3 months ago
21
Of all the things that could affect Commonwealth Bank’s lofty share price, the construction of a massive hydroelectric dam in China is probably not top of mind.
But when bank-watchers scour the world for explanations on why bank shares lagged last month, an enormous hydroelectric dam project in Tibet is one of several factors that do come up.
The reason, according to analysts, is that big ASX investors are constantly tossing up whether to put their money into either of the market’s two massive sectors: banks or miners. Which way investors lean between these two sectors can have a big bearing on share prices: if investors prefer miners, the banks tend to lag, and vice versa.
In market jargon, it’s referred to as “rotating” between the two sectors, and it can have a significant impact on share prices, especially for the most highly valued bank, CBA.
It means the price of bank shares can be influenced by things that have little direct bearing on bank’s core business, but that matter a lot for miners, such as the strength of China’s construction sector, which affects commodity prices.
A section of the Yarlung Tsangpo River, where China this month started building what’s intended to be the world’s largest hydroelectric dam.Credit: Getty Images
Some argue that is what has happened in the past month or so, and the launch of an enormous dam on the Yarlung Tsangpo river in Tibet fed into that optimism on commodities.
The underperformance of banks was a key trend in July. Except for ANZ Bank, the other Big Four lagged the ASX 200 index. CBA lost about 4 per cent in the month. Miners had the opposite experience: BHP gained close to 7 per cent in the month.
This was a stark change from the dominant narrative of the past year, in which banks have sharply outperformed miners, much to the frustration of the investment pros who can’t fathom why the CBA share price has kept rising.
Now, the CBA share price is more than 8 per cent below its record highs of June and the bank’s market value has slipped under the $300 billion milestone, though CBA shares are still up strongly since the start of the year.
So, why did miners perform so much better than the banks in July? And does this matter for investors?
Market-watchers say the outlook for banks hasn’t really changed recently and that it’s more likely that banks have lagged because investors have favoured the big miners instead. That shift towards mining has come as prices for commodities including iron ore and copper have improved. The price of iron ore, Australia’s biggest export, has risen from about $US93 a tonne to $US100 a tonne in the month.
“There’s this feeling the Chinese economy hasn’t collapsed, it’s still growing OK, and we might see some more stimulus,” says AMP chief economist Shane Oliver.
“That’s probably more of a trigger than anything happening with the banks, because it’s created a bit of enthusiasm with regards to resources stocks.”
Oliver said the announcement that China was building a 1.2 trillion yuan ($259 billion) dam on the Yarlung Tsangpo river (the notice last week briefly pushed iron ore to its highest level since February) had fed into the market’s enthusiasm for resources. The dam is expected to be far bigger than the Three Gorges Dam on the Yangtze River, and the project’s launch was seen as a sign of stimulus from China’s government.
Citi analyst Thomas Strong says the announcement of the dam triggered a sharp rotation between banks and miners.
Importantly, experts say it’s too early to say if the recent strength in mining stocks is a meaningful trend or a short-term blip.
Loading
But if it continues, a rotation from banks to miners would be hugely welcome news for many professional investors who have been burned by the surge in CBA shares.
Many fund managers sceptical of CBA’s sky-high valuation have taken an “underweight” position on the stock but that meant they underperformed the market last financial year, as CBA boomed. Even though it has retreated somewhat, the banking giant’s shares are still up by 29 per cent in the past year.
Investors who bought CBA shares near their June peak, however, would be far less pleased with its recent slump.
Whether the bank share price weakness continues or not, it follows a long-running debate among analysts about whether Australian bank shares are over-priced, leaving them highly exposed to shifts in market sentiment.
Strong sees the recent “rotation” as the second “strong warning” for bank investors since a short-lived move from banks to miners in September last year. “It serves as a reminder of the vulnerability of the bank sector’s valuation risk as the earnings outlook remains soft,” Strong wrote.
The Business Briefing newsletter delivers major stories, exclusive coverage and expert opinion. Sign up to get it every weekday morning.
Most Viewed in Business
Loading
