Eureka Correspondence

Avoiding the sharks, banks shares versus hybrids, holding onto bank stocks.

Avoiding the sharks

In his latest weekend briefing, The System Is Rigged, Alan Kohler asks: “What are we to do, as small animals entirely surrounded by water (to quote Piglet)?"

I speak from personal experience alone, but I would like to assure you, Alan, that you have done an enormous amount through your books, the establishment of Eureka Report, ABC programs, and briefings like that of last Saturday.

I am a member of the Australian Shareholders Association and I feel that it has also improved its scrutiny and assessment of stockmarket-related shonky.

Most people like me spend their lives preoccupied with the immediate issues around work, family, house maintenance, lessening free time, etc., and have too little time, little education (and sometimes little interest) in understanding what is happening in the complex financial world. Nevertheless, developments such as the growth in self-managed super funds (SMSFs) reflect a growing scepticism about some practices in money "management" and indicate that your work (and that of some others) has done much to increase the confidence and education of "mum and dad" investors. We are learning more about the sharks we need to avoid.

Thank you

Clare Kinnane

Bank shares versus hybrids

I found Scott Francis’ article on bank shares, Picking a winner: bank shares or cash, very interesting. I wonder if Scott would care to speculate on the likely performance of bank shares versus variable rate bank hybrids and deposits in a high interest rate environment?

Name withheld

Scott’s response: Thanks very much for the letter.  A high interest rate environment could be very interesting for banks, as it might tilt both aspects of what is being talked about – returns from deposits and bank profits – to favour having money in deposits.  It we were to get an extreme spike in interest rates, let’s say they went all the way to 12% (a scenario that does not seem very likely at current rates), some of the impacts might include:

• A much higher return on deposit accounts

• Less demand for new loans from banks, as higher interest rates discourage people borrowing

• A higher rate of defaults on loans – which would not be good for bank profits from their existing loans.

Variable rate hybrids or bonds would benefit from the higher interest rates – however they would be impacted by any concerns if bank profitability fell, and the ability of the bank to make interest payments was under pressure.

Holding onto bank stocks

I would like to thank John Abernethy for his cool head regarding current broker exhortations to "rotate or perish". It is hard to ignore this mantra when we are currently being exposed to it daily from multifarious media channels. I agree with John's argument that brokers profit from churn and turnover, and many are not cognisant of individual circumstances/contexts or risk tolerances when they issue such generalised edicts.  There is no way that I am trading in my attractive fully franked bank yields for riskier growth assets. I will leave the exodus to the so-called experts.

Name Withheld

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