Is it a good time to be overweight banks?
With a possible recovery in the second half of the year and a less severe market downturn than initially anticipated, investors might see banks as a good position to be overweight to, according to Ausbil’s chief investment officer and head of equities Paul Xiradis.
Investors might want to take advantage of banks at a time when most institutions were still underweight the sector based on dire forecasts in the market while, in reality, banks were provisioning for an economy with far higher unemployment levels and deeper negative growth than had occurred.
The positive outlook for banks was on the basis that earnings would exceed expectations while bad debts would not be nearly as bad as the market had been pricing, Xiradis noted.
“If you are optimistic about Australian and New Zealand economic recovery, and we are, you have to be comfortable with the banks. The banks are most leveraged to an improving environment. We are seeing that already,” he said.
“We believe that the depths of the downturn are not going to be anywhere near as bad as initially expected, and the recovery is not going to take as long as was expected. If this remains the case, it is a fantastic opportunity for investors to reweight back into the banks.”
The company increased its exposure through the COVID-19 sell-down, and was now the most overweight it had been in banks for a number of years. If earnings showed better than expected figures, banks might see strong balance sheets and would return to paying an ongoing dividends, albeit at a lower payout ratio, it said.
Asked about where he stood with COVID-19 from a macro viewpoint, Xiradis said: “Back in March, we were looking into the unknown with a pandemic that was both unpredictable and dangerous. Incredibly, almost in unison, governments and central banks across the world’s markets scrambled together the biggest stimulus package in history, over 10% of world GDP in value. Until then, things seemed bleak, but after this wave of stimulus, focus turned to containment and recovery.
“We felt that in the second half of this year there would be a recovery, we said this early. A few months on, we are experiencing a far better outcome than most expected. This is largely due to the decisive global stimulus that supported the world economy in hibernation, and the fact that this period of hibernation has been a lot shorter than expected.”
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