My oh my. Iron ore is now over US$120 a tonne. This is just too much fun for the big Aussie miners.
And thank goodness for you and me, and every other super fund.
Because the other big staple of the Aussie market — the big banks — are under all sorts of pressure.
Watch carefully here. Banks are the lynchpin of both the economy and the ASX.
They have multiple problems…
The first front the banks are fighting is the meek credit growth in Australia.
According to the latest data, it’s at the lowest point since Reserve Bank records began in 1976.
The stabilising property market offers a glimpse of hope that this could lift.
House prices will move first before the credit figures respond. So we’ll keep watching the lending side.
But the banks also face multiple problems elsewhere.
The first is that yields are sinking in Australia.
The lower interest rates go, the less buffer banks have to protect their net interest margins.
One analyst cited in the Financial Review says this dynamic could lop off 8.6% of NAB’s net profit in 2020. That’s a hefty punch in the gut.
It also implies the only way for the banks to protect their earnings — if they even can — is to take a chainsaw to their costs.
That may not be the worst of it…
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Kiwi central bank stuffing up bank outlook
The NZ regulators aren’t helping there either.
I’ve talked about this before.
The Kiwi central bank has come out and said it wants to increase the capital banks are required to hold to a huge 16%.
That’s double what it is now. The big four banks all have New Zealand subsidiaries.
This is money the banks must put aside against their assets. The banks would need to find $19 billion1 to cover it.
That’s an enormous sum. It would also lower their return on equity for their New Zealand operations.
Neither of those things are what you want to hear as a shareholder. It’s a burden on the business.
But there’s nothing we can do about it.
The Kiwi central bank says its final decision is due in November.
The new rules, if implemented, would go into effect from April next year.
Watch this space. This could hobble bank returns.
If that wasn’t enough, ASIC is coming at the banks with its ‘responsible lending’ proposals.
ASIC’s intentions are good. It wants banks to assess borrowers in a more rigorous way so people who can’t afford a loan at a certain size and rate aren’t given it.
But it’s also likely to be a recipe to keep a boot on the neck of credit growth (see above).
That’s a problem we all have when it’s private debt that drives the economy.
Suffice to say, bank stocks aren’t the most exciting place to dance right now.
That’s not to say there isn’t opportunity across the market.
There are heaps of places to look.
Follow the $100 billion
Resources is the obvious one. The big miners are so flush with cash that some is bound to flow into exploration and new investment.
But keep an eye on stocks that could tap into the huge infrastructure spending the state governments are financing.
Billionaire Alex Waislitz says the bill is going to be over $100 billion for road, rail, airport and communication projects.
This is another reason why I pay no attention to the big property bears. Land values will capture these improvements wherever they go in.
That’s not all…
The newly elected Morrison government is very close to passing its tax cuts package, possibly by the end of the week.
It’s currently structured as a three-stage program, to be rolled out from now until 2024.2
The government will say this will help low- to middle-income earners get on and blah blah.
A close study of history says that the real estate market will swallow any general ‘improvement’ of this nature.
That’s because it simply allows the average working stiff to hand over more of their earnings to landlords via higher rents or banks at interest via bigger mortgages. Property prices should rise accordingly.
But the real estate party won’t really get going until the banks can crank up the credit growth again. That just doesn’t seem likely in the current environment.
That means housing-related stocks don’t seem very tempting right now.
It’s another reason why I recommend small caps. This is one sector of the market with a lot of stocks that offer a high-growth outlook.
And if the current trade war truce holds or diminishes, the next six months could be really fun.
1. Big four banks face $19 billion NZ capital call’, The Australian Financial Review, July 1, 2019.
2. ‘Labor opens door to waving through tax cuts’, The Australian Financial Review, July 1, 2019.