Australia’s big four banks — CBA, Westpac, the ANZ and NAB — have been under significant pressure in recent weeks.
Rising bond yields, slower earnings growth, weakening economic conditions and the shadow of greater macro-prudential restrictions on residential lending have all played a role in derailing what looked to be an unstoppable bull market earlier in the year.
Here’s a chart that tracks the share price movement of Australia’s “big four” so far in 2015.
As you can see, having initially surged around the same time the ECB implemented its QE program and the RBA cut interest rates in early February, there have been some significant declines in recent weeks.
From their 2015 highs CBA has lost 16.4%, the NAB 17.1%, ANZ 15.3% while Westpac, having been up more than 20% twice this year, has fallen by 21.2% – an official bear market.
These declines have been mirrored in the broader ASX 200 banks index which has fallen 17.2% since March 25.
The question now is, what will happen from here? Will we see investors step in to “buy the dip”, something that has been seen so often in recent years, or is this only the beginning of what will be a protracted bear market?
IG Markets chief market strategist Chris Weston has been pondering that very question. While the downtrend in banks has been steep, he believes there may be more selling pressure to come.
“There really has been nowhere to hide this week with all ASX sub-sectors down by more than 3% and the broader market looking for its worst weekly close since 18 May 2012, where it closed 5.6% lower. Financials have naturally put in the bulk of the points and the sub-index looks horrible on the daily chart. Westpac has already fallen by more than 20% in this drawdown and the other three big institutions are fairly close behind.
Take CBA for example; the consensus price to earnings ratio is 14.5x, which is certainly a more healthy level than where we were a few weeks ago, but still 9% above the seven year average. The Australian 10-year treasury is also 60 basis points (or 0.6%) higher as well (in the last few weeks), which needs to be taken into consideration, relatively speaking.
It just doesn’t feel like the move lower in the banks is even mature. Many investors would have bought throughout April and many would have faced margin calls this week, although I am only speculating here. Many will be faced with the prospect of closing positions and given the strong drops seen since April most would feel that the bulk of the selling is behind us and that a bounce is due. This is exactly the same mindset as what happened during the GFC and although I am not comparing the macro backdrop to the GFC, the investing/trading psychology of holding onto losing trades is still in play”.
While Weston’s view is more in line with that of a trader rather than of a long-term investor, his analysis is relevant for all involved in the market. In the years since the global financial crisis investors have become accustomed to buying any dip, no matter how small, on expectations that the asset will almost inevitably move higher.
That’s been a solid strategy over the past six years, but with the US Federal Reserve on the cusp of raising interest rates in the second half of 2015 and asset valuations still stretched compared to historic norms, any further uplift in bond yields could see the mindset of “buying the dip” eroded even further.
Many expect that banking stocks will recover from their current malaise. It will be interesting to see what happens should that recent pattern not play out on this occasion.