Australian Investment Blog

**The Reserve Bank of New Zealand (RBNZ) surprised all and cuts its key rate to 3.25%. RBNZ says further easing may be needed. Will Australia follow suit?**

The Australian Banks have gone from everybody’s best friend/safe bet, to the major underperformer as they have corrected over 18% in the blink of an eye – see charts 1 & 2. More importantly to us at Market Matters, they have gone from significantly overpriced to very interesting. Simply the recent increase in global interest rate has led to an aggressive sell off in the “yield play”, led by banks. This has led to banks now yielding close to 6% fully franked, compared to a 2% cash rate = very attractive. Early in 2015 we had classic “FOMO” (Fear of Missing Out) as almost every financial advisor in town was pushing retail investors out of low yielding cash into higher yielding bank stocks with almost no thought to potential capital losses – yields on the banks were closer to 4% as opposed to todays 6%. We wrote numerous reports around the risks associated with such a “crowded trade” and total complacency. If it was that easy, nobody would go to work.The Australian 4 major banks remain in the top 10 of world banks in capital requirement terms, hence relatively very safe. Even though they remain 4-5% overvalued on an absolute basis, compared to their long term PE, I believe the interest rate differential is becoming extremely supportive. Personally I believe all the concerns around long term interest rates rising, APRA demanding increased Capital requirements and a potential property correction is providing some excellent long term value in the Australian Banking Sector.When we stand back and look at CBA, we can put recent price action in simple perspective.