Rudi's View | Mar 22 2023
In this week's Weekly Insights:
-Banks Need Confidence (Lots Of It)
-All-Weather Stocks - Back In Fashion
-Research To Download
By Rudi Filapek-Vandyck, Editor
Banks Need Confidence (Lots Of It)
What investors are witnessing this month is not a re-run of the Lehman Bros collapse in late 2008, but it isn't "nothing to see here" either.
Central banks and regulators around the world have been in a frenzy to prevent confidence to fully abandon local and international banks. While their swift actions might prevent worst case scenarios, confidence remains all-important for all banks; from the strongest down to the smallest lenders.
It is anyone's guess precisely how markets will respond to further daily news flow. As things stand on Monday, we have two separate bank problems that need to be dealt with. The easiest to solve is Credit Suisse, the weakest link inside the global financial system for a long while and it seems this particular vulnerability will soon be quarantined.
Over in the USA, however, we have now witnessed Silicon Valley Bank (SVB), Silvergate Capital, Signature Bank and First Republic Bank making headlines and there's more news waiting to come out, for sure. How much exactly remains unknown, also because we don't as yet know how effective regulatory actions will be.
No two situations are exactly the same, but this year's banking crisis in the US appears to have plenty of similarities with the Savings & Loans (S&L) crisis that occurred in the 1980s and early 1990s.
That crisis followed aggressive tightening from the Fed, looser regulatory restrictions and oversight, and lenders not marking to market which prevented the outside world to get a clearer (and more accurate) insight into the balance between assets and liabilities.
Ultimately, the S&L crisis went on and on, preceding a nasty recession in the US and elsewhere (the recession Australia had to have, according to Keating).
Not saying history is about to repeat, but the public debate whether the US will suffer an economic recession this year has instantaneously become a lot less combative. Banks' focus has now shifted to preserving, if not repairing, balance sheets, and counter-party risks.
History shows when this happens, economic recession is usually not far off. Bank credit is almost literally the oxygen that feeds today's economies.
There will be rallies after falls, but I would not recommend trying to be a hero in the days, weeks, or even months ahead. When the facts change, savvy and experienced investors know it's time to adapt.
For those who'd like to find out about today's similarities for themselves, I'd recommend putting S&L crisis in your internet search engine, and start reading.
It won't cheer you up.
All-Weather Stocks - Back In Fashion
This year's deterioration in economic prospects, now complimented with a banking crisis in the US and the inevitable demise of Credit Suisse, has strengthened expert calls for robust, defensive, reliable, High Quality equity exposures.
Many of the calls made include a large overlap with my personal research into All-Weather Performers listed on the ASX (see further below).
Outside of my personal selections, references often include Cleanaway Waste Management ((CWY)), Ramsay Health Care ((RHC)), Sonic Healthcare ((SHL)), and Washington H Soul Pattinson ((SOL)).
The general idea is that indiscriminate selling will at some point recognise not all companies are of similar core characteristics and those with more robust and dependable earnings will ultimately outperform.
Traditional labeling by the investment community refers to defensives versus growth companies, and many of the High Quality companies listed on the ASX are usually included when the market focus shifts to defensives, but differences still matter.
A recent research paper released by Wilsons suggests investors have a choice between 'defensive' and 'defensive growth' - the difference in return between these two categories can be significant over time.
To illustrate their thesis, analysts at Wilsons compared the performance of CSL ((CSL)) and Woolworths ((WOW)) shares over the past ten years. Woolworths functions as your typical defensive exposure, while CSL is the counter-example of a defensive growth company.
Back in early 2013, CSL shares were trading on a PE multiple of circa 21x and a forward-looking implied dividend yield of 1.9% only. Woolworths looked a lot more attractive, trading on a PE of 13.3x and offering a yield of 5.3%.
Fast forward to one week ago (March 14) and $100,000 invested in CSL shares back then would have generated $525,473 while total return from Woolworths only reaches to $142,078.
The first calculation amounts to an annual capital return of 18% over the decade while investors in Woolworths had to satisfy themselves with an annual return of 3.6%, 5.4% in total if we include dividends.
Wilsons still thinks CSL shares are more attractive than Woolworths today. Its projections for CSL are for EPS CAGR of 24% between FY23-FY25. For Woolworths the comparative pace of forecast growth is 7%.
The underlying message from this research is that growth matters, growth ultimately creates the difference in return between shares. The lowest valuation is not by definition the better choice (even though this may not be apparent in the short term).
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