THE WEEK AHEAD: Investors ride the banking wave

Just over a year ago many analysts and investors were proclaiming the end of the world with global sharemarkets being pummelled by the US financial crisis. What a difference a year can make – or 15 months to be precise. Latest data shows that the value of banking shares on the Australian sharemarket has hit record highs.

Market capitalisation of the banking industry sector is now valued at $307 billion, up 125% from the lows recorded in January 2009 (the Banking sector includes ANZ, Bendigo, Bank of Queensland, CBA, NAB, RHG Ltd, Westpac). The more than doubling in banking sector capitalisation has come via a combination of new equity issuance and higher share prices. The banking share index has lifted by 98% over the same period.

Aussie banks never experienced the problems of their overseas peers but they were still sold off over 2008 in line with other financial firms across the globe. But when the recovery came it was always likely that Aussie banks would out-perform overseas peers as well as out-perform many other sectors on the local sharemarket. And that’s proven to be the case.

No doubt many investors have done very well over the past year in picking up banking shares at fire-sale prices and taking part in equity raisings. But what the experience highlights is the value of taking a “big picture” view of the fundamentals and separating facts from noise, fear and innuendo. There are still some analysts and commentators attempting to highlight the next “X-factor” that will lead to a major sharemarket correction or new downturn for the global economy. There will always be the ambulance chasers, but for ordinary investors it is a case of remaining rational in troubled times and identifying value and opportunities.

The rise and rise of the banking sector raises an interesting point about the concentration of our sharemarket. Just 22 months ago banks accounted for 14% of the All Ordinaries. Today the market share stands at 22%. If we just focus on the big four banks and throw in BHP Billiton and Rio Tinto, these six stocks now account for almost 35% of the All Ordinaries, up from just over 25% in mid-2007.

Add in the next four biggest companies – Telstra, Wesfarmers, Woodside Petroleum and Woolworths – and the market share of the 10 biggest companies stands at 46%. If we switch our focus to the ASX 200, the top 10 stocks account for a whopping 53% of the index.

By comparison, the top 10 stocks in the US only account for 20% of the S&P 500 index and 17% of the broader S&P Composite 1500 index. If our biggest companies continue to grow in relative terms compared with the remainder of the market there will certainly be more focus on the extent of market concentration existing on the Australian sharemarket.

The week ahead

Where would we be without the Reserve Bank? Well if it wasn’t for the Reserve Bank, there would be next to nothing guiding financial markets over the coming week. Still, there’s an outside chance that the Government will release details of the Henry Tax Inquiry in coming days. And there’s always plenty happening in the US, while the IMF will also update its latest economic forecasts on Wednesday.

On Tuesday the Reserve Bank releases minutes of the April 6 Board meeting and on Friday the Reserve Bank Governor delivers a speech on the economy in Toowoomba. In terms of economic data, figures on imports are issued on Wednesday together with the skilled vacancies index. New car sales data is released on Thursday while statistics on export and import prices are slated for Friday.

The Reserve Bank never gives too much away when it releases the monthly Board minutes – but it is still worth a look. The “terms of trade” has returned as a key influence on Reserve Bank thinking and any comments on the “two speed” nature of the economy would also attract plenty of interest.

The Reserve Bank Governor has yet another opportunity to influence financial market thinking with a speech to be delivered on Friday. Seemingly the cost of housing has been preying on Glenn Stevens’ mind of late, but there is little the Reserve Bank can do to affect the imbalance in that market. And investors will want to know how the Reserve Bank will handle the “two speed” economy. Jacking up interest rates won’t slow the mining sector down, but it certainly has potential to crunch retail and housing markets.

The economic data of most interest in the coming week is car sales. The Federal Chamber of Automotive Industries has already released industry data showing March car sales at a record high for any March month. Still, once you take into account seasonal factors, car sales probably only rose by 1.5% in the month after falling by 1.9% in February.

Looking ahead, with car affordability at the best levels in 35 years, employment rising and job confidence strong, car sales should continue to drift higher as the year progresses.

In the US, there is the usual healthy spattering of economic data over the week. On Monday the leading indicator report is issued with producer prices and existing home sales on Thursday and durable goods orders and new home sales on Friday.

The leading index has lifted for 11 months in a row with annualised growth now far faster than the recovery from the 2000/01 recession. The leading index should have notched its 12th straight rise in March, gaining 1% and providing further confidence about the sustainability of the recovery.

The report on business inflation (producer prices) shouldn’t attract much attention if the core rate (excludes food and energy) lifts by 0.1% as forecast. Inflation is simply not an issue at present.

Of the other indicators, solid gains of 4-5% are expected for both existing and new home sales. But orders for durable goods (goods with a lifespan over three years) may have been largely unchanged after three straight gains.

Sharemarket

The second week of the US profit reporting season will see the who’s who of Corporate America announcing earnings results. In total, over 415 companies are slated to report over the week. Among those reporting on Monday are Citigroup and IBM. On Tuesday, Coca-Cola, Goldman Sachs, Johnson & Johnson, US Bankcorp, Apple and Yahoo! are slated to report. AT & T, Boeing McDonalds, Morgan Stanley and Wells Fargo are among those issuing earnings statements on Wednesday. On Thursday, Ford Motor, Amazon, American Express and Microsoft report earnings.

Interest rates, currencies & commodities

The currency strategists at CBA have just updated their views on where the Aussie dollar is headed. Previously, the Aussie was expected to lose some altitude to US88 cents by mid-year and then slip further in the second half of the year to US85 cents. While the strategists still expect the Aussie to ease over the final six months of the year, it is now expected to occur from a higher base. The Aussie dollar is now expected to be around US95 cents by end of June, easing to US90 cents by the end of the year.

Overall, the “front loading” of rate hikes by the Reserve Bank has served to boost the Aussie dollar. The Aussie also has received a leg up from the surprising strength of the global economy with key economies recording V-shaped turnarounds. At the same time the US Federal Reserve has done little so far in removing monetary stimulus, keeping downward pressure on the US dollar.

But while the Aussie is expected to ease against the greenback over 2010 – with parity not on the agenda – the currency is expected to prove move stable against the euro at around 69 euro cents. The Aussie is also seen losing ground against the Kiwi, dropping from NZ$1.31 to NZ$1.25 by the end of the year and from 60 pence to 58 pence against the British pound over the same period. Both NZ and the UK are expected to lift rates far more aggressively over the second half of 2010 than in the US or euro-zone.

Craig James is chief economist at CommSec.