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Investment funds pour into Australian banks; caution on miners

Published 13/08/2024, 12:48 am
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By Aaditya GovindRao

(Reuters) - Australian financial stocks are ruling the roost on the traditionally miners-led local main index, fueled by growing interest from equity funds that are wary of the commodity-backed sector due to poor Chinese demand.

The financial sub-index, composed chiefly of the biggest lenders in the region, has risen more than 15% this year. In contrast, the local metals and mining index has declined more than 18% and conceded its top weighting on the ASX 200 index to banks at the end of the second quarter.

Commonwealth Bank of Australia, the nation's biggest bank, also became its most valuable stock on July 12, surpassing global miner BHP (ASX:BHP) Group.

Lower bad debts, growing net interest margins and less competition has helped banks. Australia's property prices hitting record highs have also provided a tailwind. Meanwhile, a strong premium rate cycle has bolstered insurers.

"As property prices climb, home loan growth generally increases as well, boosting overall revenue and ensuring stable dividend payouts," Junvum Kim, senior sales trader at Saxo Asia Pacific, said.

Abrdn Australia Equity Fund Inc, an actively managed fund that helps U.S. investors gain exposure to Australian equities, increased its holding in financials by around 6% in the first half of 2024, while cutting mining sector investments by 4%.

"The Australian banks have continued their strong run over the past year. All are trading close to or well above their five-year historical average multiples now," said Eric Chan, an investment manager at Abrdn focusing on Asian equities.

"This has surprised many, given the backdrop of subdued earnings growth and return on equity levels for the sector."

A sustained slump in China's property sector, a top consumer of iron ore, has weighed on the underlying commodity prices, putting pressure on global mining giants like BHP and Rio Tinto (ASX:RIO).

"We sold a lot of the resources sector (stocks) during January and February as China's property sector continued to struggle," said Jun Bei Liu, who manages the Tribeca Alpha Plus Fund.

Financials accounted for nearly 30% of Tribeca's portfolio as of June-end, while materials only about 5%-to-10%.

GREEN SHOOTS OF HOPE

Traders believe that recent stimulus measures from the world's second largest economy could signal a turnaround for the materials sector in the near term.

© Reuters. A man uses a Commonwealth Bank of Australia ATM in Sydney, Australia, April 19, 2018. REUTERS/Edgar Su/File Photo

"Even though demand hasn't recovered yet, the stimulus efforts from China, along with the fact that the stock prices are really cheap now, has led us to start buying miners again in the past month", said Liu.

While copper and iron ore prices are in a bear market, cost bases of the big miners are stable, allowing them to withstand this pressure, Saxo's Kim said.

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