For years, active fund managers have faced pressure for holding fewer shares in Australia’s major banks than their passive counterparts. However, these long-standing bearish positions may soon yield returns as strategists signal a significant unwind for the sector amid a looming economic downturn. Australian banks are financial institutions that provide a wide range of services, including lending, deposit-taking, and wealth management, to individuals and businesses across the nation.
Morgan Stanley informed clients that the operating environment for the banking industry had profoundly shifted, a change not seen with such speed in 25 years, barring the onset of COVID-19. Equity strategist Richard Wiles highlighted rising interest rates, a global energy shock, and changes to fiscal policy as factors not yet fully priced in by the market. The firm issued a bearish report, noting an increased probability of both earnings downgrades and a de-rating for bank shares. Wiles specifically cited downside risks from the Reserve Bank of Australia’s consecutive rate rises and government changes to residential property tax, which are expected to end a three-decade housing “super-cycle”.
Among the “big four” banks, Morgan Stanley gave ANZ an “overweight” recommendation, while Australia’s largest lender, Commonwealth Bank (CBA), was ranked its worst pick. UBS echoed concerns, warning that both CBA and Westpac were most vulnerable to a slowdown in mortgage growth. Despite passive money inflows on the ASX bolstering bank share prices and helping CBA surpass a $300 billion valuation, Regal portfolio manager Mark Nathan, who is underweight the sector, warned that a large unwind in mortgage demand from residential property investors, exacerbated by recent budget changes to capital gains and negative gearing taxes, is the biggest challenge. Schroders’ head of Australian equities, Martin Conlon, suggested a pull-back could finally reward active managers who have historically held smaller bank positions, signalling a potential time for them to outperform.
