All Ords Report 06 June 2017

Has the Liberal Government knocked the wind out of big bank’s sails?

Scott Morrison’s budget measures will take something from the “fat cats”, or will it? Remember, this is not the first time a Government has tried to take a swipe at the big Aussie banks billion dollar profits and failed.

As banks are the only companies permitted to create money out of thin air, a practice particular to the accounting methods enjoyed by banks, shouldn’t they be asked to contribute more to the economy when profits rise?

I believe this is a reasonable decision for the Government, given our debt position. However, playing hard ball with banks could be dangerous given the broadcasted contest likely to follow.

That aside, banks will find a way to recoup these funds from customers. So who’s really paying?

Big bank shares have fallen, however, they were already dropping on 2 May 2017, prior to the budget announcement on 9 May 2017. That aside, it’s typical for bank shares to experience periodic falls of 10% to 15%. So far this month, ANZ has fallen around 13.5%, WBC dropped 9%, CBA 9.3% and NAB 7%.

Banks occupy a fair percentage of superannuation savings, therefore a temporary fall in bank shares can have a dramatic impact on your super balance. However, given the size of the charge to bank profits proposed, I believe the current decline in bank shares is temporary.

Banks provide great opportunities, medium to long term and also short term. Some people believe that you buy banks for income and by income they mean dividends, however, you need a huge amount of capital invested to make a decent income from dividends and not everyone has this. So it’s important that you think outside of what you currently believe is possible.

If your goal is to generate an income, those great bank shares people love to hold can be traded over weeks or months to get a better income result.

Let’s consider an example

From the low in Sep 2011, ANZ rose by around 27% in 11 weeks before falling for 4 weeks. It then rose by 29% in 29 weeks before falling for 3 weeks and up again by 36% in 21 weeks before it fell for 5 weeks. A similar opportunity presented 4 times in the next two years. So now you can you see how this opportunity has the potential to provide a short term income? It beats getting 5% in dividends!

What has been will be again as history repeats. Whether you choose ANZ, WBC, NAB or CBA there are good opportunities to make a living off banks and other shares.

Although generating an income from the share market can be for anyone, not everyone will choose to do it. Many let fear stop them before they get started. However, it’s really your decision and you have to say “I want to make an income from the share market”.

What do we expect in the market?

Last week, the Australian share market demonstrated its resilience on Wednesday and Thursday when it rose strongly back above 5900 points. Driven by optimism that the Federal Budget is likely to provide “better days ahead”. However, on Friday as the news sunk in the market again fell back below this level, which is timely as the next short term cycle low is overdue. I would like to see the market come back by between at least 1.5% and 3.5% over the next two to six weeks.

This week the market has continued to fall into the target zone, led largely by the major banks. At the time of writing the All Ordinaries Index was trading below 5800 points.

Measures announced by the Government to make the big banks pay more is likely to once again split the market. This has placed downward pressure on banks as the market digests the news and short sellers take advantage of negative sentiment, however, I believe this is temporary.

In the months prior to the Budget announcement, Mining and Financial sectors where moving in opposite directions; from mid- February to 1 May 17, the Materials sector fell by approximately 7%, while Financials rose by around 5%.

From here, we may see banks remain soft in coming weeks while the Materials sector experiences an increase in volatility as it attempts to push off the recent lows. There is always the possibility of short term downside for the sector before it trends higher. A solid rise from miners and materials stocks is likely heading into the second half, followed by a rebound in banks.

The Australian Government are planning to bring the Budget back into surplus by around 2020, which is in line with what the US ratings agency S&P Global have said is possible based on forward estimates. However, they have put Australia on a negative watch due to Australia’s current level of debt, the level of the deficit and considerations about the Australian property market.

News that Trump has allegedly attempted to halt an investigation into information being shared with Russia may appear to have overshadowed talk about a further rate rise by the US Federal Reserve this year. Currently, consensus is that there will be two more rate increases in the US in 2017. However, a pending decision like this is generally felt on the US and our market well in advance of the move.

Dale Gillham is Chief Analyst at Wealth Within