The Next Fintech Superstars

Thursday, 23 January 2020
Adelaide, Australia
By Bernd Struben

  • You ain’t seen nothing yet
  • There’s a bug in my crude
  • In the mailbag…Make up your minds!

Whoever can win over this younger generation will reap the benefits of this pivotal time in banking history.’

Exponential Stock Investor’s Ryan Dinse

Yesterday we had a look at the ongoing follies of the world’s central banks.

Today we turn our attention to Australia’s large commercial banks. And how you can potentially profit…big time…from their own perennial woes.

We’ll get back to targeting those profits shortly.

First, a quick recap of the major issues plaguing Australia’s commercial banks.

And when you’re talking about their major issues, you can’t beat the Banking Royal Commission. Kenneth Hayne kicked things off in December 2017. And the fallout has turned out to be far costlier than most pundits imagined.

That fallout includes financial compensation paid out by the Big Four to customers they’d duped or downright cheated. To the tune of some $10 billion.

As The Guardian reported back in October:

‘[A]cross the industry the cost to banks of compensating customers, estimated by the Reserve Bank at $7.5bn before NAB and ANZ’s new charges, is likely to climb beyond the $10bn mark.

But the proverbial didn’t stop hitting the fan in October.

You probably recall that the next month Westpac made headlines for all the wrong reasons. Namely myriad accusations by AUSTRAC of money laundering, some tied into alleged child exploitation.

Then there’s this, from today’s edition of Mortgage Business:

National Australia Bank’s superannuation trustees have been hit with a new class action for alleged beaches of super trustee duties, which caused substantial losses to 330,000 members and their retirement savings.’

It’s no bold call to say this won’t be the last bad news to hit the big banks. News that’s already cost them billions of dollars in compensation and may have irreparably tarnished their brands.

More, after a look at the markets.

 

Markets

Overnight, the Dow Jones Industrial Average closed down 9.77 points, or 0.03%.

The S&P 500 closed up 0.96 points, or 0.03%.

In Europe the Euro Stoxx 50 index closed down 19.33 points, or 0.51%. Meanwhile, the FTSE 100 lost 0.51%, and Germany’s DAX closed down 40.12 points, or 0.30%.

In Asian markets Japan’s Nikkei 225 is down 231.30 points, or 0.96%. China’s CSI 300 is down 1.78%.

The S&P/ASX 200 is down 49.73 points, or 0.70%.

West Texas Intermediate crude oil is US$55.90 per barrel. Brent crude is US$62.45 per barrel. (More on oil below…)

Turning to gold, the yellow metal is trading for US$1,562.02 (AU$2,283.32) per troy ounce. Silver is US$17.88 (AU$26.14) per troy ounce.

One bitcoin is worth US$8,643.98.

The Aussie dollar is worth 68.41 US cents.

You ain’t seen nothing yet

Getting back to the Big Four…

Beyond the problems of their own making, low interest rates are also eating into the banks’ bottom lines.

Yes, lower interest rates translate to lower borrowing costs for the banks. But with the official cash rate at a record low 0.75% — and widely forecast to go even lower in 2020 — the banks’ net interest margins (NIM) are getting uncomfortably tight.

NIM is the difference between the rates banks charge for loans and their own funding costs. As rates head closer to zero this difference shrinks, cutting into overall profitability.

Then there’s the rapidly expanding influence of technology upending the industry. Technology the banks have been woefully slow to adopt, leaving them exposed to smaller, nimbler fintech competitors.

Or as Ryan Dinse calls them, ‘The swarm of sly little upstarts coming to cut the Big Four’s lunch.’

The banks’ laggardly approach to adopting cutting edge technologies could hit them particularly hard with the younger generation.

Ryan cites studies indicating 68% of millennials believe that in five years they won’t need a bank at all. Not a great growth outlook for traditional banking models.

With this background in mind, you won’t be shocked to hear that Australia’s major investment companies are reducing their holdings of the Big Four’s shares.

From The Australian:

Led by Australian Foundation Investment Company (AFIC), Australia’s major investment companies have undertaken an unprecedented uniform reduction in their exposure to big four bank shares in the last three months.

AFIC reduced the percentage of big four banks in its portfolio from 22.6 to 19.2 per cent; Argo from 17.6 to 15.1 per cent; Djerriwarrh from 28.3 to 24.9; Milton from 24.3 to 20.6; and BKI from 21.5 to 15.2.

