Banks set to soar as Royal Commission ends
In the past year the financial news has been dominated by the Royal Commission into the Finance Sector, however, this is now coming to an end as the final report is due to be submitted on 1 February. Will this report cut the anchor that has held the banks back or will it be a nail in their coffin?
The Royal Commission has well and truly taken its toll on the banks as they were down as much as 30 per cent from their 2015 highs last year. To put this into perspective, as of December 2018, some of the banks where trading at levels not seen since 2012.
With dividend yields of around 6 to 8 per cent, this makes bank stocks a very attractive investment right now, although you would be wise to ponder whether the worst is behind us.
That said, while the dividend yields are attractive, they often a sign of a poor performing stock, which is certainly the case here. We also need to remember that there is a reason why the banks are down as much as they are, and there are many hurdles they still need to overcome.
So what’s in store for the Big 4 in 2019?
The first quarter trading updates for the banks will occur shortly after the Royal Commission report is released, so the banks may see some short term volatility in the next month.
If there are no real surprises from the commission, we could see a 5 to 8 per cent gain in the short term. That said, there is downside risk if the commissioner wants to make an example out of the banks, as the recommendations may significantly impact the banks bottom line. If this occurs, prices could fall to back to the lows in December.
Right now, I believe the worst is over and that the banks will continue to rise in the short to medium term. Looking at the big four banks historically, we know they have been down since early 2015, and history suggests that a decline of more than four years is highly unlikely. That said, for the banks to be in the clear they need to have a strong move up in the next 6 months in the order of 10 per cent or more.
The best time to make your decision on the banks is shortly after the Royal Commission report is released, as the change in trend from down to up will be confirmed by then and you will be able to gauge the response to the report. Remember, the big four are a longer-term investment, so there is no not need to rush.
My favourite stock in this sector at the moment is CBA, although I do like some of the second-tier banks such as Bendigo and Adelaide Bank, so I recommend sticking both stocks on your watch list.
So what do we expect in the market?
The All Ordinaries is bullish and while this statement may seem a little over confident the signs are certainly there to back this up. The market is up nearly 8 per cent in the past few weeks and the banks have moved up strongly this week along with BHP and RIO. In the past 11 days the market has only traded lower than the previous day once, which was last Monday, and we are experiencing the highest closing prices in our market over the past two months.
That said, the volatility in the past year has investors cautious and with normal volumes starting to return to after the Christmas break, we still need to be careful that the market could do anything.
The real test will come when the market trades up to 6,000 points, because if it fails to break through this level, it will mean further downside is likely. Right now things are looking good and I expect the market will trade through this level and move up to 6,200 by the end of the first quarter this year. My advice is look to the big stocks for opportunities to buy.
