As Middle East tensions escalated, a familiar trade emerged in the Australian sharemarket. Investors moved away from riskier small-cap stocks, seeking perceived safety in major banks. Regal Partners investment director Charlie Aitken describes this as “one of the great Australian long-short trades of my 32-year career.” Regal Partners, an alternative investment manager, offers various strategies. Aitken, like many fund managers, is perplexed by investors paying near-record prices for banks, citing various headwinds including interest rate rises and weakening consumer sentiment.
Aitken labels the banks’ “flight to safety” rally “idiotic,” attributing it to passive investing and deleveraging in Australia’s narrow equity market. Regal is among hedge funds betting against bank shares, including Commonwealth Bank. Despite these bets, CBA shares have rebounded 22 per cent since February, nearing their record of $192. This has impacted Regal’s returns, with its Australian Long Short Equity Fund down 17 per cent year-to-date after falling 19 per cent in March, and its geared Atlantic Absolute Return Fund sinking 31 per cent in March to be down 24 per cent.
Fund managers are seeking a catalyst for a bank stock correction, with Aitken identifying Westpac’s recent trading update as a potential trigger for sector-wide earnings downgrades. Westpac plans to increase bad debt buffers, anticipating losses from energy-intensive customers, which analysts warn could lead to forecast downgrades. Aitken views “growthless, expensive, and risky” Australian banks as an “obvious funding vehicle.” He notes small caps are now significantly cheaper, with the S&P/ASX Small Ordinaries Index trading at its largest price-earnings discount to the S&P/ASX 20 in over two decades. Aitken advocates for “ridiculously cheap Australian small caps with demonstrable growth,” and sees BHP shares as significantly undervalued. He predicts BHP could soon surpass CBA as the ASX’s most valuable stock, expecting its FY29 earnings per share estimates to be understated by up to 50 per cent due to potential copper price increases, benefiting the world’s largest copper producer.
