By Luke Kinsella
For weeks, the Commonwealth Bank share price seemed to defy gravity and the will of thousands of fund managers and brokers who could not believe its rise. By late last month, shares in the country’s largest lender had recorded an almost 25 per cent rise since the start of the year.
But is the gloss finally coming off? The great rotation is a theme many investors like to mention – out of the banks, with their expensive shares and low growth, and into mining giants, helped by strong iron ore prices.
Since its June 25 peak of $191.40 per share, CBA is down 9.4 per cent. Its market capitalisation has slumped $30 billion to around $290.3 billion.
“I think there are a few managers out there who’d be pleased to see this level of reversion, given that it’s been a painful trade for a lot of people,” said Mark Nathan, the head of fundamental research at Regal Funds Management.
“It was difficult to see investors continue to hold them for the yield appeal, and earnings growth is quite modest as well. They’re fantastic businesses [but] the investment or the return upside was getting compressed.”
At its peak, CBA’s stock made up 12 per cent of the entire S&P/ASX 200 Index, a dominance that alarmed many investors, who suggested it could be one reason for a lack of floats. Money that could otherwise make its way to smaller companies was being locked away in major banks as fund managers worried that staying clear would hurt their returns.
Anna Milne is a deputy portfolio manager who follows financial services for Wilson Asset Management. Her portfolio held comparatively fewer CBA shares compared to its market size, and Milne said she had thought the bank’s stock was expensive when it traded at $130. It is now at $173.
“It hasn’t been earnings-related when it has rallied, and therefore it probably won’t be dramatically [earnings related] when the share prices fall either. I think CBA is actually probably set up for a good result.”
Milne said investors were likely to simply reallocate their money, rather than move it away from equities. Her pick? Like many others, Milne expected money to flow to miners, but also to financial services businesses outside of lending, particularly insurers.
“I’m not so concerned about the broader market. CBA’s rally has soaked up so much capital from other areas of the market that these other areas have been starved.”
It is not just CBA that has felt the pain this week. National Australia Bank, where chief executive Andrew Irvine has been under intense investor scrutiny over his leadership style and alleged drinking at client events, is down 3.9 per cent. ANZ is down 1.2 per cent, and Westpac shares have fallen 3 per cent. Westpac hit a high of $34.71 in February, and since then, its stock has slid more than 9 per cent.
Earlier this month, MST Marquee strategist Hasan Tevfik suggested that the ASX 200 would fall by around 5 per cent if CBA returned to trading at its historical average of 16 times earnings. It had been trading at 30.
Regal’s Nathan said, “It’s very unlikely we see CBA retrace to those levels.”
“I’d be cautious around the banks holding their multiple, but I wouldn’t be suggesting they revert back to their 10-year average.”
“The most volatile part of bank earnings is normally bad debts, and that remains quite subdued,” he added. “We’re in a rate-cutting environment, which will put pressure on margins over the longer term. While [banks] have been fantastic businesses, the growth will be modest.”
Funds that missed out on the CBA opportunity this year may be hoping to capitalise on the correction. Sage Capital, the fund run by veteran portfolio manager Sean Fenton, doubled down on its short position on CBA this week.
“To short the Australian banks, you’d need to be extremely high conviction that they’re going to decline in the short term,” said Wilson Asset Management’s Milne, adding that their recent run lasted longer than anyone expected, and the correction could similarly be a “long-term story”.
“If you don’t own CBA as an active manager, you don’t have to short it to make significant relative gains should the share price fall.”
The rise in the ASX 200 Materials Index suggests the great rotation is well and truly under way. The index is up 12½ per cent over the past month, and the three iron ore majors – BHP, Rio Tinto and Fortescue – are all up more than 15 per cent, powered by a surge in commodity prices.
“It feels like to me the great rotation into the long laggard, resources sector has started,” said Brian Johnson, who covers banks for MST Marquee.
“[Last year] was the year of buying banks and selling pretty well everything else. But you can’t have stuff lag forever, and the Australian banks are trading expensively, so what we’ve now got is negative momentum in the sector,” he said, adding that he expected the correction to continue.
It would have a long way to run, however, until CBA is usurped as the country’s biggest company. Despite its share price fall, the bank still has a market capitalisation of $290 billion. BHP sits at $211 billion.
