One of the most bitterly divisive US presidential elections in history has investors on edge. While it will ensure market volatility, long term it’s the economy that will dictate how markets perform.
It was Crosby Stills Nash and Young who wrote that immortal 1970 tune, Teach Your Children. That’s exactly what Selfwealth’s Craig Keary is advocating to ensure the estimated $3.5 trillion wealth transfer to future generations over the next 25 years is not squandered.
SMSF members need to examine insatiable appetite for the ‘big four’
For self-funded retirees holding scrip in the ‘big four’ banks, it’s been a joyride to savour. Despite some recent profit-taking, for the past year they have enjoyed the seemingly inexorable rise in the respective share prices of their bank shares – a welcome respite from the downturn in resources stocks.
At its peak for the year, Westpac lead the pack, up 44 per cent, followed by CBA (34 per cent), NAB (27 per cent), and, bringing up the rear, ANZ (16 per cent). Throw in the franked dividends and it’s been party time in SMSF land.
It’s been a big party, too. The Class 2024 Annual Benchmark Report shows the average holding for these four banks was, on average, about 38 per cent for each fund of the more than 180,000 SMSFs (nearly 30 per cent of all SMSFs) on this software provider’s data base. Only two stocks, BHP and Woodside, ranked higher, at 48.8 per cent and 44.1 per cent, respectively.
Collectively, these banks comprise 18.2 per cent of all Australian shares held by SMSFs, highlighting the appeal of their franked dividends, ongoing market expectations of interest rate cuts (the Reserve Bank is yet to accommodate this prediction) and their effect on credit growth and a belief the economy will still enjoy a soft landing.
They would have been further encouraged – not so consumers, obviously – by the decision by the ‘big four’ to cut term deposit rates in August, in some cases by up to 80 basis points, as they looked to shore up profit margins, either anticipating an outbreak of the mortgage wars or an interest rate cut. Or both.
Finally, these self-funded retirees are keeping good company. Many of the biggest superannuation funds are overweight the banks, summarily dismissing a Reserve Bank warning that their large exposure to the ‘big four’ threatens the stability of financial markets.
But, while it’s plausible to understand a glass half-full argument, a glass half-empty also has merit. Financial advisory firm Wattle Partners principal Drew Meredith makes the point that over the past decade, the ‘big four’ have added $100 billion in market cap for just $100 million in extra profits. That’s a lot of cream from very little milk.
Certainly, the last round of half-yearly results for ANZ, Westpac and ANZ to March 31, 2004, and the full-year results for the CBA to June 30, 2024, highlighted the pressure on profit margins – and it’s hard to see that changing dramatically, and certainly not to the degree to justify their rising share prices.
It also doesn’t factor in their addiction to mortgage lending with these banks having nearly 60 per cent of the residential property market. Although the cost-of-living crisis has mostly bypassed a residential property market that has enjoyed a virtually uninterrupted 20-year boom, the ‘big four’ would appreciate just how many of their clients are nearing the edge of the mortgage cliff.
None of this is seemingly fazing self-funded retirees – despite the recent profit-taking. So, perhaps they are viewing the ‘big four’ through a different prism. With resources, the other mainstay of the ASX, they are captive to global economic trends and their impact on commodity prices and the Australian dollar.
Not so the banks. Having ventured offshore in the 1980s with very limited success they have found it much easier – and profitable – to play on their home turf. Today, they account for about 75 per cent of market share in Australia’s banking sector. Add in the government guarantee on deposits – the too big to fail argument – and the franked dividends, it’s understandable why the banks have that gilt-edged appeal.
But self-managed retirees need to heed the lessons of banking history. Measured by market cap, banking is cyclical. In the 1980s it was the French banks, followed by their Japanese counterparts in the 1990s, which had the dominant market share. Then came the US and European banks until the GFC knocked them off their perch.
Today, the US banks are back to the fore (although the only institution to consistently remain in the top 10 over this period was the San Francisco-headquartered Wells Fargo), with CBA and the Royal Bank of Canada also in the mix.
What this suggests is that although Australian banks did emerge from the GFC with strong balance sheets, profitable and, most importantly, generating healthy dividends, it doesn’t mean that’s preordained. As Meredith says, the ‘big four’ are among the most expensive in the world on a price-to-book ratio measure. That’s not a signal to sell. But it is time to closely assess whether to take some scrip off the table and enjoy a tidy profit.
