Why these stocks are poised for exponential gains

Thursday, 7 November 2019
Adelaide, Australia
By Bernd Struben

  • Judgement day
  • In the mailbag…the banks

We’re approaching a huge collision point in banking. I genuinely believe this is going to be the Australian investing megatrend of the 2020s.

Exponential Stock Investor’s Ryan Dinse

It doesn’t come as any great surprise.

All the big banks are under pressure, after all.

Even so, NAB’s earnings report for the 12 months ending 30 September showed profits declined more than analyst expectations.

The poor results will see NAB’s executives go without their coveted bonuses. (Tiny violins, anyone?) Though the bank’s announcement that its dividend remains intact came as good news to shareholders. It also buoyed the share price, up 2.30% in intraday trading.

But as I said. NAB’s in…erm…good company.

From ABC News:

With its full-year profit of $4.8 billion, down 13.6 per cent, it [NAB] joined ANZ, Commonwealth and Westpac in announcing a big decline in earnings.’

The banks are facing some serious headwinds.

The housing market may be showing some signs of revival. But overall consumer credit growth remains weak. Then there’s the record low cash rate of 0.75% putting a squeeze on their profit margins.

Add to that the fallout from the Banking Royal Commission and it’s little surprise the Big Four are slipping in the ranks of the world’s most profitable banks. And slipping hard.

Just have a look at the chart below:



chart image
Source: Bloomberg
Click to enlarge

The ongoing battle between Canadian and Australian banks to claim the world’s most profitable title is over. In fact, the big Aussie banks can’t even claim second place anymore.

From Bloomberg:

Based on return-on-equity, a key measure of profitability, Australia’s banks have fallen below Singapore and the U.S. for the first time in at least nine years…’

Now being the fourth most profitable banks in the world isn’t disastrous. The Big Four aren’t about to go belly up. In fact, all of their share prices are well into the green, year-to-date.

But their business models are under mounting pressure. And it’s these antiquated models, formed during years of unmatched market dominance, that’s opened them up to the biggest threat of all.

We’ll get back to that after a look at the markets.

Markets

Overnight, the Dow Jones Industrial Average closed flat, down 0.07 points, or 0.00%.

The S&P 500 closed up 2.16 points, or 0.07%.

In Europe the Euro Stoxx 50 index closed up 12.22 points, or 0.33%. Meanwhile, the FTSE 100 gained 0.12% and Germany’s DAX closed up 31.39 points, or 0.24%.

In Asian markets Japan’s Nikkei 225 is down 17.81 points, or 0.08%. China’s CSI 300 is down 0.19%.

In Australia, the S&P/ASX 200 is up 65.64 points, or 0.99%.

West Texas Intermediate crude oil is US$56.40 per barrel. Brent crude is US$61.74 per barrel.

Both crude benchmarks slid 1.2% overnight. That ends the gradual up trend, spurred by rekindled hopes a US–China trade deal will lift global energy demand. But those hopes weren’t enough to overcome the supply side news delivered by OPEC+.

Namely, that the cartel is unlikely to cut production any further in 2020.

From Bloomberg:

The biggest producers in OPEC+ aren’t pushing for deeper oil-supply cuts when the group meets next month, according to delegates across the coalition.

Instead OPEC hopes its member states will actually stick to the cuts they’ve already agreed to. But as I’ve written here before, the incentive for cash strapped members to cheat has long been a thorn in Saudi Arabia’s side.

As Bloomberg notes, ‘Iraq and Nigeria have mostly increased output instead of delivering their promised curbs.’

Then there’s Russia, the ‘plus’ member. Russia has also pumped more than it agreed to during several months in 2019. And Russian Energy Minister Alexander Novak indicated on Wednesday that he was happy with current prices.

With a sea of oil on tap and a US shale oil driven supply glut set to really take hold in 2020, we’ll see how happy Novak is when crude prices drop another 20%…as I expect they will.

Turning to gold, the yellow metal is trading for US$1,490.20 (AU$2,166.62) per troy ounce. Silver is US$17.61 (AU$25.60) per troy ounce.

One bitcoin is worth US$9,357.29.

The Aussie dollar is worth 68.78 US cents.

Judgement day

In a free market system, the biggest threat to most every business is competition.

