The following report was published in the Australian Financial Review, 6 December 2015. Article by Vanessa Desloires. Based on the original article written by John Abernethy, Chief Investment Officer, Clime (read report).
Now is the time to buy the oversold big four banks and purchase in the dips in an abnormal sharemarket, a leading fund manager says.
Clime Asset Management chief investment officer John Abernethy said the banks were positioning for a sustained bounce, having been oversold in the past six months.
The non-mining economy is improving on the weaker Australian dollar, while interest rates remain at a record low.
Most significantly, the banks had raised about 80 per cent of the capital imposed by the Australian Prudential Regulation Authority, he said.
Clime Asset Management’s John Abernethy says the big four banks are poised for a big bounce.
“That was a recapitalisation not caused by distress but caused by regulation. You need to bring that into account,” he said.
Mr Abernethy said he favoured National Australia Bank – best positioned to business lending growth – and Commonwealth Bank of Australia, with a diversified loan book, over ANZ Banking Group and Westpac Banking Corp, but all banks were undervalued on a two-year view.
“Looking back, with dividends and franking, you’ll probably see a 12 per cent return per annum over two years with a weaker Australian dollar turning through,” he said.
While that signalled a “buy”, investors needed to look beyond the short-term gyrations and buy in the dips, such as last Friday, where the banks all fell 1.5 per cent or more in a broad-based sell-off on a disappointing European Central Bank stimulus announcement.
Mr Abernethy said the excess liquidity flowing from central banks, including the ECB, was driving short-term excessive trading.
“The short-term gyrations, people should just ignore them, so long as you’re accumulating on the bad days. This is a feature of the world today,” he said.
Bond fund manager PIMCO is also turning positive on the big four banks.
Robert Mead, head of portfolio management Australia, said PIMCO had become “less bearish” on bank hybrids.
Previously, they had not fully compensated investors for the inherent risk, but having mostly met their capital requirements, the pricing of new issuance was reaching “fair value territory”, he said.
“While the cash rate will likely remain low and may fall further, income opportunities in the Australian capital securities space have improved significantly. But it is crucial to diversify,” he said.
“More broadly, global credit and global capital securities, issued by banks specifically to raise regulatory capital, offer income that is less correlated with both the outlook for the Australian economy and investors’ dominant portfolio position: equities.”
“This is an opportunity that should bring cheer to Australian investors.”