Australian bank stocks are expensive, highly exposed to the housing market and make up a part of the local market that is overvalued, meaning investors should look elsewhere for better returns on their investments, according to a portfolio manager at Schroders.
Schroders head of Australian equities Martin Conlon said caution should be exercised when it comes to investing in bank stocks, with some of them reaching new highs and outperforming the S&P/ASX 200 Index over the past year, despite stalling housing construction and ongoing higher interest rates.
“There is a lot of tension in the housing market, with higher interest rates working bluntly to slow down housing starts, which are at trough levels compared to the last 30 or 40 years,” Conlon said.
“Yet bank valuations are a lot higher than they would be normally and their debt levels look like they’re in a situation where they can’t really get any better.
“Conditions in the Australian housing market suggest that it’s going to be tough for banks to keep on injecting more credit, particularly against housing.”
He added investors should avoid the current trend in equities markets where many are looking at sharp share price rises, but losing sight of the fundamentals of investing, causing them to become momentum investors, and pointed to the very high price-earnings multiples of United States technology stocks.
“I think we all know that that’s the epicentre of speculative activity around the world, the Nvidias of the world. People are attracted to prices that move most because they love a fast buck. When it comes to valuations, there’s a lot of crazy stuff happening,” he said.
“While the ASX is probably skewing a little bit more expensive versus markets globally, the one thing that you would say is that everyone loves growth.
“The reason the US markets are more expensive than Europe by a lot is that Europe doesn’t have much growth. People are running to where the growth is.”
Schroders head of research Justin Halliwell pointed out that while the banking and technology sectors in Australia were expensive, most of the local market was not trading at high multiples and more reasonable prices could be found in the resources, materials and energy sectors.
“One thing that struck me in the results in the mining space is that earnings have remained stable, both at price level and at cost level, which is unusual, particularly in the big end of town,” Halliwell said.
“Our valuations say that BHP looks reasonable on a valuation metric and Rio Tinto too. Despite recent price falls, the market and ourselves are expecting less profit, but it’s nothing to panic about.”
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