Three reasons why the Banks are not your saviour
Your portfolio is dominated by the Big 4 Banks and since March 2009, this has worked for investors. The bank-focus however, will not be your portfolio’s saviour in the years ahead. Here are the three reasons why:
1. Blue-Chip growth rallies
Investors have been justified in holding a lot of banks in portfolios since the market bottomed in March 2009 because the two main economic drivers of the market have benefited the banks.
We all remember the GFC.
Many will also recall the rapid rally from March 2009 to December 2009. For those needing a refresher, the chart is here:
The dramatic fall on the left is the thick of the GFC. The bottom is clear in the middle of the chart and the rally extends to Christmas 2009 on the far right.
I remember being down the coast at the end of 2009 for a friend’s wedding and reading an article by Marcus Padley. Marcus said 80% of the market rally for calendar year 2009 was from the Big Eight, being:
- Big 4 Banks (Commonwealth, ANZ, National Australia, Westpac)
The majority of the Big Eight was the Big 4 banks.
Most self-directed investors reaped the benefit of blind luck by holding the banks during this rally whichwas led by the Blue-chips.
Scramble for any yield
The next flow-on effect of the GFC started in 2012; what I called it the ‘Domestic Dash for Dividends’.
In 2012 the weary investors who were unconvinced of share-market stability ventured out into the world from the comfort of term deposits, seeking dividend yield.
What I noticed the most was that clients were rolling out of 5 year term deposits (TDs) set in 2007.
These TDs were created on rates of ~7%+ back in 2007. Fast forward to 2012 and the concept of rolling over to another TD for 5 years at ~3% was no longer a possibility.
Many investors were literally living off the interest 7%+. To roll the TD over from a 7% yield to a 3% yield had dramatic lifestyle implications. No annual European holiday. No new car. No fun – that’s how many saw their next 5 years.
These investors sought refuge in the share market. At the time Telstra (TLS) was paying just under 10% dividends PLUS franking credits. Banks were 7%+ franking. It’s clear to see where the money went:
The red line is the ASX’s twenty largest companies, or Blue Chips, that include all of the ‘Big Eight’ mentioned above.
We can see from this chart that in 2012 the money flowed into the share market – favouring the blue chips with strong dividends – Big 4 Banks anyone?
This process started in 2012 and accelerated into 2014. By early 2015 the last of those who swapped from shares to TDs were coming off 5 years of blissful 7%+. These investors were the last to buy into the Domestic Dividend Dash, pushing the market to its top - the peak of the red line in the middle of the chart above.
At this time, I had inherited a whole desk worth of clients. From 12 brokers, I was the last man standing. The clients and I had seen the worst of the GFC and come out the other side. What was most interesting was the change in the clients' attitudes.
Charlie Aitken was 'right there' with me through the thick of it. Charlie picked TLS better than anyone. I remember reading his daily research notes as my peers were leaving the industry - the desk was still losing clients and brokers. Charlie was my just about my only companion and in March 2012 and he nailed it.
Charlie said to buy Telstra. Charlie said to buy on a 10% yield, that had just been confirmed by TLS for the next 18 months and to take the franking credits to almost a 14% yield. That’s not a typo, it was 14% yield each year.
Every client was called but not one single client bought TLS because it was a ‘dog’ in their eyes. Sure, it had been, but many investors were coming off 7% yield and looking for a home, just anything but TLS.
TLS skyrocketed 100% over the next two years. 12 months after they said ‘no’, these same investors piled into TLS on lower yields. They also voted with their feet and pushed the banks et al, higher.
This rally culminated with CBA’s May 2015 dividend, and the wheels fell off (see the peak of the red line in the chart above).
2. Caution: Low Growth Ahead
Banks don’t perform well in low-growth periods.
The forecast for the banks is low single-digit growth for the next few years. That’s uninspiring for investors and the share price ends up reflecting that mood.
Sure, the yield might be the same, and by the time growth reappears, the yield will be much higher because the share price has been belted. A 5% yield each year for three years (15% yield + franking) is little comfort after the share price has fallen 20%+.
Rudi Filapek-Vandyk had some interesting words on this subject when I interviewed him yesterday about the impact of low growth on the Big 4 Banks.
3. Ballarat Gold Fields
Nothing lasts forever, especially when the government is involved, so when investing, don’t fight parliament.
In 1851 you could walk the untouched fields of Ballarat and pick up gold at your feet.
If you’ve even been to Ballarat you’ll find that the miners are no more, and panning for gold is a difficult task... The same concept applies in financial markets.
The rules have changed for SMSF investors - despite being encouraged to invest in their super over the last two decades, tax advantages are now limited to balances under $1.6m.
In 2012 the miners were the dominate industry in the Australia and the Rudd/Gillard government introduced the Resource Super Profits Tax overnight – without industry consultation.
The Banks are the dominant force in the Australian economy and have benefited from the property boom in Australia. This property boom was all-but legislated to succeed and fill the economy’s and the federal budget's hole left from the mining collapse. In the last few months the lending framework, being the property boom, has been legislatively changed.
Investing in banks today doesn't inspire investor confidence for stronger bank share prices in the future. It's late in the TD to share cycle, fraught with legislative risk, and these shares have much lower growth prospects.
The Banks are a crowded trade, with uninspiring prospects and heighten risks.
Sure the thirst for dividends is not going away, but the watering hole we’ve all been feeding from looks very crowded.
Note: There have been other stories and drivers operating in the markets over the same time, this is the story from the dividend perspective.