Time for Australian equities investors to reassess Buffett’s advice

In a recent Chanticleer column of the Australian Financial Review, the headline read “Time for ASX investors to rethink Buffett’s buy-and-hold advice”. The buy-and-hold advice in the headline refers to Buffett’s well-known ultra-long-term holding periods, “The money is made in investing by owning good companies for long periods of time. That’s what people should do with stocks,” Buffett said in 2016.

The article made the case that the big banks and giant iron ore miners dominate the Australian stock exchange and thus investors’ allocations but both sectors face structural headwinds. The article considers 2007’s then-large caps, now-smaller-caps AMP, QBE and LendLease and that should have shareholders thinking hard about the future.

Of course, this consideration is also in direct contradiction to another of Mr Buffett’s suggestions, that a low-cost index fund is the most sensible equity investment and many local investors invest in funds that track the S&P/ASX 200.

We think investors in those funds should think hard about the future too.

Despite rising rates, pressure remains on banks' margins and profits, and if we do head into a recession, cyclicals such as banks could face a period of underperformance.

Resources are also cyclical, and with demand from China stagnating, local miners also face headwinds. But these two sectors make up significant portions of Australian equity portfolios.

The headwinds faced by our big banks and mega miners

Assistant RBA governor, Brad Jones recently warned that our banking system was under threat in the coming decade from “new types of risks.” Some of these included artificial intelligence, cyber-attacks and a rapid run on the banks accelerated by the rapid spread of information and misinformation. He also warned of extreme weather events, a risk that can result in unexpected losses for lenders, increased claims on insurers and write-downs for investors.

But it is not only long-term structural headwinds banks are facing. Increasing competition in the mortgage market is squeezing margins. September’s APRA data revealed that CBA’s mortgage book had shrunk for the third month in a row, the first time CBA’s mortgage book had shrunk for three consecutive months since 2004 and the first quarterly fall since 2011, according to the Australian Financial Review.

This increased competition is in a period in which banks have openly stated that some of their borrowers “need ongoing support to help with practical steps to adapt to a higher rate environment.”

So, with more pressure on existing loans, and an economic outlook not conducive to growth, in addition to the long-term headwinds the RBA warned, Australia’s banks must also navigate more immediate headwinds.

Likewise, Australia’s resources sector, which benefited from the phenomenal growth of China, must navigate China’s lowering demand as its growth slows. While resource prices have remained resilient this year, increased supply from other regions such as Africa and a tepid demand in a slowdown may put pressure on prices over the short to medium term.

A different Australian equity approach

We are not saying sell or short Australian banks or mega-miners, these are some of Australia’s best run companies, we are just highlighting it may be a risk into the rest of 2024 and beyond if a sizable part of your Australian equity portfolio is overexposed to them. Most Australian equity portfolios benchmarked to the S&P/ASX 200 are likely to have an exposure to the big 4 banks around the 25% range because that is their representation of the benchmark index. 10% is BHP.

VanEck Australian Equal Weight ETF (MVW) is the only equal weight Australian equity portfolio on ASX and it currently has less than 7% exposure to the big four banks and BHP. We think MVW is an ideal low-cost core allocation around which ideas can be added.

If you have MVW as a core Australian equity portfolio and you believe the economic environment will become favourable for banks, you can add to your MVW portfolio by buying your preferred bank directly as a satellite position. Alternatively, you could consider the VanEck Australian Banks ETF. In this way, ETFs are efficient tools to express portfolio ideas for the prevailing economic environment.

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VanEck Australian Equal Weight ETF (MVW)

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