Editor’s note: This article contains information only, it is not intended as general or personal advice. Your Money recommends getting advice from a licensed, independent financial adviser specific to your personal circumstances.
Whether it be via your superannuation fund or a separate personal portfolio, it’s nearly impossible for Australians not to be invested in the big banks.
As 2018 winds up as “an extraordinary year” for them, however, perhaps you wish you weren’t.
Westpac and NAB, having fallen around 20 per cent, are flirting with bear market territory, while CBA is a long way from January’s $80 stock price.
Even ANZ, the best stock performer of the four, has sunk almost 15 per cent.
Given the slump, are the banks now looking like good value and are they worth investing in as we enter 2019?
“It depends on how long the holding period is,” Tribeca Investment Partners’ Jun Bei Liu told Trading Day.
“If you have at least a 12 month holding period you do feel that in terms of banks there are a lot of challenges.”
With Commissioner Kenneth Hayne due to hand his final report down in February next year, there are concerns that his recommendations could see costs rise and profit margins shrink.
“At the same time, credit growth is slowing. With that kind of outlook it is challenging for the banks, and of course, the housing market poses a bit of risk [as well],” Liu said.
“If prices continue to fall, it could put enormous pressure on the banks.”
Intelligent Investor deputy head of research Gaurav Sodhi said stock prices weren’t as important as the potential downside.
“The decision to buy is less important than the decision about how much to hold. I think investors ought to think about their portfolio sizes for the banking sectors rather than trying to chase stock prices,” Sodhi said.
“In most circumstances, you’ll get your dividend, your 5 or 6 per cent return and that will be that. However, there’s a small probability that we could wake up and find there are catastrophic mortgage losses and the banks could quickly spiral into very large losses,” he explained.
Given that, long-term exposure should be minimised, according to Sodhi.
“The market weighting of banks is far too high… you want to hold less than the index is holding.”
While the probability of all-out calamity is low, declining property markets would continue to depress returns over the mid-term, according to Blue Ocean Equities’ portfolio strategist.
“At some point in probably the next one or two years, the default rate will rise and we’ll get into more of a mess,” Mathan Somasundaram said.
“At some point, it will unwind and the banks will get into a bit of trouble.”
Given that, risks in the banking sector may be more than some Australians wish to stomach.