Banks, miners could give ASX rally more legs, analysts say


Surging consumer confidence, reflected in the latest ANZ-Roy Morgan survey that saw the rating rise by 3.6 per cent – the biggest increase in 10 months – also fostered investor sentiment.

A sector that could help sustain the sharemarket’s recent advance is financial services, including the big four banks, which took a pounding in the wake of the banking royal commission last year.

Market expectations for the banks remain quite low, so we do not expect too many negative surprises.

“Banks continue to do well, as they always do in April, leading into their May results and dividends reporting season,” said TS Lim, head of research at Bell Potter.

“Market expectations for the banks remain quite low, so we do not expect too many negative surprises.

“We believe the bulk of the noise – royal commission, federal election issues and calls for higher capital requirements by the Reserve Bank of NZ – has been baked into the share prices, so as long as the banks keep a lid on credit quality and sustainable dividends, they should be fine,” he said.

City analyst Brendan Sproules said banks would continue to be a safe haven should the overall sharemarket or the economy weaken.

Weak earnings growth

“Until dividends are cut and capital is called, the bank sector will remain defensive and likely to deliver relative outperformance,” he said.

Tim Ridley, portfolio head, asset allocation at Cbus super, said while the market had risen sharply, valuations are still only “around fair value”, after climbing from “moderately cheap levels” in the fourth quarter of 2018.

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However, the likelihood of lacklustre overall earnings growth has tempered his view to a “neutral” outlook over the next 12 months.

Mr Ridley said a large part of the local market rally reflected  policy announcements by the US Federal Reserve and China.

“The Fed has retreated from its tightening path and is now taking time to assess its next move,” he said.  “This has been an important development for markets, as its previous path was progressively increasing downside risks, particularly the risk of a US recession.

Less margin of safety

“China is employing policy stimulus that has helped to reduce its downside risks to growth.

“And while negotiations are yet to realise a trade deal, there are signs that the US and China will broker one soon,” Mr Ridley said.

Neil Carter, head of active equities for IFM Investors, said there was less margin of safety with higher valuations following the market’s march higher.

“That makes it subject to greater risk of a correction, if there is a significant event or shock,” he said.

Commodity prices can stay strong for longer and the valuation of the mining sector is not stretched.

However, he added that strong support would come from both the Fed and the RBA, which are seemingly moving toward an interest-rate easing bias.

“This makes equities look attractive relative to bonds or cash, since you have both the dividend yield and the potential for growth,” he said.

Mr Carter said mining companies had been strong contributors in the rally and this would likely continue.

“Iron ore, coal and oil have all performed well and the majors are producing prodigious amounts of cash,” he said.

Lukasz de Pourbaix, chief investment officer at Lonsec, said with equities now in the late stages of their market cycle, he expects increased volatility.

“The flow-on effect that a softening housing market will have on households is yet to impact the markets,” he said.

“From a valuation perspective, most asset classes have been trading at a premium to their long-term valuations, as markets have been supported by a low-interest-rate environment.

“This environment, in our view, is now changing,” he said.

Tom Collinson, portfolio manager at Lucerne Investment Partners, said if the US suffers a correction, “it will be felt here.”

“Valuations remain high but, if inflation stays low and central banks can remain dovish, a case can be made for our market to continue grinding higher in the short-to-medium term,” he said.

Stephen is Investment Editor at The Age and Sydney Morning Herald. He writes about personal finance issues and markets as well as editing Money.

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