Callum Newman here. I’m a ‘new’ editor at Money Morning.
Here at Fat Tail Investment Research, I’m behind our small-cap advisories, Australian Small-Cap Investigator and Small-Cap Systems.
For the last few years, I’ve been having fun over at Money Morning’s sister publication, The Daily Reckoning Australia.
I’ll be filing my weekly column here on Wednesday’s now. I hope you find them beneficial.
Now, on to today’s market…
Volatility rattles investors, but not me
‘Everyone has a plan until they get punched in the face.’
Boxer Mike Tyson said that one time.
Yesterday, the market copped one across the chops from the RBA. It’s getting another dose today.
But the fight between the bulls and the bears ain’t over…
And there’s always opportunity amongst volatility like this.
Read on for my take on where we should be looking!
Here’s what I noticed about yesterday. The 1% drop in the index got the headlines.
But there was one group of stocks that didn’t get rattled that much.
It was the Big Four banks.
I find that instructive. They’re under some pressure today. But I see opportunity.
What’s going on here?
All four are already well down from their February highs of 2023.
The US banking wobbles since March have hit financial stocks all over the place.
That’s not all…
Reuters reported back in December that Aussie fund managers had a very low weighting toward banks.
The concerns were peaking margins and rising bad debts as the Aussie property slowdown hit their assets.
The world looks a little different three months on
The RBA rate rise yesterday gives a lift to bank profitability, via their loans (assets) with variable rates.
Plus, the housing market is now surprising people by rising from low stock available and high rents.
And look at this recent report on the Big Four’s results that are coming shortly, from The Sydney Morning Herald:
‘According to analyst estimates, the profits of NAB, ANZ and Westpac are all expected to increase by well above 10 per cent, mainly because of a sharp widening in net interest margins (NIMs), which compare funding costs with banks’ pricing of loans.’
There looks to be reasonable value in the Big Four. I suspect the market accumulates them on sell-offs like now.
There’s a potential scenario where this could turn into an excellent idea…
High rates are good for banks
The mainstream media and the financial markets are convinced the world is heading into a recession.
That’s why US bond traders think the Fed will cut rates later this year.
It may not be so.
My analysis says that the global economy will surprise people with how robust it stays. That could keep interest rates higher for longer.
However, let me add an important caveat to this.
Interest rates are only ‘high’ if we compare them to the previous decade of ultra-low interest rates.
Relative to a longer perspective, here in Australia, they’re around their 20-year average.
Check that out for yourself here:
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| Source: Alphinity |
Here’s the thing…
‘Ultra’-low interest rates are not good for banks.
It hurts their profitability because it squeezes their margins.
This is one reason Aussie banks have seen their return on equity fall over the years.
Today’s higher rates make banks more profitable, as we can see above.
And here’s the kicker…higher rates give them MORE incentive to lend.
Why? Bigger profits of course!
This is important.
Bank lending is a key variable in any economy. More lending is bullish. History teaches us that.
Now, this is where the robust housing market comes into play.
One: it protects the collateral value of their loans.
Two: the Big Four are likely to increase their lending into real estate if the property upswing is maintained.
With 700,000 immigrants due into the country over the next two years, I think it’s safe to say this is likely to happen.
Property investors will also be drawn back into the market from the high rents and high rental demand we’re seeing.
A healthy Big Four is a strong lead for the Aussie market in general.
Yes, we had a big fall yesterday. But that’s the share market — it’s volatile.
Many stocks on my watchlist didn’t budge, and some even went up.
Down at the smaller end of the market, many stocks have already been smashed since 2021.
They are priced as if we are in a recession already.
But we are NOT in a recession.
I hope you can see the implications of where I am going with this
A good chunk of the Aussie stock market has been hammered down as investors fled last year.
It could only take the global economy being ‘less bad’ than everyone fears for these stocks to start rising.
And if my analysis is correct — that the world economy will surprise most in 2023 — you can set yourself up for a shot at some barnstorming gains.
I’m urging all my subscribers to be as aggressive as they can right now, provided they’re OK with the risk of losing whatever they put down.
Warren Buffett says it best:
‘Be greedy when others are fearful, and fearful when others are greedy.’
What he doesn’t tell us is the timing for that to work.
In today’s case, I think the odds say the Big Four are going higher this year, and, in time, so is the Aussie market with them.
You with me?
Here are five other dears to get your thinking started.
There’s quite a bit of red on the market today. But they don’t call it contrarian investing for nothing.
Best wishes,
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Callum Newman,
Editor, Money Morning
