Bad banks can’t hold back the ASX 200, up more than 20pc this year
CSL is a star performer, but bad banks haven’t stopped the ASX 200 making big gains this calendar year.
Even our selection of “bad banks” can’t hold the wider market back in the final lap of the year, as the S&P/ASX 200, powered by good trade news out of the US and a clear outcome in the UK election, bounced by 1.6 per cent Monday – the strongest session since May.
The surge in sentiment comes on the back of a remarkable 12 months where the ASX 200 has managed to rise by more than 21 per cent, even as its most powerful sector – bank stocks – limped along at roughly a fifth of the pace.
The banking index has gained less than 4 per cent over the year to date, as a toxic combination of weak credit growth, rising prudential standards and in-house scandals scared away leading investment funds.
Moreover, key bank stocks actually went backwards, with scandal hit Westpac still down for the year by around 1 per cent at Monday’s close, while the Bank of Queensland — trading near seven-year lows — has fallen by more than 20 per cent over the period.
ANZ was flat for the year to date at 2.4 per cent and NAB managed to put on 6 per cent.
A very poor relative performance in bank stocks shrinks the sector to less than 20 per cent of the entire market capitalisation – banks stocks had represented more than 30 per cent of the ASX five years ago.
As banks flagged, the biggest change in the broader market this year is the ascendancy of blood products groups CSL, which is now the second-biggest stock in the market in terms of market weighting. It represents about 7 per cent of the ASX 200, while CBA represents around 7.8 per cent.
CSL is now a $130bn stock, having gained a spectacular 54 per cent this year as the group took advantage of a shortage of products in its key markets. It continued to move higher on Monday, gaining another 2.5 per cent to $285.10.
The only consolation for bank stock investors is that bank dividends remained considerably higher than the wider market, at a little more than 6 per cent against 4.4 per cent on average.
Dividend yields on some of the market’s “growth stocks” are non-existent or very low. CSL, for example, has a dividend yield of less than 1 per cent.
The new alignment in the ASX means long-term investors will have to come to terms with some surprise outcomes.
CBA, which broke ranks with its weaker sector rivals, gaining 12 per cent year to date, now represents more than a third of the banking index at 37 per cent and is worth about the same as NAB and ANZ put together.
For the year ahead, the consensus among brokers for bank stocks is mixed, with Westpac and NAB both expected to lift by around 6 per cent while ANZ is forecast to gain about 5 per cent based on current broker “targets”. CBA has already moved higher than many broker targets.
As for the wider market, brokers are calling “high single digits”, which would be less than half of the returns we have witnessed this year.
What’s more, “high single digits” is the closest thing to a standard call at the end of most years on the ASX.
The market has a long-term return of close to 9 per cent, so such forecasts tell us little.
Basically, we are in an extended bull market driven by lower interest rates and nobody knows how long it will last.
On current sentiment, it certainly looks like calendar 2019 will end with above average returns.
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