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

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…

5 things every SMSF must do in 2017

Whether you've been running an SMSF for many years, or you've only just established one more recently, the income tax and regulatory environment in which SMSFs operate can be quite convoluted.

We've put together a list of the five most important things that we believe will help you keep your SMSF on the straight-and-narrow now and into the future.

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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.

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