Foreign equity flows avoid the banks

Retail investors are continuing to be extremely wary of the stock market, although self managed super funds are still exposed: 38 per cent of SMSF assets are in cash or fixed interest, 35 per cent in Australian shares, 18 per cent in property and 8 per cent in international shares. As Deutsche Bank notes, it is the super pool and foreign institutions that are the main source of support for the stock market:

Foreign investors continue to inject new money into Australian equities, though are focused on non-banks. Banks exposure is at record lows. – Superannuation funds have received substantial discretionary inflows on top of mandatory contributions. Quarterly inflows have averaged $27bn over the past 2 years, allowing solid investment in domestic equities. Super funds have shown considerably less interest in foreign securities in the past 6 months. Cash positions remain high and are still being added to, suggesting there is scope for more flows from super funds into asset markets in time. – Households continue to opt for deposits over shares, though bank stocks are of some interest. The household debt/income ratio has been stable for ~6yrs, but accounting for rising deposits suggests a fall in ‘net’ gearing. – Investment funds have withdrawn from equities, as the retail inflows on which they rely have turned to outflows.

There is a big divergence in perception about Australian banks. Foreign institutions do not like them, local institutions love them. This may be in part the difference in tax treatment — franking credits do not apply to foreign institutions — but it may also be an indicator of local complacency, expecially about the health of the Australian property market, and therefore the banks:

Domestic institutions are close to a record overweight in banks, and if markets were to rally there could be a rotation to mining where valuations have fallen. Foreign investors have a large underweight in Australian banks, but may maintain that and instead choose foreign banks given they are considerably cheaper relative to history.

The interesting thing with the Australian super pool is the relative lack of investment into alternatives, which in SMSFs account for about 1-5% (although in industry funds it is closer to 20%). Equities, cash and property seem to be seen as the options. That is not the case internationally. A Towers Watson report  makes interesting reading. If there is a shift to alternatives in the Australian context, especially at the retail end, the demand for Australian shares may get even weaker.

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Comments

  1. CBA: Biggest liquidator by far = Legal & General (UK).
    Maintenance of value at around $47 per share assumes growing revenue. Currently trading at $53.40.

    WBC: Biggest liquidator by far = Legal & General (UK).
    Maintenance of value at around $21.50 per share assumes growing revenue. Currently trading at $21.70.

    NAB: Biggest liquidator by far = Legal & General (UK).
    Maintenance of value at around $25 per share assumes growing revenue. Currently trading at $23.50.

    ANZ: Biggest liquidator by far = Legal & General (UK).
    Maintenance of value at around $24 per share assumes growing revenue. Currently trading at $22.20.

    Put together, Megabank is close to fair value based on expecations, but this with the assumption that revenues will continue to grow. Given the continued drop in lending volumes, it is an unrealistic assumption. Therefore the value of Megabank is likely to be falling, as well as the capacity to maintain dividends. If the price follows, the yield may remain attractive, although this is only due to the fact that both price and dividends may decline at a similar pace.

    Legal and General is selling Megabank. The selling pressue appears to have been offset mostly by index funds.

  2. Deutsche report page 10:

    “interest in property is now at its highest level since 2005”

    Looking at Figure 18:
    Have the recent interest rate cuts shifted sentiment for “Wisest Place to Put Savings” from ‘Pay down mortgage’ to “Purchase property’?

    “There has been discussion about households’ shift to higher saving and ongoing deleveraging . . . they have not been paying off their debts, [but] this has been somewhat offset by rising deposits, . . .”

    Does recent change in sentiment = Use deposit to take out mortgage (to purchase property)?