Bank clues to the bull market

Today I have banks on the brain.

A piece in today’s Australian Financial Review points out that the brokers are calling the big four down…while the market is bidding them up.

What’s the story?

In theory the major Aussie banks are too expensive relative to the muted outlook for their earnings and growth prospects.

However, the benign level of bad debts and bigger cashflows off higher rates mean that the big four are buying back shares and lifting their dividends.

One wonders, too, how much passive money flows into the sector regardless of the fundamentals.

We can leave it to the big cap fund managers to wrestle with whether they should be “under” or “over” weight the banks.

All I need to know is they have solid profits to provide structural support to the overall ASX.

A profitable, healthy banking sector is the lynchpin of the financial system…and Australia’s stock market because the banks make up so much of it.

Big dividends mean large profits and strong capital: a healthy combination to bolster an ongoing bull market on the ASX.

We can apply this basic framework overseas too

The Economist reported on May 11 that European bank shares are ripping up lately too.

Check it out…

European banks are reporting growing profits and have lower bad debts like here in Australia.

Suddenly some EU major banks are swooping in aggressively to buy up small rivals. Read: they're acting with confidence. 

We even saw this play out on the ASX earlier this year when UK bank Nationwide bid for Virgin Money UK ($VUK) at a 40% premium.

I neither trade nor invest in European shares.

However, the same point above holds: a profitable bank sector is a good sign for the Euro economy…and therefore global growth and asset markets in general.

These two points above help set my overall game plan when it comes to shares

As a broad brush stroke, we should remain in a structural bull market.

The implication is that dips in the market, like now - at least for me - are to be bought, and not sold.

Best wishes,

Callum Newman

Editor, Fat Tail Investment Research

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