The recent and sudden surge in market volatility in early February has highlighted the rising disconnect between the economy and markets. For some time many asset prices have been artificially inflated by trillions of dollars in monetary stimulus and ultra-low rates as central banks have tried to reignite sluggish economies.
Reality sinks in for investors
As economies begin to register strong growth on the back of tax cuts and resurgent “animal spirits”, investors have become concerned that inflation and interest rates are on the way back up and the stimulus will need to be withdrawn.
Against this backdrop we believe that companies with solid balance sheets and good quality earnings are well positioned. They are also the types of companies that are likely look more and more attractive as markets absorb the new realities.
Westpac well placed to outperform its peers
The significant de-rating in Westpac’s share price in the middle of calendar year 2017, driven by concerns over the bank’s excessive exposure to interest only lending, presented an opportunity to increase exposure.
This is an area that the banking regulator, APRA, had expressed concern with, and then introduced caps on new interest only loan growth for the banks.
Subsequent to the prudential regulatory measures introduced by APRA, APRA relaxed the definition of what was to be deemed a new interest only loan, which removed refinancing risk for most interest-only borrowers.
All the banks also took proactive steps to reduce their exposure to interest only lending by encouraging customers to switch into principal loans by re-pricing different mortgage products. Banks were also quick to reduce new mortgage flow to less than 30% of lending.
Westpac has reduced its interest only exposure risk, and continues to have a superior consumer banking franchise assisted by its peer-leading investment in technology, including the development of the wealth management platform Panorama.
For these reasons Westpac now appears well placed to outperform its peers in the Australian banking sector.
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Vince is Deputy Head of Equities and Portfolio Manager for Australian Share, Geared Australian Shares, Direct Equity Alpha and Perpetual Equity Investment Company (ASX: PIC).