All Ords Report 14 April 2015
To investors, I have long said, “Why hand over your ‘hard earned’ to a bank for a cash return, when you can invest in the bank?” However, with bank share prices at six year highs, I can understand why investors are asking whether banks will continue to be a good investment.
Over recent years, with the cash rate so low, you will have been paid very little if you put your money in a bank term deposit. Currently, depositors are being paid only around 2.5 per cent for 30 days, and around 3 per cent for 90 days. I’ve heard a number of retirees complaining to a bank teller, asking for a better return because over recent times they’ve been feeling the pinch. Their concerns fell on deaf ears.
With the inflation rate, or the rate of increase in the price of goods and services just below this level, your true return is extremely low, possibly less than one per cent. Given this, the argument for bank shares over cash has been compelling, even for the more conservative investor. And, I believe the current situation is likely to continue to support share prices into 2016, even if we were to see an increase in volatility in the market short term.
Also, consider the current stance by the RBA on monetary policy, which has been ‘easing’ rather than ‘tightening’, so one has to ponder, what is the likelihood that the cash rate, and hence bank deposit rates, will soon rise? Whilst those who have term deposits may be hoping for a rise, logic says that the probability of a sizable lift, or ‘hike’, in the cash rate any time soon, is low. This means that money is more likely to continue to flow to equities rather than cash.
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Further to this, I believe that the cash rate would have to rise in the order of at least one per cent before this would really change. So, even if we were to assume that the RBA had reached a bottom for the cash rate at the current level, being 2.25 per cent, the problem for cash-bound retirees is that Australian economic data does not currently support a reversal and the market is leaning towards a further rate cut in the coming months.
So, what are the benefits for being invested in banks?
With your bank shares you receive a fully franked dividend, typically between 4.4 and 5.1 per cent, depending on the bank, as well as the opportunity for capital growth. And, here’s where it gets interesting…
Over the past ten years, despite the major decline during the GFC, where big banks fell between 50 and 65 per cent, ANZ generated around 43 per cent, CBA 160 per cent, NAB 36 per cent, and WBC around 52 per cent. CBA aside, because of its stellar returns, you will notice how even the other banks, which have generated a much lower rate of return, provided good long term returns, when you factor in the dividends and franking.
What do you do if you hold banks?
Right now, technical analysis indicates that banks are bullish, and short to medium term targets haven’t been met, which supports the potential for further upside later in 2015. As an investor, who may be running your own portfolio, inside or outside of a Self-Managed Super Fund, your first priority ought to be managing your risk, which you can do properly if you get the knowledge to select the appropriate rules to buy and sell. The most important thing you can do as an investor is to then wait for confirmation that those rules have been met before you trade. Currently, my charts show no reason to sell banks, and therefore, to do so would be to sell based on speculation, rather than confirmation of solid rules.
One other point you ought to be aware of when it comes to banks, is how the biggest months for price gains occur in around April, July and December. Also, ANZ, NAB and WBC will trade ex-dividend in May, which means that prices may soften temporarily mid-year before the next potential rise resumes.
So what do we expect in the market?
Following a rise on the All Ordinaries Index last Tuesday morning, the Australian market settled down for most of the week and continued to hold its ground above 5900 points. It was interesting to see the market close up at 5935 points on Friday, still below the 6000 point level. Yesterday the market managed to trade to around 5963 points, just above the March 2015 high, before closing low.
Given the way the market has unfolded over recent weeks, which has been sideways since late February, and as there is no real evidence of major selling activity to push prices lower, I have set aside my target for the downside, being between 5600 and 5700 points. That said, I would prefer to see the market let off a little steam and soften to at least the upper level of this zone over the coming weeks. That said, if the market holds above 5800 points it is likely to continue higher to between 6000 and 6100 points before 30 June.
Although it is important to consider shorter term moves, the market is still pointing strongly up, and therefore my longer term view on the market still stands. It is important that we consider all possible scenarios as to how the market may unfold, and therefore, even if it does soften short term, my medium term target for the second half remains at between 6200 and 6400 points.
All eyes and ears have been strongly focused on each report that the US Federal Reserve Bank (FED) releases, and you may be interested to learn how just prior to these meetings activity on the market slows. This is because the big fund managers await the FED’s announcement before making trading decisions. If you observe low volatility in share prices the day prior to, or on the day of the FED’s meeting, this is why.
Following the FED’s announcement in April, the US market closed higher, indicating the major players were happy with the FED’s current position on rates. Opinion is still very much divided as to the timing of a rate rise, and the market is closely watching US unemployment numbers as they head closer to the preferred target of around 5 per cent.
I believe we will continue to hear the debate over a US rate rise until at least July, keeping in mind that back in March, a number of FED members appeared to support a rise in June.
Dale Gillham is Chief Analyst at Wealth Within