The Fin has another article about the banks, one of many, in which they contrast the outlook across brokers and fund managers.
The essential questions are: 1) do net interest margins (NIMs) expand given rising rates, and 2) do rising bad and doubtful debts (BDDs) eat all the profit?
To be overweight, you’ve got to think 1) happens and that 2) doesn’t (or at least doesn’t entirely). There is competition, too, as we think of fintech lending. I don’t think we need to worry too much about those; they will cease to exist in a credit event.
But even if you think competition will keep a lid on NIMs and rising BDDs will prevent NPAT growth, you would have every other sector struggling without any offset in that environment.
There isn’t a positive relative argument to make for consumer discretionary if the bear story above plays out. It’s the same for any other sector with lots of duration risk and leverage risk. It is just a larger claim on revenues, with no attached benefits.
Now, it looks like a solid argument that we map out above. But it is by no means a slam dunk. And it is a trade with a somewhat limited lifespan. The bad case (rising BDDs) will come through with a lag in the same way rising unemployment does, as an indicator for anything, so we should see it coming.
Meanwhile, the NIMs should go first; if that happens, and the banks make some money, so we will have generated a decent outcome.
Note that we are only equal weight the banks. The overweights are to the insurance companies, and the above is about us trying to figure out if using up 20% of our capital just to hedge out the banks is a worthwhile trade.
Important Information: This document has been prepared by Aequitas Investment Partners ABN 92 644 165 266 (“Aequitas”, “our”, “we”), a Corporate Authorised Representative (no. 1284389) of C2 Financial Services, (Australian Financial Services Licensee no. 502171), and is for distribution within Australia to wholesale clients and financial advisers only.
This document is based on information available at the time of publishing, information which we believe is correct and any opinions, conclusions or forecasts are reasonably held or made as at the time of its compilation, but no warranty is made as to its accuracy, reliability or completeness. To the extent permitted by law, neither Aequitas nor any of its affiliates accept liability to any person for loss or damage arising from the use of the information herein.
Please note that past performance is not a reliable indicator of future performance.
General Advice Warning: This document has been prepared without taking into account your objectives, financial situation or needs, and therefore you should consider its appropriateness, having regard to your objectives, financial situation and needs. Before making any decision about whether to acquire a financial product, you should obtain and read the relevant Product Disclosure Statement (PDS) or Investor Directed Portfolio Service Guide (IDPS Guide) and consider talking to a financial adviser.
Taxation warning: Any taxation considerations are general and based on present taxation laws and may be subject to change. Aequitas is not a registered tax (financial) adviser under the Tax Agent Services Act 2009 and investors should seek tax advice from a registered tax agent or a registered tax (financial) adviser if they intend to rely on this information to satisfy the liabilities or obligations or claim entitlements that arise, or could arise, under a taxation law.