Taking stock of bank stocks

My recent post touched on the resilience of the Australian property market throughout 2020 and the solid outlook going into 2021. With that in mind, it is worth checking on the Big 4 bank stocks; Commonwealth, ANZ, Westpac and NAB.

Financials were some of the hardest hit blue chips during the CV-19 downturn earlier this year. The yearly chart below shows the brutal sell off these stocks witnessed from February (up 10% since the start of the year) to late March (down around 40%). True to its status as the ‘Rolls Royce’ of the Big 4, CBA sold off the least in the initial downturn. Nonetheless it was still a time for bargain hunters, with the stock falling from over $90 to under $60. Meanwhile, other Big 4 banks remarkably broke their GFC lows.

It just shows the extent of the panic and media-driven frenzy of March. In 2008 the world financial system was legitimately close to imploding while there was no such financial disaster in 2020.

Bank shares languished for a good two months at these levels before a jolt higher, and then another one. I was very happy buying CBA at sub-$60 as I saw it as one of the lowest risk buys in the market. Now at circa-$83, I’m comfortably up, yet could have made more money elsewhere in hindsight. Such is life. My last bank buy was ANZ around September, but now I don’t see the value on the table anymore.

However, I’m still modestly positive on 2021, though I don’t see the same possible gains as buying this year amongst the turmoil. The recent rebound in lending has been driven largely by owner-occupiers, for bank shares to get the next leg-up I think we’d need to see some stronger activity in the investment segment of the market. The positive news is it’s currently in the doldrums meaning the only way is up.

How much money is sitting on the sidelines potentially going into property in 2021? Or will investors have been deterred due to uncertainty around international students (a key segment of the rental market) and increasingly bold government intrusion into private rental agreements this year.

Taking stock of bank stocks

End 2020 property market update

The ABS released the now somewhat outdated September 2020 quarter results for the Australian property market. From a 1.8% decline in the June quarter, property prices rebounded by 0.8%. Year-to growth remains a handy 4.5% – not bad in a year where the economy entered its first recession since I was in diapers (early 1990s – although I’m not exactly sure when I graduated in that respect…)

Annual change in property prices (quarter over same quarter last year)

Under the surface, there are different forces at play. Melbourne and Sydney are coming off the boil, while the smaller cities are heating up. In a post a few months ago I discussed this phenomenon I expected to play out with regional areas and smaller capitals outperforming Sydney and Melbourne after their big run-up, particularly from 2012-17.

Recently released population data is consistent with this hypothesis. While unsurprisingly Australia’s population growth fell in the year ending June 2020 (1.3% annual growth or 321k persons vs 1.5% and 383k in the year ending June 2019), there were some big shifts at the state level. The exodus had already started hitting Melbourne in the June quarter according to the ABS – just wait for future quarters! Net interstate migration was -4,000 in NSW in June and -3,000 in Victoria. However, that is a bigger story for Victoria as the prior trend had been positive, while NSW has been consistently losing people to other states. Where are they going? The answer is everywhere else; the exodus out of WA/SA has narrowed while QLD remains the key attractor for Aussies moving locally.

This population story sits consistently with the property market price growth just discussed.

I expect to see more of the same in 2021 – with Sydney and Melbourne running behind their smaller populace counterparts. Interest rates will be key to the outlook of prices more broadly, but the recent cuts are likely to continue to fuel the market in 2021, particularly while employment rebounds.

Meanwhile, other asset markets are all doing well – buoyed by big monetary and fiscal stimulus. Commodity prices have benefitted from both, which has some talking of another commodity supercycle. Iron ore prices are currently at astounding levels of US$150/ton, for reference they were around $90/ton before CV-19 hit earlier this year. Yep, up 70% since. Nickel, copper and other prices are all very strong as well. No wonder the $A has continued to climb – now buying US 76c.

It’s been a roller coaster year, who know what lays in store for 2021.

Happy Christmas for those who celebrate it, and happy holidays for those who don’t. Stay safe.

End 2020 property market update