BANKS: Dividends have been the #1 reason to own the Oz banks, but with payout ratios and capital management under the focus of the regulator the market needs to get more comfortable with earnings growth. Unfortunately for the banks trading at record highs and on record multiples the market is pricing in the expectation of very strong growth – an unlikely outcome given rising unemployment = NPL risk, RBA expectation for sub trend growth = low credit growth, increasing competition and financial inquiry risk.
MINERS: High margins look sustainable for BHP & RIO given tier 1 low cost assets, growth in production is offsetting any fall in commodity prices and cost and CAPEX reduction is delivering significant FCF. With gearing back to comfortable levels this FCF looks set to come back to shareholders via higher dividends and capital management.
Given the attraction for dividends and capital management for superannuation funds in Australia we could see a big shift out of banks into miners as both BHP and RIO embark on a very shareholder friendly 12mths.
Out of banks into miners – Sell WBC / Buy BHP