US stocks were lower on Friday night with the Dow finishing down 1% and the S&P 500 0.85% lower. But against that rather poor outlook, and ignoring weak data out of China over the weekend, the ASX 200 is up 0.55% today.
The rally is being led by healthcare companies, which are up a collective 2% in trade today, thanks to invention by the Turnbull government. And the financial sector is also higher with the big four banks leading the way.
The ANZ is currently up 0.83%, the CBA 0.65%, Westpac defied any concerns raised by fresh ASIC allegations with a 0.87% gain and while the NAB is lagging, it’s still up a very credible 0.55%.
While the bank rally is in contrast to recent weakness, a Deutsche Bank report suggests shares in the major banks are looking cheap.
Deutsche Bank analysts Andrew Triggs and Anthony Hoo said in a note Friday that the Majors are “on average…currently trading at a ~9% discount to their 5-year historical P/E” relative to the All Industrials index ex-Banks.
“ANZ offers the best value relative to historical P/E rels (17% below 5-yr avg PE rel), followed by WBC at 11% below its 5-yr avg PE rel. NAB offers the smallest discount at 4% and CBA is at 7% below”, they wrote.
That discount is a result of the banks coming under heavy selling recently as the multiple headwinds facing their businesses weighed on investor sentiment.
But after the recent half yearly reporting season from the ANZ, NAB, and Westpac, and the Commonwealth’s quarterly update, investors appear happy that they are now fully informed of the outlook and are once again focussed on yield.
Likewise the recent RBA rate cut, and the increased number of forecasters who think rates will fall as far as 1% appears to have focussed investors minds once again on their alternative income streams from bank bills, bonds, and at a retail level term deposits.
The yield paid on a bank stock is a function of share price and dividend stream. So it’s not an apples and apples measure when compared with the yield being paid on these interest rate instruments, which have a far lower volatility than bank stock prices.
But in a low interest rate environment, where many investors will be fearful of further falls in interest rates, the banks are again standing out clearly as an attractive investment.
Triggs and Hoo say “NAB offers the highest 12-month forward dividend yield among the majors, at 6.8% (based on our forecasts), while CBA’s yield is the lowest of the majors at 5.4%”.
Global comparisons also suggest the majors represent value.
With a 12 month forward PE ratio of 12.7, the Big Four appear mid-range of the comparison Triggs and Hoo offer. But they clearly stand out on a dividend yield comparison basis.
Many offshore investors still see the banks as just a housing market accident away from lower levels. But in a local sense it looks like the prospective dividend yields and the prospect of further falls in Australian interest rates are making the banks appear cheap to many investors on the ASX.