Potential risk to returns by having an underweight position in resources, overweight financials, especially from such extreme levels says Pengana’s Ric Ronge.
The first signs of a correction between banks and miners are showing, as miners have started to rally on better-than-expected US jobs growth, supportive Chinese trade data and further Central Bank stimulus.
Ronge says the RBA rate cut and commentary confirms that the Australian economy is growing below trend and that credit growth will be challenging moving forward, a definite head-wind for banks.
“Banks and miners largely traded in-line to the end of 2011, and as before, ASX banks rallied from the end of 2011 to hit a 5+ year high with investors chasing yield in an environment of falling cash rates and bond yields,” says Ronge.
“Conversely, resources have continued to fall to be at or near GFC lows.”
“Any degree of normalisation between banks and resources from these levels will see a significant re-rate in miners in an absolute and relative sense versus banks,” he says.
“While it is difficult to time markets or ring a bell at the bottom, clients should be made aware of the severity of dislocation between these two sectors and the potential risk to returns by having an underweight position in resources, overweight financials, especially from such extreme levels.”