Banks lead the way again as investors seek value

Banks drove the Australian sharemarket up for a fourth day running, as analysts saw value in the sector after its recent underperformance.

Banks drove the Australian sharemarket up for a fourth day running, as analysts saw value in the sector after its recent underperformance and Reserve Bank governor Philip Lowe highlighted the fact that easing coronavirus restrictions are lessening the risk of worst-case economic scenarios.

The benchmark S&P/ASX 200 Index surged 2.6 per cent to a 11-week high of 5922 points before closing up 1.3 per cent at 5851.1, with the financials, utilities and materials sectors outperforming.

While the energy and real estate sectors fell back on Thursday, this week’s somewhat dramaticswitch from growth to value stocks continued to play out in the banks.

The four major banks rose by an average of 4 per cent to their best levels since March.

Bell Potter head of institutional sales and trading Richard Coppleson, said “another amazing day” for the Australian sharemarket put the benchmark index on track for its best week since 2011.

“Value was massive as we saw, for the third consecutive day, big buying in the banks as other institutional investors join in,” Mr Coppleson said.

The sharemarket also got a tailwind from Dr Lowe’s comments that the economic downturn might not be as severe as first thought, given that national health outcomes were better than earlier feared, although “much depends on how quickly confidence can be restored”.

The economy was probably tracking between the Reserve Bank’s central and upside scen­arios, although the upside scenario was “still a pretty depressing scenario”, he said.

But the “shape and timing” of recovery “depends not only on when (health) restrictions are lifted, but also on the confidence that Australians have about their own health and their finances”.

The RBA governor again indicated that interest rates should remain at record lows for some time, but consistent with his previous comments, strongly rejected the option of negative interest rates.

Negative rates were “extraordinarily unlikely” in Australia, Dr Lowe said.

“I just don’t think negative interest rates work,” he added, noting that the offshore evidence was that consumers responded to negative rates by cutting their spending.

On Wednesday the US S&P 500 broke above 3000 points — regaining its 200-day moving average for the first time since March — with US banks also leading the way up on Wall Street.

The S&P/ASX 200 Banks Index has risen 18 per cent this week, adding $45bn of value.

JPMorgan analyst Andrew Triggs said valuations in the sector “remain cheap” and that an impressive rise this week was “long overdue”, with banks having underperformed by 19 per cent from the peak of the Australian sharemarket in February until the rebound in banks started this week.

“We see cause for optimism that more dire forecasts on economic activity may have overstated the risks, with restrictions easing across the country,” Mr Triggs said in report.

In his view NAB is the best positioned of the major banks to benefit from a “less bad” economy.

“Whether the recovery continues remains to be seen but one times price-to-book value may prove to be the ceiling in the short-term (excluding CBA) given ongoing uncertainty and structural headwinds the sector faces,” Mr Triggs added.

The unusually strong rise in banks this week came after UBS analyst Jonathan Mott told clients on Tuesday that he was “more optimistic” on the sector as an improved economic outlook had reduced the chance of a more severe downturn driving larger credit losses and capital raisings.

The local bourse pared some of its rise on Thursday as the Hang Seng index fell as much as 2.2 per cent after US Secretary of State Michael Pompeo said the US could no longer certify Hong Kong’s political autonomy from China, potentially ending its special trading status with US.

The Australian dollar also saw a slight negative reaction to the news on Hong Kong, at least temporarily bucking positive leads for risk sentiment from the US sharemarket.

After hitting an almost three-month high of US66.8c overnight, the Aussie dollar dipped as much as 0.5 per cent to US65.88c in local trading, before stabilising around US66.00c.

But the Hang Seng index pared most of its decline to end down 0.7 per cent.

A 6.3 per cent rise so far this week puts the local bourse on track for its best week since 2011.

But the outperformance of Australian shares relative to bonds this month could lead balanced funds to sell shares to rebalance their portfolios before the month ends.

After a 29 per cent rise in the S&P/ASX 200 in two months, the outlook for Australian shares is likely to be highly dependent on a recovery in corporate earnings and dividends per share.

While valuations typically expand ahead of a rise in earnings forecasts, the S&P/ASX 200 was, as of Thursday, trading on a record-high 12-month forward price-to-earnings multiple of about 19.5 times. The consensus estimate for 12-month forward earnings per share has fallen about 23 per cent since January.