Now, before you get the impression that the Big Four’s share prices are in freefall, they’re not. At least not yet…

All the major banks are in the green so far in 2020. Though all are trailing the ASX 200’s 6.8% year-to-date gain (as of yesterday’s close).

But the really big potential gains look to be amongst the fintech upstarts.

The Australian Financial Review reported on two of these on Tuesday:

They’re the Australian-founded fintechs you’ve probably never heard of, working in one of the hottest sectors in the country and now they’re honing in on a $2 billion-plus sale.

Street Talk understands payments businesses Optal and sister company eNett are poised to be sold in a stealth process run by Goldman Sachs in New York and Credit Suisse in London.

Neither Optal or eNett are listed companies. But the same types of stories are playing out among small fintech businesses listed on the ASX.

Over at Exponential Stock Investor, Ryan Dinse ran his slide rule across all the contenders. Most didn’t make the cut.

Subscribers to his service can find the ones that did in the Exponential Stock Investor portfolio under the heading ‘The Great Bank Unbundling’.

I can’t share the names of the stocks with you here. But I can show you a screen shot of the returns as of market close yesterday:

RETURN

 


chart image
Source: Exponential Stock Investor
Click to enlarge
 

 

All of the returns you see above come from recommendations made between February and October last year. Not exactly a lengthy holding period for gains like 73.3%…or 344.4%! Of course, there’s no guarantee that all of Ryan’s tips will perform like these, but they are certainly going well so far.

And according to Ryan, 2020 could see these stocks rise even faster.

I believe the stock moves we’ve seen so far are nothing compared to what you could see when this trend really starts rolling in 2020.’

For the full scoop, you can access Ryan’s comprehensive research report here.

There’s a bug in my crude

Returning to oil…

In Tuesday’s Port Phillip Insider I wrote that ‘crude looks to be 15–20% overpriced in today’s markets, by my metrics’.

At the time West Texas Intermediate crude (WTI) was trading for US$58.71 per barrel. Today it’s at US$55.90 per barrel. Down 4.8% in only two days.

Global supply glut aside, the finger of blame for the rapid price fall is being pointed at the coronavirus:

 

 


chart image
Source: Nymex, Bloomberg
Click to enlarge
 

 

You’ve probably heard about this new virus emanating from the Chinese city of Wuhan. That city has now been isolated, with transportation shut down.

We can only hope the fears sprayed across mainstream headlines turn out to be wildly inflated.

But already analysts are predicting a hit to energy demand.

Goldman Sachs, for example, believes the coronavirus could knock 260,000 barrels per day from global oil demand.

And that with the OPEC+ supply cut agreement once more up for renegotiation at the end of March.

 

In the mailbag…Make up your minds!

If you subscribe to more than one of our publications, you most likely hear more than one viewpoint from our editors.

For some readers, like Addas who wrote in below, that can be frustrating.

Dear Port Phillip,

I receive emails from Port Phillip Publishing on a daily basis. Between, Port Phillip Insider, Money Morning and Rum Rebellion I don’t know whether to laugh, cry, buy, sell, hold or otherwise.

On one hand, the economy is on the brink of a spectacular collapse, and on the other, 2020 may be a supercharged year for the ASX with gains exceeding those of 2019! Or we may be set to flatline for the next 10 years?

It would seem to me that no one has any idea what 2020 holds in store for us, and that you appear to have multiple experts recommending conflicting courses of action.

Addas brings up a good point. Which is that none of our editors or analysts has a functional crystal ball. So, indeed, no one can tell you with certainty what 2020 holds in store.

What each of our editors can offer you is their best researched ideas into how to grow or safeguard your wealth in the investment climate they see ahead.

Some, like Vern Gowdie and Harry Dent, counsel you to take shelter. Others, like Sam Volkering and Ryan Dinse, are always eyeing the next big opportunities, whether the wider market is rising or falling.

At the end of the day it’s up to you to decide whose advice aligns more closely with your own views and situation. While that can be frustrating, we trust it will make you a better investor in the long run.

That’s all for today.

Tune in tomorrow to hear the latest from colleague Selva Freigedo. I’ll be back with you on Tuesday, after the long Australia Day weekend.

Cheers,
Bernd