It’s a stock market meltdown unlike anything we’ve seen in decades.
A sell-off that is as extraordinary as it is frightening.
However, it is also an opportunity. We haven’t seen stocks this cheap for a long time. Giving savvy investors the chance to accumulate some real bargains.
But, you still have to know what to look for. There is a good chance that some industries aren’t going to recover for quite some time. Or, they may never fully recover at all.
For example, it is hard to justify any exposure in an air travel company currently. It is simply too hard to tell how impactful the global grounding and border closures will be.
That’s why I personally wouldn’t be touching any such stocks just yet. The risks and unknowns outweigh any potential reward.
I’m not here to talk to you about airlines though.
No, I’m here to talk about banks versus fintech’s. So, let’s do a little comparing.
Old versus new
For years the ASX has been dominated by the banks. Huge institutions sitting at, or near, the top of the table.
Even the damning royal commission didn’t totally dethrone them.
However, this virus, and the RBA’s response just might though…
Over the past month, the big four have all been clipped heavily:
Commonwealth Bank of Australia [ASX:CBA] — down 32%
National Australia Bank Ltd [ASX:NAB] — down 43%
Australia and New Zealand Banking Group [ASX:ANZ] — down 40%
Westpac Banking Corp [ASX:WBC] — down 39%
This the grim reality of the coronavirus-induced panic. A market that has been hit hard by economic uncertainty.
Yet, these losses almost look rosy compared to fintech stocks. Just have a look at how savaged they have been:
Afterpay Ltd [ASX:APT] — down 55% (even reaching a 77% loss on Monday)
Zip Co Ltd [ASX:Z1P] — down 56%
EML Payments Ltd [ASX:EML] — down 65%
Tyro Payments Ltd [ASX:TYR] — down 61%
Suffice to say, as badly as banks have been hit, fintech’s have copped it worse.
The reason for this discrepancy is obvious. People trust the banks. They’ve endured times of hardship and crisis before.
Comparatively, these upstart fintech’s are enduring their first real bear market. Being put to the test at a time when they’re still trying to grow.
Because of this, if someone was looking to invest strictly on value, the banks seem like the clear winner. They’re profitable, pay dividends and have the cash to ride out this crisis.
The fintech’s on the other hand could be in for a rough couple of months. With much of the world in lockdown and economies put on hold, we’re going to see far less transactions. That will translate into less revenue for these companies.
But I don’t expect it to bankrupt any of them. It will be tough, but this crisis would have to last years for it to kill any of the fintech’s I’ve listed.
Does that make them a better investment than the banks though?
No.
But, it does give them the chance to be…
Extreme measures for an extreme time
In my view the single biggest threat to the banks isn’t the virus, or the lockdown of Australia — it’s the RBA.
Right now, interest rates are sitting at a record low of 0.25%. And the RBA has even said they’re offering zero rates when practical.
In other words, interest is irrelevant as we know it. For banks, that means the money they make on loan interest is going to fall. Eating away at whatever profits they make.
I expect we’re going to see some very average results from all of the banks because of this. After all, loans are their primary source of revenue.
Worse still, we could be set to see low interest rates for quite some time. Meaning this just might be the new normal for banks. Meaning they’re going to have to find new ways to make more money.
Which is exactly where the fintech’s come in.
See, they’re already bringing innovation to the finance industry. Finding new and novel ways to extract value from everyday spending. That’s why interest rates don’t matter all that much to them.
In fact, there is an argument to be made that low interest rates will actually benefit fintech’s.
More importantly, when things return to normal, I expect the fintech’s will be able to recover far faster than the banks. Their flexible strategies and lean operations make them far more adaptable than the gargantuan banks.
So, once opportunity begins to present itself again (and it will), they will be able to capitalise on it.
Yes, they’ve taken a big hit, but they’re still kicking. And that makes now a fantastic time to consider taking up a position in fintech stocks.
For three of our favourites, check out this report by my colleague Ryan Dinse. In it you will find out all about the incredible potential these stocks have. Trust me, it is worth giving a read if you’ve got the time. You can get your free copy right now, right here.
Regards,
Ryan Clarkson-Ledward,
Editor, Money Morning
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