, still, but a series of updates on Conviction Calls and Model Portfolios by stockbrokers and investment bankers this past week are triggering one more general update from me, after which I will surely take my year-end holiday break. That's a promise.

Market strategists at Citi have turned positive on the Big Four banks in Australia, an event that hadn't been witnessed for over a decade, on the firm's own admission. It's not a case of halcyon days are about to return, but more of so much bad news has been priced in, it is difficult to see how share prices can fall a lot lower from November's beaten down levels.

Ironically, this implies that were the share market to weaken a lot further in 2019, Australian banks should offer relative protection to the downside, assisted by those above-average yield/income promises. Citi's positive, value-inspired stance on Australian banks is matched by equally positive views by (some) peers elsewhere, like Shaw and Partners' Brett Le Mesurier and Bell Potter's TS Lim, to name but a few (but not Morgan Stanley and UBS).

In order to provide the complete picture: Le Mesurier at Shaw has currently Buy ratings for all of the Big Four, plus regionals Bendigo and Adalaide Bank ((BEN)), Bank of Queensland ((BOQ)) and Suncorp ((SUN)), while CYBG ((CYB)) is rated Hold. The three main insurers are all rated Sell, as is Challenger ((CGF)).

At Bell Potter, both ANZ Bank ((ANZ)) and Westpac ((WBC)) are rated Buy, with Hold ratings for CommBank ((CBA)) and National Australia Bank ((NAB)).

It is a popular trait in a "value" oriented climate as is the Australian share market to treat weakening share prices as an incentive to jump on board, but the obvious warning applies here too: should investors focus a bit more on the reason(s) as to why share prices are weaker, or is the fact of the weakening enough to unleash "value" in the foreseeable future?

Take banking industry veteran Brian Johnson and his team at CLSA, for instance. They released a 360 pages tome on the sector late in November, with the intriguing title of "Will Bill Kill? How will Shorten's platform reshape the Aussie investor?'.

CLSA's conclusion is there should be no hurry whatsoever to jump onto dragged down banking share prices. Sure, they all look "cheap", but fact of the matter is they are not as cheap as they might seem. From an historical angle, CLSA notes present valuations are much closer to long term averages than is likely being appreciated by most market watchers and commentators.

Plus banks' abilities to restrain cost input seems limited, while downward pressure on the sector's EPS outlook profile very much remains. Plus we all know Bill Shorten is most likely the next prime minister, right?

Equally important, Johnson & Co do not see any serious calamities on the horizon. So no recession, no collapse in property prices, etc. But still: no need to hurry in. Final recommendation: stay Underweight the sector. Favourites are Macquarie Group ((MQG)) and CYBG.

Amongst the larger "traditional" banks, CLSA prefers CommBank and National Australia Bank, both rated Outperform.



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Strategists at the aforementioned Citi have replaced Rio Tinto ((RIO)) with South32 ((S32)) on the Citi Focus List Australia/NZ. Their move was inspired by more potential upside for the latter combined with a more benign house view on the outlook for iron ore prices.

South32 is also exposed to steel manufacturing but manganese is a smaller exposure in comparison with Rio Tinto, Citi strategists point out.


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