Why Australian Banks Will No Longer Be a Defensive Play

According to Slipstream Trader Murray Dawes, the technical stars have aligned. They’re warning of an imminent market plunge. Murray reckons it could happen within weeks. (Read his latest research here).

We thought the big sell-off that Murray is looking for was underway last night. Stocks opened down in Europe and the US. Until late in the day indices were in the red by more than 1%. But then, out of nowhere, a huge late-day rally gave some respectability to the numbers.

What caused the rally? There was no particular news to move the market that sharply. We have no idea. Like most things in the markets these days, it smells a bit dodgy.

Perhaps the late rally was simply intended to make us all think the Europeans were doing something productive at their latest summit in Rome…apart from watching Italy beat Germany in the Euro 2012 football semi-finals.

But, just like every other summit and emergency meeting in this whole sorry debacle, whatever they come up with will just be more of the same. Because in a fiat currency system that runs on debt, the only solution is to create more debt. We’re not trying to be pessimistic about the situation. It’s just reality.

A debt-based fiat money system is a giant and elaborate Ponzi scheme. Individual Ponzi schemes die a very quick death upon discovery. But the global Ponzi has a considerable life span. That’s because its perpetrators write the rules of the system. But this just ensures that, when the end finally arrives, it will be spectacular.

The Safety of Australian Banks?

As Murray mentioned yesterday, the market is on a precipice at the moment. The longer the tug-of-war continues, the more violent the eventual break will be. But for the market to plunge from here the Australian banks will have to come under pressure. That’s because they make up such a large proportion of the overall market.

Below is a chart showing the ASX200 plotted against Australia’s biggest bank, the Commonwealth (ASX: CBA). As you can see, the performance between the ASX200 and CBA diverged in March. And since the beginning of June, the outperformance has only increased. As a result, over the past 12 months the ASX200 fell just over 10% while the CBA advanced around 2.5%.

It appears as though money is running scared from most other sectors in the market and heading to the safety of the Aussie banks. Let’s call it relative safety. Australian banks only look good because everything else looks so bad…Australian resources especially.

Australian investors revere the banks. Throughout the long credit boom they were the solid, safe, growth stock. During the bust they revealed their true colours by plunging in price. But they recapitalised and now, in the post-boom environment, they are back to their most favoured trading status.

Even the Bank for International Settlements (BIS), the central banks’ central bank, reckons the Australian banks are amongst the best and most profitable in the world.

Commonwealth Bank Outperforming the Market

Commonwealth Bank Outperforming the Market

Source: BigCharts

But with credit growth anaemic and residential property prices at the beginning of a long and epic slide, how will Australian banks maintain their darling status?

Our guess is they won’t. But we’ve been saying that for a while now so take it with a grain a salt. The reality is that the Australian banks remain highly profitable thanks to good management and good fortune. And while management will probably remain sound, their fortunes are slowly turning.

As this credit crisis rolls on, we think the property market downturn will damage bank balance sheets (Australian banks have around 70% balance sheet exposure to residential property) and drag down their profitability (measured by return on equity). In time, Australian banks won’t be seen as a defensive play…rather they’ll be viewed as the highly leveraged and risky institutions that they are.

That’s a longer term view. In the short term, we’re interested to see whether these ‘defensive’ plays will re-join the broader market as they did in the latter half of 2011 (see chart). If they do, then Murray’s prognosis will prove correct, and you can expect much lower prices in the weeks ahead.


Greg Canavan
for Markets and Money

From the Archives…

The US Deficit of Deceit
2012-06-22 – Greg Canavan

How Nice to Have Friends At the Fed
2012-06-21 – Bill Bonner

Deep in the Stock Market Trenches
2012-06-20 – Murray Dawes

In Praise of the Eureka Rebellion
2012-06-19 – Dan Denning

What Could Possibly Go Wrong With Infrastructure Investment Bonds?
2012-06-18 – Dan Denning

Greg Canavan
Greg Canavan is a contributing Editor of Markets and Money and is the foremost authority for retail investors on value investing in Australia. He is a former head of Australasian Research for an Australian asset-management group and has been a regular guest on CNBC, Sky Business’s The Perrett Report and Lateline Business. Greg is also the editor of Crisis & Opportunity, an investment publication designed to help investors profit from companies and stocks that are undervalued on the market. To follow Greg's financial world view more closely you can subscribe to Markets and Money for free here. If you’re already a Markets and Money subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Markets and Money emails. For more on Greg go here.

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5 Comments on "Why Australian Banks Will No Longer Be a Defensive Play"

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I’m sure someone among the DR writers would make something of this one.



What property downturn. Property is about to boom. Trying to sell our house, 36 groups came through last weekend, 1st open. Must admit it is in a prize location. Note sure where the MEDIAN house price is situated, and even so not sure what it means as a statistic. Whatever, expecting a better turn out this week, better price.


Interesting comment John. Try selling a house in Perth. It only happens when sellers drop the price by up to 25%. Many are trying to sell for what they paid during our housing boom in 2007. Huge falls in prices since then unfortunately.

Is his name John Smith? Man that’s one of the most amazing comments I’ve heard this year. He must work for either a Realestate company or the Labour government. We must all understand that we will not be immune to our bursting bubble. If you think they can keep stimulating our housing market to upside then you need a reality check man. We are now proven to be overstocked not under stocked on properties especially in the GoldCoast. I sold my home in January for a fraction less than what I bought it for in 2009. All I did was… Read more »
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A great article indeed and a very detailed, realistic and superb analysis of the current and past scenarios.

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