Now Australia’s big banks have long enjoyed an edge over that competition. That comes in the form of government backed loan guarantees and the banks’ ‘too big to fail’ status. An edge their smaller competitors didn’t…and don’t…enjoy.

But rapidly evolving technologies are levelling the playing field. In fact, technologies like blockchain and the rise of artificial intelligence (AI) have done more than level the playing field. They’re now actually shifting the advantage to some of the smaller, nimbler upstarts.

And with the disreputable conducts unveiled during the banking commission still fresh in people’s minds, the fintech revolution couldn’t have come at a worse time for the Big Four.

I mentioned the rebounding property market above. Traditional banks are benefiting from that. But a peek into the 2019 investor sentiment survey from the Property Investment Professionals of Australia (PIPA), tells you a lot about their growing woes.

Here’s an excerpt from PIPA’s 3 October media release:

“Difficulty obtaining finance, as well as the popularity of banks being on the slide over the past year, meant that about 60 per cent of investors are now more likely to consider a non-major bank lender, especially after the outcomes of last year’s Banking Royal Commission,” [PIPA Chairman Peter Koulizos] said.

Over the past year, the survey found that 27 per cent of investors had secured a loan from a non-major bank lender with the top two reasons being cheaper interest rates and increasing borrowing power.

Did you get that?

27% of investors took out a property loan outside of the major banks this past year. And 60% are thinking about it.

While that’s not good news for the traditional banks, the opportunity up for grabs for their new small-cap rivals is massive.

It’s an opportunity small-cap investing guru Ryan Dinse labels, ‘the Australian investing megatrend of the 2020s’.

Here’s more, from Ryan:

I think the world of banking is about to be slowly picked apart. Each old bank business unit will be eaten up by a more nimble, relevant and technologically advanced competitor.

Now the banks aren’t completely stupid. Some have already realised this is happening. And they’ve started to react.

ANZ is in the process of selling its wealth management arm. Commonwealth Bank has sold its life insurance business. The National Bank is selling its funds business MLC.

All up, Australian banks have shed over $18 billion worth of asset sales up to the end of 2018. With plenty more sales still to come.

Some Aussie fintechs are now in prime position to hoover up these abandoned markets. But it’s not just the scraps these scrappy underdogs are going after. No, they’re pursuing the retreating banks right back into their core businesses.’

Not every upstart fintech company is going to succeed. Many will flounder and lose money to better positioned competitors.

But the ones that do crack the market could be the next iSignthis Ltd [ASX:ISX], which delivered shareholders a 478% gain in the first nine months of this year.

Or Afterpay Touch Group Ltd [ASX:APT], up 1,700% since its IPO in May 2016.

Over at Exponential Stock Investor, Ryan believes he’s found four little-known fintech players that could become tomorrow’s household names. And each one has the potential to offer early investors life changing gains.

You can get all the details here.

In the mailbag…the banks

Staying with the banks, we’re still receiving a few letters relating to the impact of zero bound interest rates.

Like this one, from reader Errol:

I keep seeing bank bashing about not passing on the full interest rate reduction to home buyers. My understanding is banks have a mix of domestic & international funds to fund home lending. It follows that there is an interest rate differential between the sources of funding. It also follows that if the RBA reduces interest rates then banks would only reduce their interest rate on only the proportion of the Australian funding component not the full funding book.

It’s annoying that journalists (including that idiot Koch) continue to report sensational headlines regarding interest rates rather than the facts based on the proportion of bank funding that relates to the interest rate change.

It’s don’t let the truth get in the way of a good sensational headline!! It gets the suckers & uninformed forming an opinion on deliberate misleading information. Or is it the journos not understanding what they are writing about!

Please publish unbiased facts!!

Unbiased facts from the 21st century mainstream media?

Thanks for the chuckle Errol.

But — pie in the sky dreams aside — you are correct.

The RBA doesn’t simply hand the banks all the money they need at the current cash rate of 0.75%. Some of their funding costs are higher. With the rate literally only fractionally above zero, banks can’t pass on the latest cuts in full without further damaging their profits.

And as we saw above, their profitability is already nosediving.

We’ve got some more mail stacking up in the Insider inbox, including feedback on our population growth Ponzi scheme instalment from yesterday. I’ll share some of those with you tomorrow.

In the meantime, you can send your own feedback to letters@portphillipinsider.com.au.

Cheers,
Bernd