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If You’ve Got Shares In An Australian Bank, Watch This Trend

A leading global independent investment strategist is predicting a decline in Australian banking stocks in the next few years. In his daily missive, “Downunder Daily”, Gerard Minack of Minack Advisers,
01 Aug 2015 10:56
If You’ve Got Shares In An Australian Bank, Watch This Trend

A leading global independent investment strategist is predicting a decline in Australian banking stocks in the next few years.

In his daily missive, “Downunder Daily”, Gerard Minack of Minack Advisers, has warned that the housing cycle in Australia appears to be peaking.

This is a development that could have major implications for Australian banks and by extension, their performance on the stock exchange1.

This is something Fijian investors in Australian bank stocks, including Commonwealth Bank of Australia (CBA) shares, should take heed of.

 

Australian Housing Market

Whilst labelling the housing market as the “brightest spot in the Australian economy”, Minack thinks housing activity and house prices are likely to peak this year.

Minack writes that prices are already trending downwards with price declines becoming more common outside Sydney.

“Apartment prices have fallen through this year in five of the eight capital cities; house prices are now falling in two capitals; and the pace of gains elsewhere (outside Sydney) are starting to slow,” he writes.

This, he says, suggests that the housing cycle will peak later in 2015.

 

Implications for Banking Stocks

So what does this all mean for banking stocks such as CBA?

Minack points out that three-quarters of loans by Australian banks are housing-related and that historically the rise in loan approvals has gone hand-in-hand with the rise in bank shares.

It follows therefore that with a peaking of housing activity, housing-related credit growth will follow suit, in turn leading to a downward trend in banking stocks.

Furthermore, with the mining industry already in sustained decline, a weakening housing sector would increase the risk of recession in 2016 in which case, the adverse effects of the housing decline could be sustained.

Minack’s views are echoed by Maple Brown about Chief Investment Officer, Garth Rossler. Cited in “The Sydney Morning Herhald,” Rossler said that historically low debt on banks’ balance sheets supported the view the big lenders’ share prices would do particularly badly during any potential recession.

Additionally, bank valuations are pretty stretched on earnings and that they are relatively high compared to the rest of the market.

According to Mr Rossler, there could be tougher days ahead and owning banks in that environment is not necessarily a sensible strategy.

Adding further presence on banks’ share was the announcement by the Australian Prudential Regulation Authority (APRA) this month that banks will have to hold more capital to fund mortgages.

In short, if the above sentiments hold true, the recent download trend observed in banking stocks could well be sustained for years to come.

This reinforces KSB’s general “Sell” recommendation for CBA shares.

 

Four Signs that Support this View:

  • First, fewer consumers think ‘it is a good time to buy a property’, as reported in the Westpac consumer sentiment survey. Turning points in sentiment have often led turning points in house price growth.
  • Second, finance approvals for the construction of new homes have stopped rising. Housing finance typically turns before building approvals.
  • Third, there have been (modest) declines in building approvals and auction clearance rates over the past month (to be fair, never put too much weight on data for one month).
  • Finally, the house price rally is starting to fray at the edges. As is well known, the price gains in this cycle have been led by Sydney – which partly reverses the price under-performance of Sydney in the prior cycle”.

Feedback: rachnal@fijisun.com.fj

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