- After falling by around 15% this year, Credit Suisse says Australian bank stocks look cheap by some metrics.
- However, strategist Damien Boey is still hesitant to trim his underweight position in the sector.
- Boey said “de-leveraging risk is still an issue” as global financial conditions continue to tighten.
Credit Suisse says investors could make a strong argument Australian banks stocks are looking cheap.
But strategist Damien Boey isn’t ready to shift to an overweight position in the sector just yet.
Australia’s big four banks are down by an average of almost 15% since January. And looking at the laundry list of headwinds facing the sector, it’s not hard to see why 2018 has been a rough year.
Lending conditions have tightened, credit growth is slowing, margin pressures have intensified and house prices are in a sustained decline. Not to mention the ongoing uncertainty from the banking royal commission.
But despite lingering fears of a “credit crunch” as market conditions worsen, Boey said Australia’s economy is still holding up well.
So far this year, “credit and economic growth have not deteriorated as sharply as leading indicators would have suggested,” he said.
And if those conditions are maintained, one could argue that the steep falls in bank stocks leaves them looking like a value-buy opportunity.
“We have a lot of sympathy for this point of view,” Boey said.
In fact, he’s “very tempted” to shift to an overweight position in banks and defensive cyclical sectors (defined as stocks which have a low correlation to broader economic activity).
However, “the problem is that financial conditions are fluid”.
In other words, the recent bout of market uncertainty — which led to the October selloff in global stocks — hasn’t just affected share price valuations. It’s also feeding back negatively into the outlook for economic growth.
“De-leveraging risk is still an issue”, Boey said, noting that “every 1% slowing in credit growth from here shaves 6.5% from earnings forecasts”.
And it’s still too early to say whether downward revision to the global earnings outlook has bottomed out yet.
In such an environment, “we remain of the view that banks and domestic cyclicals are strategic underweights”, Boey said.
He added it may be a prudent strategy to trim underweight positions until the there’s more evidence in the data of a material slowdown in credit and GDP growth.
But based off Credit Suisse’s leading indicators, Boey remains “reluctant to do so”.
“Tightening global financial conditions are a concern over and above housing,” he said.
The resulting volatility will drive demand for safer assets. So Boey’s portfolio is structured towards gold and bond proxies (such as utility or infrastructure stocks with steady dividends).