Beyond the Big Four: VanEck predicts structural shift away from bank dominance

Last week, the Commonwealth Bank saw a 10.4% drop after its results announcement, wiping $30 billion off its market cap.

According to VanEck, while this is a signal that there’s a rotation underway, it’s far from the only factor.

Reading the asset manager’s latest Australian Equities Outlook, it's hard to argue with the underpinnings that lead to this conclusion.

The days of the major banks as the default trade are now gone, as disinflation, falling rates, unbroken housing credit growth, and benign provisioning have, in the words of VanEck, “reversed simultaneously”.

“We could be seeing the start of a regime shift,” says head of investments Russel Chesler.

“We’re in a structurally different earnings environment to the one that delivered the last five years of bank performance. Australian investors may need to look beyond the big banks to capture the next phase of opportunity on the ASX.”

Indeed, the rotation has already begun, with conditions now more favourable for “real-economy sectors”, such as materials and industrials. This means investors need to be wary of maintaining a heavy allocation to the banks.

“Concentration risk in the major banks now cuts both ways,” Chesler said.

“They have driven the index higher for years. They can drive it lower just as quickly. Investors should be mindful that CBA alone accounts for roughly 10% of the S&P/ASX 200. When a single stock can move the benchmark by half a per cent on a single quarterly update, you are no longer running a diversified portfolio.”

Macroeconomic headwinds: “Higher for longer” rates

Australia’s core economic framework is facing complex hurdles that severely restrict the Reserve Bank of Australia’s (RBA) capacity for monetary easing. The domestic economy is heavily impacted by “sticky inflation, faltering consumer and business confidence, low private investment, and weak productivity”.

Since 2023, Australia’s headline economic growth has masked underlying vulnerabilities because it “largely depends on public spending”. This structural dynamic has seen public consumption rise as a share of GDP rather than normalising alongside developed global peers, uncovering a less favourable economic reality where expansion “is being supported more by the public sector than by a genuine lift in private demand”.

Furthermore, outsized public sector employment has actively “crowded out private investment and weighed on productivity”. Both GDP per hour worked and real capital per person have deteriorated, with trend productivity growth not expected to recover until 2030–31.

Compounding these domestic imbalances are sweeping policy adjustments, as “changes to capital gains tax and negative gearing announced in the recent Federal Budget could shift investment preferences across property and shares”.

Exogenous shocks and geopolitical wildcards

A primary external threat to Australian growth is the ongoing US-Iran conflict, which serves as a significant macroeconomic “wildcard”. Recent US-Israeli strikes on Iran and the effective closure of the crucial Strait of Hormuz have triggered a severe energy shock, forcing oil prices above US$100/bbl. If prolonged, this disruption poses severe systemic risks because the Strait carries “roughly one-quarter of global seaborne oil trade and around one-fifth of global LNG trade”.

For Australian markets, the spillover is highly damaging: “higher energy and freight costs would compound already persistent domestic cost pressures”. 

This supply-side shock reinforces the “higher for longer” interest rate environment while simultaneously lowering corporate profit margins and eroding consumer purchasing power.

February earnings review and sector positioning

The February earnings season was modestly positive, with 40% of ASX 200 companies beating expectations, 34% trading in-line, and 26% missing. Despite these solid baseline numbers, equity price reactions were remarkably volatile, with “one in five stocks recording a single-day swing of +/-10% or more post-result”.

In response to these conditions, VanEck outlines a clear strategy for structural sector allocation:

• Constructive on materials and select industrials: These sectors offer “growth at a reasonable price and pricing power”. Materials act as a historical outperformer in high-inflation environments , buoyed by the structural demand for gold and critical minerals. Because Australia holds the fourth-largest rare earth reserves globally, local critical mineral producers stand as “direct beneficiaries of this structural shift in global sourcing” as Western nations pursue supply chain sovereignty.
• Neutral on large-cap banks: Banks emerged as large-cap winners due to priced-in margin expansion from elevated rates; however, their valuations are now heavily “stretched”. Concentrated large-cap positioning poses a notable portfolio risk if stagflation takes hold.
• Cautious on information technology and consumer discretionary: Software-heavy Australian tech names face severe “AI disruption risk” alongside demanding valuations. Concurrently, smaller retailers are highly vulnerable to shrinking household budgets, rising cost-of-living pressures, and “limited pricing power”.

Key tactical takeaway: The mid-cap and equal-weight premium

Faced with stretched large-cap valuations, VanEck argues for an equal-weight strategy that tilts toward mid-caps. Mid-caps represented the undisputed “sweet spot” of the earnings season, capturing the highest upward price target revisions and strongest earnings surprises. Equal-weight portfolios have also proven to be resilient investment vehicles, successfully outperforming during the market’s last three interest rate hiking cycles.

You can read VanEck's full outlook for Australian Equities here.