Strong sentiment in the banks

Contrarian investing is not always about selling the market.

Sometimes, the key contrarian aspect of opportunity is to note how the market itself is defying conventional wisdom. 

In April, we had the infamous "Sell all the Banks" broker call.

This turned out to be a splendid buying opportunity.

Here we show how the cost basis sentiment indicator could have helped identify how the market sentiment was not bearish at the time of this heroic failed call.

The following charts for the big financials all show a similar condition.

Stocks are trading well above their average cost basis. Even under a 10% correction, all of these banks would continue to trade in support territory above cost basis.

This continues to be a bull market for banks.

Commonwealth Bank ASX: CBA continues to be heavily bought.

National Australia Bank ASX: NAB is also making new highs.

Macquarie Group ASX: MQG was weaker in the first quarter but has broken out to the upside.

ANZ Group ASX: ANZ is trading in a tight range.

Westpac ASX: WBC is a little firmer than ANZ.

This short note highlights how the market narrative, based on perceptions of value, may not relate at all strongly to how the market actually trades.

Australian banks are widely held by retail investors. These investors do not trade anywhere near as quickly as institutions. This means that most retail investors are holding shares at entry prices that are well below the market.

Unlike the professional investors, retail investors did not dump their bank shares in April. This buy and hold strategy has worked for them.

When reviewing the above, Westpac is perhaps the most interesting laggard. It is too early to tell if the planned technology refresh will pay off. However, we note that the market has not given the bank much credit for this. While there are risks involved, we think that now is a great time to undertake this spend. 

Generative AI is transforming many aspects of software development, especially in the more difficult areas of data management. We think this is good for the banks.

We recently added Westpac to our model portfolio construction and believe that better times lie ahead for the bank. Interest rates are likely to remain elevated and GenAI offers a major opportunity for banks to reclaim lost channel from mortgage brokers.

There is no proof of this yet, but the expectations in the stock price are modest.

Photo by Marcus Reubenstein on Unsplash

A screen over the top 20 largest stocks on the ASX is attached.