- The ASX 200 Banks Index has fallen 23.1% since early May last year, leaving it entrenched in a technical bear market.
- Morgan Stanley’s Australian equities team says they’ve recently sensed a shift in investor mindset, indicating that some believe the worst for the sector is over.
- It does not share that view, warning “this is likely just the calm before the storm”.
It’s been a torrid 18 months for Australian banking stocks.
From the recent cyclical peak struck in early May last year, the ASX 200 Banks Index has fallen 23.1%, leaving it entrenched in a technical bear market.
A slowing housing market and the threat of a tighter regulatory environment following Australia’s Banking Royal Commission has clearly weighed on the outlook for earnings.
As seen in the chart below from Morgan Stanley, banking stocks have now under-performed the broader ASX 200 Index for 18 consecutive months, a period only surpassed on two prior occasions since the turn of the century.
Having already fallen substantially and with so much bad news already priced in, it’s easy to see why some investors may be tempted to buy the dip, especially with gross yields now substantially higher than what they’ve been in the past.
Morgan Stanley’s Australian equities team says they’ve recently sensed a shift in investor mindset, indicating that some believe the worst for the sector is over.
“We sense a real desire by some investors to call the sustained underperformance of the banks as done, with concerns now in the price,” they say.
“The main… [reasoning] is simple valuation.
“Versus 10 year averages of price-to-earnings and expected yield, the banks all screen as a value opportunity.”
However, past performance is not always indicative of future returns, and while banks may look like an attractive prospect from a historic perspective, Morgan Stanley says there’s still plenty of reasons to show caution.
“Comparing valuation history over this period does not reflect or anticipate the challenges and headwinds facing the banks,” they say. “This is likely just the calm before the storm.”
“Despite screening as value, banks have not participated in the recent growth to value rotation. This has much to do with — as just plain equities — this sector offering declining revenue and earnings outlooks compounded by continued negative regulatory oversight.
“Add in the yet-to-be priced potential for a decline in credit quality linked to a housing slowdown and continued caution is warranted.”
Given that assessment, Morgan Stanley says it will not be joining others in piling into banking stocks.
“We maintain our sector underweight to -5.3% relative to benchmark,” they say.
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