Why investors are chasing these ‘sly little upstarts’

Tuesday, 24 September 2019
Adelaide, Australia
By Bernd Struben

  • Markets
  • What’s next for oil?

I think a great “unbundling” process is underway. And there are huge profits to be found.

Ryan Dinse, on the big banks’ demise

If the big banks think the worst is behind them, they’ve got another thing coming.

Now to be clear, Australia’s Big Four banks still count among the most profitable in the world. And all four have returned healthy gains so far in 2019. Albeit those gains follow on the sharp downturns suffered in the last months of 2018.

But there’s a good reason for that profitability. And it’s one that looks to be coming to a rapid end.

Here’s how Ryan Dinse explains it in his advisory service, Exponential Stock Investor:

It’ll be no surprise to you that the source of this great wealth is a distinct lack of competition. Our top five banks have over 80% market share.

And they’ve exploited it as far as they can. But those days are fast coming to an end.

I think a great “unbundling” process is underway. And there are huge profits to be found.

The big banks are under fire from multiple fronts.

First, the Hayne Royal Commission may have wrapped up, but the fallout from its findings are only just beginning to bite. The Australian Securities and Investments Commission (ASIC) took a lot of flak for going light on the banks. Now the agency is making up for lost time.

ASIC has 88 enforcement investigations underway. And 86 of those involve the Big Four banks along with AMP.

But it’s not just ASIC putting the big banks under the regulatory microscope. The Australian Competition and Consumer Commission (ACCC) is also on their case.

This headline comes for The Sydney Morning Herald: ‘ACCC eyes fresh competition inquiry into big banks’. The article continues:

Competition tsar Rod Sims [chairman of the ACCC] has flagged another inquiry into the major banks’ market dominance, as part of the regulator’s ongoing scrutiny of financial services…

Asked what competition issues the ACCC wanted to explore in its next inquiry targeting the industry, Mr Sims referred to a previous inquiry the ACCC did into mortgage pricing, and he said it had been “surprised at how little price competition there was between the big banks.”

Mr Sims said a lack of fierce price competition was “not surprising” in a market dominated by four players, because “obviously if one of them starts a price war, they’ll expect the others to respond, so they’ll all lose money.”

While I’m no fan of the big banks’ dominance in Australia’s financial markets, the idea of another government inquiry into their oligopoly leaves me cold. Far better if the free market can deliver the more competitive outcomes that Sims is gunning for.

And despite the static snapshot image of the banking sector today, that competition is coming on. Fast.

Here’s Ryan Dinse again:

A swarm of sly little upstarts are coming to cut the Big Four’s lunch.

Unlike our Big Four, they’re not stuck with dated 1970’s technology, costly branches and old-fashioned notions of customer service.

They’re at the cutting edge of technology.

And they’re ready to explode onto the market and disrupt every single aspect of Australian finance.

Ryan details the dire situation facing the Big Four banks in his research report, ‘Australia’s Banks Are About to Get “CRAIGSLISTED”’.

And he offers four small-cap ASX listed disruptors he believes are poised to seize significant market share from the Big Four.

You can read the full report here.

Now, to the markets…

Markets

Overnight, the Dow Jones Industrial Average closed up 14.92 points, or 0.06%.

The S&P 500 closed down 0.29 points, or 0.01%.

In Europe the Euro Stoxx 50 index closed down 34.42 points, or 0.96%. Meanwhile, the FTSE 100 fell 0.26% and Germany’s DAX closed down 125.68 points, or 1.01%.

In Asian markets Japan’s Nikkei 225 is up 15.22 points, or 0.07%. China’s CSI 300 is up 0.81%.

In Australia, the S&P/ASX 200 is up 4.47 points, or 0.07%.

West Texas Intermediate crude oil is US$58.41 per barrel. Brent crude is US$64.49 per barrel. (More on oil below…)

Turning to gold, the yellow metal is trading for US$1,520.51 (AU$2,244.63) per troy ounce. Silver is US$18.72 (AU$27.64) per troy ounce.

One bitcoin is worth US$9,737.79.

The Aussie dollar is worth 67.74 US cents.

What’s next for oil?

Getting back to oil, both Brent and WTI crude slipped a few cents per barrel on expectations Saudi Arabia will return to full production in October.

But, as you can see in the chart below, Brent (white line) and WTI (blue line) are still trading close to 7% above their pre-attack levels:



chart image
Source: Bloomberg
Click to enlarge

Iran still denies responsibility for the 13 September drone and missile strike that took out 5% of the world’s oil production. But the rest of the world isn’t buying it. France and the UK have joined the US in accusing Iran. And along with Germany, the nations are now all calling for new nuclear and missile negotiations with Iran.

That leaves Iran increasingly isolated. Down to just two major supporters, Russia and China.

It’s hard to predict how Iran will react next.

On the dovish side, the Iranians announced they’re releasing the UK-flagged Stena Impero tanker the Revolutionary Guard hijacked in July.

On the not so dovish side, Iran’s Foreign Minister Mohammad Javad Zarif is talking war as Trump sends more US troops into Saudi Arabia.

To further muddy the waters, Iran says it will hold joint naval exercises with Russia and China. While that will allegedly take place in the Indian Ocean, not the Persian Gulf, the signal Iran hopes to send here is clear.

Realistically, Iran cannot hope to win a war against the US and its allies. Anymore than it can hope Russia or China will come to its aid with direct military intervention should war erupt.

But realism doesn’t always come into play.

If tensions heat up — highly likely — and we see more limited attacks as on 13 September, expect crude prices to spike higher once more.

If a shooting war erupts — possible, but in my view still unlikely — then crude could rocket past US$100 per barrel and stay there for months.

Either way my good friend Callum Newman over at our sister company, Agora Financial Australia, believes he’s found the best crude stock on the ASX. Whether crude stays in its recent price range or shoots higher on fears of war, this is one company you might want to add to your portfolio.

Get the details here.

Cheers,
Bernd