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.
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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.