A Confirmation From Aussie Banks

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 | Jun 20 2019

In this week's Weekly Insights (published in two parts):

-A Confirmation From Aussie Banks
-What's There To Worry?

-Conviction Calls
-Morphic Explains Shorts For CCL, Woolies
-Rudi On Tour
-Rudi Talks

[Non-highlighted parts will appear in Part Two on Friday]

By Rudi Filapek-Vandyck, Editor FNArena

A Confirmation From Aussie Banks

A pullback in most equity markets around the globe in May, while Australian equities continued to march onwards and upwards, have turned the Australian share market into one of the best performers all around in 2019.

But strategists and analysts are not so confident the local market can hold its own simply on the promise of more RBA rate cuts and, on the back of this, a potential recovery in domestic housing. Is the Australian share market now too expensive?

Let's find out whether my personal market indicator can shine any light on the issue.

Traditionally, I focus on share prices of the Big Four banks, and more specifically on the gap between these four share prices and FNArena's consensus price targets, to gauge the status for local sentiment in the share market.

Today, Tuesday 18th June 2019, Stock Analysis on the FNArena website shows CommBank ((CBA)) shares are trading well above target (to the tune of 13%), while Westpac ((WBC)) is also above target, as is ANZ Bank ((ANZ)), while the sector laggard National Australia Bank ((NAB)) still has a minor gap to fill (0.6%).

All else remaining equal, this seems to suggest investor sentiment is running red hot and there is not much room left, if any, to rally a lot higher from here, which shortens the odds for a pullback in the not too distant future.

The fact major commodity producers BHP Group ((BHP)) and Rio Tinto ((RIO)) are equally trading above their respective consensus target, while the next rally in both Woodside Petroleum ((WPL)) and Santos ((STO)) will put the major energy producers in the same position, only reinforces the idea that the local share market is trying to defy gravity in June.

Hence, in the short term, my banking stocks sentiment indicator confirms it's probably best to be a little more cautious for investors.


When using this market indicator, and every other gauge I hasten to add, investors should always question whether there are specific circumstances that can potentially make its apparent signal invalid. This is not always easy and one of the key reasons my advice to investors is to never rely on just one indicator or signal.

In this particular case, there are times when banks share prices are dominated by sector-specific dynamics that are not necessarily representative for the Australian economy or share market as a whole. Think last year's Royal Commission, for instance. It goes without saying during such times whatever happens to bank share prices cannot be used to measure risk appetite in general.

Which begs the question: are we back to normal?

I suspect the answer is yes. See BHP and Rio Tinto above. A number of other indicators is equally suggesting more upside might just be a stretch too far, and not long lasting given the ongoing declining trend in earnings forecasts outside of iron ore producers in Australia.

This need not be the end of the road for the local share market. After all, share markets are forward looking and in less than two months we'll have the August reporting season to take note and update our general outlook for the year ahead.

One of the key reasons as to why Australian bank shares have recovered so swiftly this year is because investors can once again see profit growth on the horizon, after having succumbed to the view there won't be any growth for longer for the sector.

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