Markets have ‘baked in’ expectations that interest rates and inflation will stay low for a long time, but Simon Mawhinney, Chief Investment Officer at Allan Gray, thinks that assuming low rates for an extended period could be dangerous.
“There’s quite a few things that could go wrong, and probably only one thing that can go right for the banks – credit growth in the low single digits going forwards. I would think that’s quite an optimistic outcome.”
Headwinds for the banks:
- Loan serviceability could fall as borrowers struggle to pay higher interest costs
- Flat or negative credit growth, combined with growing costs bases, could hurt the banks’ bottom line
- NAB recently announced that they’re spending $1.5B on restructuring; Mawhinney expects the others will need to follow suit.
In the video below, he shares two other sectors he would avoid as rates rise.
For further insights from Allan Gray, please visit their website
Livewire Exclusive brings you exclusive content from a wide range of leading fund managers and investment professionals.
The problem I see with this argument is that banks have some of the highest dividend yields on the ASX. NAB for example is paying 6.7% dividend yield. The rest of the big four are in this vicinity. Share prices with yields at this level are not "priced for perfection" - they are priced with the expectation that there is risk in the Australian market from a housing perspective on hand and fintech disruption on the other.