BHP is once again the largest company on the ASX, thanks to a 15 per cent surge in its share price last week and early this week, and a five per cent drop in Commonwealth Bank’s share price. As I write, BHP has a market capitalisation of $226 billion and CBA’s market cap is $223 billion. They are streets ahead of number three, CSL, which has a market cap of $140 billion. Investing is about returns, not size, but what has happened to BHP and CBA reflects what’s happened to resource stocks and bank stocks. Last week Beijing announced several measures to help boost the world’s second largest economy, and that sent commodity prices higher, helping the miners. The more mysterious part of the equation is what’s happening to banks. Is it the beginning of a “great rotation” from bank stocks to resources on the ASX? Maybe, though plenty don’t think that’s the case because Beijing still has to turn around the Chinese economy. Given the consensus view on NAB, Westpac and ANZ is “sell” and it's “strong sell” on CBA, according to Market Index, is it fund managers finally deciding to stop buying banks? Again the answer is maybe, but given investors have been wrong about the banks for more than 12 months, few are ready to subscribe to that view yet. Is the bank sell-down because interest rates in Australia will eventually fall? Banks are supposed to suffer in a falling rate environment because the gap between the cost of funding and what interest rates are charged on loans gets squeezed, particularly as rates get lower. It’s another “maybe”. It all depends on competition in the market. The big mining stocks are much easier to forecast than the banks. The bank stocks are the conundrum.
2. Qatar-Virgin is good for passengers
The deal between Qatar Airways and Virgin Australia is a good one for passengers. Qatar has bought 25 per cent of Virgin from private equity group Bain. Back in 2020, Bain purchased Virgin, saving it from collapse, and it has been a steady climb back. Now with Qatar on board, Virgin can start offering flights to Europe. All flights will be ticketed Virgin, routed through Doha, and mostly be on Qatar planes. More competition in the market is good for customers. It is notable that two very senior politicians – opposition leader Peter Dutton and Labor’s Bill Shorten – immediately come out in support of the deal. And Virgin has Qantas to thank for that. Early last year, Qantas ran a ferocious lobbying campaign to prevent Qatar from getting more flights into Australia. The federal government listened and knocked back Qatar’s applications. But the mood in Canberra around Qantas has changed. Its brand has been tarnished by greed that resulted in people being booked on flights that didn’t exist and poor service. The federal Labor government is no longer inclined to look favourably on national carrier. The Qatar-Virgin deal still needs to get through the Foreign Investment Review Board and the Australian Competition and Consumer Commission. It has a much better chance of doing so then it would have two years ago, thanks to the actions of Qantas. The lesson in all this: brand matters.
3. The unfortunate rise of two super funds
There is a big, big problem brewing in Australian financial markets. It is the growing dominance of just two players – AustralianSuper and Australian Retirement Trust. They now account for more than half of all new retirement savings entering accounts and together manage more than $655 billion in assets. The next five largest industry super funds – UniSuper, Hostplus, Cbus, Rest and HESTA – manage $700 billion and the gap between the top two and the rest is growing. Figures compiled by Morningstar show AustralianSuper received 37 per cent of inflows – less withdrawals – in the 12 months to the end of June 2023, while Australian Retirement Trust accounted for 15 per cent. These two groups are too big. How does a manager the size of AussieSuper or ART deploy all the capital they have? Individually they have enough money to shift markets, and nothing major happens without them knowing about it. It means too much power is concentrated in the hands of a few. Where do the funds invest all the money, especially if they have members who want their retirement savings in a specific asset class, such as local equities? It’s bad for members, who need competition among super funds to keep managers trying to achieve the best returns, and fees low. We’ve been lucky thus far. The two funds, at least from my viewpoint, are run responsibly and well. But that won’t always be the case.
4. The end for Star Entertainment is nigh
There are some stocks that aren’t supposed to be volatile, and traditionally gaming companies in Australia have been steady earners, through booms and busts. People still gamble in tough times. Star Entertainment has put paid to that rule of thumb. Last Friday, it began trading again after finally publishing its financial year accounts. On opening its share price fell 50 per cent. While Star has negotiated a $200 million facility to stave off collapse, it will pay a very high interest rate of 13.5 per cent. Things were a bit better on Monday, with the share price up 19 per cent on the view Star still has a chance of making it. Then it released the audit report for its financial accounts and that gave only qualified support, based on expenses related to the new Queen’s Wharf casino precinct in Brisbane. Its share price fell eight per cent on Tuesday. At the same time revenue is down with the business not performing well and it is still operating under a restricted licence in Sydney, its main location. The Star is unlikely to make it as a listed entity unless there is a white knight, probably from offshore, willing to take a big chunk of stock. And if they do, they will probably have control. Farewell Star Entertainment, as we know it.
5. Tea and scones with the RBA: not a good idea
The Reserve Bank is getting itself into hot water by holding briefings with select financial institutions, that are then being leaked to other market participants or the media. It is a fraught area for Governor Michele Bullock. In the past couple of years, senior RBA management – including former Governor Philip Lowe and Ms Bullock – have met with Barrenjoey Capital Partners, Westpac and RBC Capital Markets for private briefings, according to media reports. Rules apply to these meetings – whatever is said and heard in the room must stay in the room. But inevitably there’s a leak, and in the Barrenjoey case that was to The Australian Financial Review. As a result of the leaks, the three organisations won’t be receiving a morning tea call again. Should the Reserve Bank Governors be meeting with select financial institutions anyway? No. Being RBA Governor can’t be fun. Every word you deliver is scoured for hints of monetary policy insights. The price for Ms Bullock and her deputy Andrew Hauser, is to not give select briefings. Why should a handful of finance players at a lunch hear from Governors while other market participants do not, particularly when literally hundreds of billions of dollars of capital is involved. The central bank needs to liaise with the financial services community, but it shouldn’t be the Governors doing select briefings.
BEST OF THE WEEK
IF YOU MISSED THIS ONE, CATCH-UP NOW
If you've ever bid for property at auction, you'd know just how intense the experience is. Should you start the bidding? How much should you bid? Where should you stand? Should you get someone to bid for you? All of these questions and more are answered in the latest episode of The Property Pendulum, presented by Domain and Fear & Greed.
"Why is it that the Reserve Bank Governor Michele Bullock says that interest rates won’t fall until at least next year, yet financial markets and some economists don’t believe her? They say rates will fall this year."
AND ONE LAST THING...
Regular listeners to Fear & Greed would've heard us talk to Diana Mousina, Deputy Chief Economist at AMP, on many occasions. She's a great communicator on all things economic... but who knew she could act as well?
Check out this video on LinkedIn, where Diana takes us through the real story of the housing market in Australia, and why changes to negative gearing and capital gains tax are so fraught. In just over one minute, Diana plays more roles than Eddie Murphy.
