Few can suppress a yawn when asked about the Reserve Bank’s decision on its benchmark cash rate today. The increase in part and full-time employment by an estimated 71,500 jobs in February has put paid to any hopes of an April rate cut.
But, says the managing director of hedge fund Blue Sky Apeiron, David Hobart, 175 basis points of Reserve Bank cuts over 15 months have created a “bubble” among bank stocks – Commonwealth Bank’s market value is equivalent to Citigroup’s – as Australian stock market investors have chased “yield” with time deposit rates below 5 per cent.
“It’s an old story played out again that will end in tears,” Hobart says.
Matt Sherwood, head of investment market research at Perpetual, holds a slightly different view. Sherwood rejects any notion there is a "bubble" in bank stocks. Banks, he says, have modest EPS growth with which to increase dividends. But their valuations are stretched. "Investors need to be cautious as the banks are near the bottom of their bad and doubtful debt cycle, which will be a headwind for EPS as unemployment is likely to increase," says Sherwood. Yield will be increasingly important moving forward, he adds.
Citigroup says foreign investors and local investors have been net purchasers of banks “alongside heavy net selling of other stocks". Those stocks cast aside by investors have largely been the miners.
In March, according to UBS, the ASX 200 materials index, a benchmark of mining shares, fell 9.6 per cent, the worst of any sector in the market. Those dismal returns for miners may continue while questions continue as to Chinese demand.
Peter Mouatt, a director at Adam Smith Asset Management, says China’s steel production capacity is 920 million tonnes compared with estimated production this year of 737 million tonnes. Iron ore prices look likely to fall below $120 a tonne, Mouatt says. That may mean the share price of Arrium, Atlas Iron, Rio Tinto and BHP may struggle not to slide further.