Investors have started the new year convinced of a couple of things: that interest rates will fall, and that this is great news for a bunch of blue-chip companies.
The bullishness is particularly clear when you look at Commonwealth Bank, which this week hit its highest share price on record, trading above $113 a share, pushing its market value to about $190 billion.
CBA shares have recently traded at record highs, fuelled by bets of looming interest rate cuts.Credit: Eamon Gallagher
Shares in CBA’s smaller rivals aren’t performing quite as well, but the trend is puzzling all the same. Does this really seem like a time in the economic cycle when banks – highly sensitive to any worsening in economic conditions – should be trading at record-high valuations?
It gets more curious when you think about what’s been going on in the banks’ underlying businesses.
Aren’t they slugging it out in a profit-shredding mortgage market price war? Weren’t banks also big winners when interest rates were rising, because they passed on increases to borrowers while dragging their feet on savings accounts? How can they have it both ways, making more profits when rates rise, and then winning again when rates fall?
It’s possible to come up with scenarios that answer all these questions and still paint a rosy outlook for the banking giants at the heart of our financial system. But these scenarios require a lot to go the banks’ way.
A more convincing answer, I’d say, is that the recent rally in bank shares may be overdone, and markets have been getting overexcited in the absence of much real new information over summer.
The big four banks make up one-fifth of the ASX 200 and are therefore hard for investors – let alone big superannuation funds – to avoid. The recent exuberance in bank shares is part of a broader rally in the ASX during late 2023, following a more powerful gain in the world’s biggest market, the US.
Bank investors’ rate cut exuberance doesn’t stack up
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18.01.2024
Investors have started the new year convinced of a couple of things: that interest rates will fall, and that this is great news for a bunch of blue-chip companies.
The bullishness is particularly clear when you look at Commonwealth Bank, which this week hit its highest share price on record, trading above $113 a share, pushing its market value to about $190 billion.
CBA shares have recently traded at record highs, fuelled by bets of looming interest rate cuts.Credit: Eamon........
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