Bulls bet banks to push Australia stocks to post-crisis peak

[SINGAPORE] Australia, home to one of the worst-performing stock markets anywhere in the developed world this year, is finally poised to leave the financial crisis behind.

K2 Asset Management Ltd, whose fund has trounced the market, is betting financial and commodity companies will drive gains for equities Down Under. While many countries saw their local markets recently hit fresh record highs, Australia's benchmark S&P/ASX 200 Index is only just approaching the highest level since 2008. Along with K2, Eight Investments Partners and Credit Suisse Group AG see earnings continuing to recover amid broader global economic growth and an improving outlook for commodity prices.

"Looking forward, the capacity for Australian companies to generate profits is quite good," said Melbourne-based David Poppenbeek, whose K2 Australian Fund has outperformed its benchmark by a factor of almost two since starting in 1999 and now has 35 per cent of assets devoted to financial stocks. "Jobs are being created and confidence is returning."

K2's cut the cash portion of its A$470 million (S$490.39 million) portfolio to buy more equities.

Profits for ASX 200 companies will grow another 6 per cent in the year through June after expanding 15 per cent in the previous period, according to Credit Suisse estimates.

Australia added more jobs than forecast in September, even as concerns over wage growth and consumer sentiment persist. The Reserve Bank of Australia has held rates at the lowest on record for more than a year, steering growth toward services as the economy transitions away from a mining-investment boom. It has also signaled it's in no rush to join global peers in reining in stimulus even as the nation's economy is improving.

The equity benchmark posted its best month this year in October, rising 4 per cent amid a worldwide bull run. A broader measure of the local market reached a post-crisis high last week - the All Ordinaries Index, which tracks Australia's 500 largest stocks, is trading at the highest level since May 2008. 

There are signs the market's advance was too much too soon. The Relative Strength Indicator, a technical measure, has been suggesting stocks are poised for a drop.

"Statistically we are close to profit taking," said Chris Weston, chief market strategist at IG Group in Melbourne. "Put no new money to work, wait for the pullback." The ASX 200 on Monday closed down 0.1 per cent at 5,953.80. The biggest drag was Westpac Banking Corp, which fell 2.2 per cent after its full-year profit missed estimates. Chief executive officer Brian Hartzer said the outlook for the financial industry is becoming more challenging.

The biggest contributor to October's rally was the country's largest lender, Commonwealth Bank of Australia, which posted record profit in August thanks to mortgage and business lending. Westpac, National Australia Bank Ltd, BHP Billiton Ltd and Macquarie Group Ltd rounded out the top five.

The biggest risk for the nation's banks is a correction in property prices, but that scenario is unlikely, according to S&P Global Ratings. "Loan losses in the next two years are likely to remain very low by historical and international standards," S&P said Friday.

The ASX 200 previously approached the 6,000 level back in May and in 2015. Touching that level could spur more optimism around the 17-year-old measure, which was worse off than the S&P 500 in 2008 with a 41 per cent decline.

"It is a significant level" that may bring further gains, said Kerry Series, who oversees A$250 million as chief investment officer of Eight Investments Partners in Sydney. "Stable economic growth and relative low bad debts, falling unemployment are positive for the economy and banks" while "synchronised global growth" will support commodity prices and miners. He's betting smaller companies such as Cooper Energy Ltd will outperform their larger rivals.

Still, the banks and the miners have the two highest weightings on index so their fortunes can determine the direction of the local stock market. For instance, a surprise bank tax announced in May helped trigger five straight months of losses for stocks.

For some, the 6,000 level may just be a number. Reinvesting dividends, which play a prominent role in the local market, would have helped investors recoup losses from the financial crisis back in 2013, based on the performance of the S&P/ASX 200 Accumulation Index.

The lack of large technology stocks in Australia has limited the market's performance this year. Tech firms, which make up less than two per cent of the local benchmark, have led gains on the MSCI All-Country World Index, where they account for more than 17 per cent of the global equities gauge.

The ASX 200 has climbed 5 per cent this year in local dollar terms. In US dollars, that advance is 11 per cent, compared with 16 per cent for the S&P 500 and 18 per cent for the MSCI World. That relative under-performance has made the Australian measure cheaper, and possibly more attractive.

Consensus price targets for the index's 200 members suggest the gauge will be at 6,040.59 in a year, according to data compiled by Bloomberg. Credit Suisse is more bullish. Strategist Hasan Tevfik expects the index to finish 2018 at 6,500, implying a 9.2 per cent advance from Monday's close.

BLOOMBERG