Oligopolies as safe as money in the banks
This week we thought we would address the suggestion that Australian investors should just forget all the effort, complications and risks of picking a portfolio out of the 2000-odd listed stocks and simply put all their money in the four banks and leave it at that. Ridiculous. Or is it?
As a Pom, I have to tell you, the bank sector here is quite unique. There's nothing like it in Britain. A protected oligopoly that the government wants to preserve and see thrive at all costs, the banks' success is key to the government, and their competition is non-existent.
Try to get a credit card or mortgage in Britain and you'll get run over by the rivalry of international banks competing on an open battlefield. Try that in Australia and they'll be charging you a set-up fee, an exit fee and a fee if you want to fart in the meantime. It's a bit of a joke really, and all the bank-results commentary about it being a "challenging environment" is just bank management running interference lest we notice that between them, the big four earn $1455 for every man, woman, and child in Australia - and that's net profit, not turnover or pre-tax profit. Not that I, as a stockbroker, am ever going to complain.
Between them, the big four banks account for 25.7 per cent of the total equity market; if you can't get your clients to trade these stocks or switch between them, you're giving away 25 per cent of your potential turnover to someone who can. The banks are a broking bonanza.
I also find it rather amusing that while customers squeal, some politically driven finance ministers erroneously try to turn bank customers into voters with talk of a moral-high-ground "super bank tax". It's hollow stuff. No one in government is ever going to really intimidate the profitability of the banks. It's not good for them, us, or Australia. Period.
They may be earning super profits but rather than complain about it, the government sleeps more soundly, and rather than squeal, customers should hedge their pain and become a shareholder, if they can.
On top of all that, the international lesson from the global financial crisis has been just how integral to the stability of an economy banking systems have become.
The US economy almost went under on the coat-tails of its investment banks, and the legacy of that brush with death is a US central bank that will do anything and print anything to avoid a recurrence of 2008, even if it means spending billions of taxpayer funds rescuing the culprit institutions and, in so doing, enabling them to once more distribute billion-dollar bonus pools to the same culpable financial elite just a few years later.
Morals aside, the result is, it's in everyone's interest that these institutions thrive and survive, and they do. Should you invest in them? Talk to any fund manager and ask them what makes a stock a good investment and they will tell you monopoly cash flows and high barriers to entry.
Australia is a small country with only 23 million people. There are a lot of quasi-monopolies in this country because our population and tax structures mean the international players don't bother to compete here. Nowhere else in the Western world is there such a shallow depth of competition.
This leaves a lot of companies with big market shares and dominance in their sectors. This pre-existing dominance is the biggest barrier to entry for new competition. In many cases, the incumbent is so entrenched, it's impossible for others to even begin to compete without considerable risk and cost.
Australia is stuffed with dominant players, whose features include: their large market shares; minimal or "cartel"-style competition; high barriers to entry; very sustainable earnings streams; their maturity as businesses; lower risk; lower price-earnings ratios; high and free cash flows; strong balance sheets; higher dividend payout ratios; higher yields; higher levels of franking (because most of the earnings are coming from domestic markets); less volatile share prices (people hate to sell them); imperviousness to currency fluctuations; and their ability and propensity to return big wads of cash to shareholders, often with unbelievable franking tax breaks attached.
We spend a lot of time fussing about which stocks to pick and put in a portfolio, but in fact, for those trying to grow their money rather than double it, the Australian monopoly stocks pick themselves.
So, do you buy the four big banks and forget the rest? No, I'm not allowed to tell you that or I'd be out of business in a week, but the truth is, you probably could, and at the very least, they are the core holdings in every Australian portfolio until any competition arrives.
Which bank, you ask?
Anyone who can reliably finesse the timing of which bank's share price is going up the most and when is a genius. We just go them all. And for those of you who cry "GFC Two!", the truth is, while the bank sector fell 56 per cent during the global financial crisis, since then - including the compounding of all their dividends - banks are now 44.7 per cent higher than they were at the peak in 2007. Cop that.
There are the banks. Then there's the rest of the market. Start with the banks.
Marcus Padley is a stockbroker and the author of sharemarket newsletter Marcus Today. For a free trial, go to marcustoday.com.au.