Why higher cash rates could put a rocket up your bank shares in 2017

Why Commonwealth Bank of Australia (ASX:CBA) and Australia & New Zealand Banking Group (ASX:ANZ) shares could run higher.

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Many Australian investors will own bank shares within their investment or SMSF portfolios, with the likes of Commonwealth Bank of Australia (ASX: CBA), Australia & New Zealand Banking Group (ASX: ANZ), National Australia Bank Ltd (ASX: NAB) and Macquarie Group Ltd (ASX: MQG) all performing strongly over the last six months.

In fact many of the above are now at 52-week highs as local investors reassess the likely direction of cash rates in Australia and globally. In the U.S. the Federal Reserve is expected to lift cash rates this week, with up to another three rate hikes pencilled in for the year ahead.

The rising cash rate environment has seen U.S. bank shares like JP Morgan, Bank of America and Citgroup put on gains of 28% to 60% over just the last six months.

This is because institutional investors tend to bid up bank shares in anticipation of rising lending rates as this environment is generally conducive to banks generating higher returns on equity and net interest profit margins.

In Australia the politically-supported property market is strong with a solid outlook, while real GDP growth is also reasonable as the country heads for a world-record-breaking recession free streak supported by the surprise rebound in commodity prices.

Given the macro picture looks reasonable with the potential tailwind of rising cash rates to come I'm not surprised to see Australia's big bank shares once again moving higher.

The Big 4 Australian banks also enjoy oligopolistic market positions that overseas rivals can only dream of which goes some way to justifying their higher valuations on a price-to-book basis.

Given I expect we have now witnessed the end of the RBA's cash rate cutting cycle, I would not be surprised to see bank shares move higher over 2017 as markets react to the likelihood that the RBA's next rate move will be higher.

And let's not forget the bumper dividends the banks pay that go a long way to underpinning their current valuations!

Smart investors always combine capital gains and income to secure a blue-chip retirement, especially in tax effective SMSFs…

Motley Fool contributor Tom Richardson owns shares of Macquarie Group Limited. You can find Tom on Twitter @tommyr345 The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »