All Ords Report 30 March 2016
ANZ Banking Groupís (ANZ) share price has taken a beating, and so has the companyís board, which is no surprise when you consider what history shows.
What happened to ANZ reminds us that no company is too big to fall. ANZ was the worst hit of the big four Australian banks in the recent market decline.
ANZís share price fell by around 40 per cent from a high of $37.25 in April 2015, to a low of $21.86 in February 2016, which is more than National Australia Bank (NAB) experienced. NAB was coming out on the other side of a poorly timed investment in Clydesdale bank, which means that while the market wasnít happy about the loss, it was a light at the end of the tunnel.
So why has ANZ been more volatile than even NAB in the recent market decline?
I believe that history and the charts can explain. ANZ acquired Grindlays Bank in the 80ís to gain a foothold in Asia. Thatís right, ANZ have attempted to crack the Asian market before, and failed. Less than a decade later the decision proved to be ill-timed, and shareholders that bought in the 80ís and held were stung. ANZ fell by around 60 per cent into the early 90ís (when the market declined), more than NAB which fell by around 30 per cent.
To put this into perspective, ANZís fall in the 90ís was equivalent to the decline in its share price in the GFC, when it fell by around 63 per cent from an all-time high price of $31.74 in October 2007.
In recent times, ANZís push into Asia has, in my opinion, again contributed to higher volatility in ANZ shares. The market hasnít completely forgotten the past, and history does repeat. However, the move into Asia may turn out to be a good strategic decision for ANZ, but only time will tell.
The other factor, that I have been listening for the rumblings of, and which started to get louder last month, is the risk from the mining industry on bank books. Last week, ANZ announced an increase in the total Groupís credit charges by $100 million. This follows the release of information about the deteriorating position of some resources companies, in particular coal stocks.
Remember that bank stocks have been raising capital to bolster their books, and recent falls in bank stocks will be factoring in risk six to twelve months from now. So this means that much of the what-ifs about the commodities slump for this period have been factored into the share price.
Now, as a trader I consider both the best and worst case scenarios, drawing on logic, not perceptions. This is what you do when you apply technical analysis to determine how a stock or market is likely to unfold in future. Remember, history shows that when the market fears the worst, the worst rarely transpires.
So, is it probable for ANZís risk to be higher now than any other time in history? Higher than the early 90ís when we had the fallout from the decadent 80ís, which saw Pyramid Building Society collapse, through wars, the Asian crisis, a global financial crisis?
While it is possible, itís not highly probable. That said, to be realistic, the risk may be greater than the bank can currently forecast. However, Australian banks do have rules for capital management so as to manage their risk. As importantly, so should you the investor know how to manage your risk with any share you buy. A good place to learn how is in my book How To Beat The Managed Funds By 20%.
What do we expect in the market?
The Australian share market moved lower last week, having fallen to just below the 5150 point level on Thursday. My analysis indicates that this pull back is to be expected, given the market finished on a high of 5272 points the week prior, after having risen for five consecutive weeks.
From here, I would like to see the market soften for a further one to three weeks before it finds support for the next rise. This will indicate that the market is behaving normally. As the All Ordinaries Index (XAO) makes the next move it is possible for the market to dip below 5000 points, which is within a strong support zone below. Then it will be its ability to recover back above this level in the shortest time frame that will provide an important signal to what lies ahead.
The Australian Dollar
Looking more broadly to the Australian dollar (AUD) versus the US dollar, I was surprised to see the AUD break 76 cents last week. My analysis indicated that we would see a rise to around $0.735, and that it was likely to slow down at around that level, however the rebound in commodities has pushed our currency swiftly higher.
This is likely to be welcome news if you are travelling at this time. For investors, you may have stocks in your portfolio that have benefited from a falling AUD and rising USD, such as CSL Ltd (CSL) and Aristocrat Leisure (ALL), which may increase in volatility as the dollar fluctuates from here. Remember that the AUD was in decline from $1.108 in July 2011 to the recent low of $0.683 in January 2016.
This doesnít mean that you would sell just because the dollar has been rising, however, it does indicate that nowís a good time to prepare a strategy to manage your risk, and consider the rules you might use to preserve your profit, in case the share price falls away.
While listed companies do hedge against the movements in the dollar, quick movements like we have just seen can require changes to the hedging strategies after the fact, and we donít usually find out whether they got this right until sometime later, and in some cases, not until the next reporting season.
Dale Gillham is Chief Analyst at Wealth Within