Return of the great Australian bank short?

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The Australian has an interesting snippet today:

In recent weeks, global investors have been gradually repatriating funds from the local stockmarket as the dollar cools against the US dollar and Japanese yen, with the banks a key target after their 20 per cent outperformance against the broader market in the past year. A rally in offshore bond yields has also reduced the appeal of local high-yielding stocks for offshore investors who do not benefit from franking credits.

BlackRock, one of the world’s largest asset managers with $US4 trillion ($4.1 trillion) under management, appears to have reduced its holding last week, offloading more than $100 million worth of shares in the big four banks, according to Bloomberg.

BlackRock is a top-three shareholder in Westpac, CBA, NAB and ANZ. But because it doesn’t hold more than 5 per cent, the asset manager is not required to disclose changes in its holdings to the Australian Securities Exchange.

The Blackrock shift out of banks is probably best viewed through the prism of portfolio rebalancing as risk assets move away from Australia on the back of growing confidence in the US economy.

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It is still too early in the cycle for bad debts to creep up on bank balance sheets. In fact, the banks are still cutting their bad debt provisioning. But it is an opportune moment to ask the question that will be on lips of every global hedge fund manager that follows Australia: Is it time to short the banks?

House prices are still firm, mortgage credit is modestly accelerating and in the past shorting the banks has been a very costly affair, wearing the big dividends while waiting for capital losses. But with bank share prices so high, the dividends are lower and risk/reward equation is better.

Moreover, the combination of inflated bank prices and an approaching mining investment cliff that’s certain to cause some measure of economic disruption must be beginning to make the bank short look pretty compelling to an offshore investor.

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Add in the fact that monetary policy now looks to be finally impacting the dollar and the RBA’s halo of bank protection is also fraying for foreign investors (not so much local ones). Even if for locals further rats cuts produce another spurt of bank share price inflation, rate cuts are also now likely to accelerate dollar declines, offering a built in hedge to foreign shorts. Certainly the dollar looks set to fall further than bank shares prices look likely to rise.

Other ways of playing the Australian adjustment are already significantly played out. Miners have fallen a long way, interest rates have fallen a long way and other equities sectors remain subdued. Simple dollar plays have plenty more left in the tank, but as inflated as they are, the banks stick out today as a prime asymmetric play if your view is that the Australia’s economy is headed for rough waters.

About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.