Tuesday, 19 March 2013

Calling a market top

Life's pretty good for the Oz Corporate Sector.  Shares are looking up and for banks particularly.  A giddy piece by Myriam Robin painted a rosy picture, especially for the banks which "became more valuable by market capitalisation than all of those in the eurozone".

No worries about banking systems and debts exceeding the size and capacity of the underlying economy a la Cyprus then.  The Commonwealth Bank gets a special mention as it hit highest equity valuation for a day

...CBA has certainly been a very strong contributor, particularly because it’s attractive for investors seeking a lower risk.... Part of the reason why the banks, and indeed the whole economy, got through the GFC relatively unscathed is because of government-mandated limits on the amount of risks banks could take on. Our banks had relatively low levels of sub-prime debt, and were less highly leveraged than those overseas....(here)
A conventional view if not truly accurate.  CBA's mammoth position in the market is a result of it having swallowed up ailing Bankwest in a shotgun takeover in the midst of the outbreak of the GFC in 2008 (more details here).  And for better or for worse, the major banks oversized position has left them gouging their customers on deposits and mortgages and vulnerable to a turn in the wholesale markets.  Or to put it another way - being a large bank in a world where all other banks are trying to rapidly downsize is a bad thing!
As if to add to the sense that things can only head downhill, Chinese buyers are increasing their interest in Australia's financial sector:
..."What hasn't happened in a big way, but is starting to, is banking. Chinese banks finance a lot of banks around the world and we're starting to see them open branches in Perth and Sydney, looking to service Chinese clients here, but it is the beginning of what might be significant growth in the industry for China," he said....(here).

What bad could come from foreign investment and new funds? Well with Chinese investors, though capital rich, are not always successful investors.  In the mining sector, the most notorious failure is the $2.6bn Karara iron ore joint venture between China’s Anshan Iron and Steel and Australia’s Gindalbie Metals which has been weighed down by infrastructure design changes, rising material and labour costs, and currency movements and seen its budget blow out to $8 billion, then up to $10 billion (here).

Let's hope the new masters can handle the ride down from the top of the cycle when banks turn sour..

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