Banks
To our mind, it is hard to justify an overweight to banks, when the CEO of the biggest bank (and good on him for doing so) is suggesting that collective action should be taken to reduce the heat in the sector, or else there will be problems later.
When forming a basis for a view, you are usually trying to express and articulate the evidence for a variance to market, that supports your position, and not normally forming a variance to the CEO.
Interestingly (making it a housing centric day market wise) we note similar comments from the IMF, who, like us, can see the same worrying backdrop as our big bank CEO.
Combing the above points, with the below observation about valuation across the Australian banking sector (where a stock like CBA stands out as wildly expensive) you’ve got good reason(s) to tilt to underweight the sector, even as a rising rate environment benefits the banks. (that comment is written with reference to our earlier note this morning about rate sensitives).
Additionally, consider the below tweet from Amir Sufi, award winning author and professor of economics, writing about the linkages between household debt, house prices, and subsequent economic growth.
Now he had China in mind, when he wrote that, but those comments, and many of the similar sounding, similarly structured comments about Evergrande (which we’ve written about, on this blog, but really the best you’ll read on it is the Michael Pettis version) could easily apply to Australia.
Acceptance of the above, or not, likely defines your DAA view on Australian shares, at the overall portfolio level, and the banks, at a sectoral one.
Our process is about distilling market narratives, and that, outside of the energy sector bet, is probably the biggest divergence there is, in our local market.
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