Banks in bubble trouble

It seems analysts are finally catching on to what we here at the Motley Fool have been saying for some time now. Share prices of the major banks have been inflated well past any measure of relative value.

Now, Emilio Gonzalez, chief executive of BT Investment Management, says soaring asset prices generally lead to a price correction. “This happened in 1999/2000 with the internet boom, and I’m seeing similar symptoms [among banks], which throws up a few red flags,” he has told the Australian Financial Review (AFR). He added, “Banks are a leveraged play on the economy and that shouldn’t be forgotten, so hopefully as people chase those yields they have a diversified portfolio.”

UBS analysts, in a report titled ‘Welcome to the great bank bubble of 2013’, said banks were low growth companies, heavily exposed to a housing market downturn and unemployment. The analysts also said that as with all asset bubbles, they can go higher and for longer than many expect. Quoting former Citigroup CEO, Chuck Prince, the analysts added, ‘As long as the music is playing, you’ve got to get up and dance’. “All we can say is buyer beware.”

Veteran fund manager Peter Morgan also chimed in saying Australian Bank shares were expensive and he did not own any.

The bank index is up more than 50% since June last year, and 27% since the beginning of this year. Westpac Banking Corporation (ASX: WBC) recently joined Commonwealth Bank (ASX: CBA) in surpassing $100 billion in market cap, and Australia’s top four banks, including ANZ Bank (ASX: ANZ) and National Australia Bank (ASX: NAB) are now ranked among the world’s top 11 by market cap. That’s an astonishing statistic given the size of Australia, its population, economy and our banking system, relative to other countries like the US, China, Japan and the UK.

Foolish takeaway

Unlike UBS analysts, we don’t believe that investors have to ‘get up and dance’. When the music stops, and everyone rushes for the exits, many investors will be left behind, and those dividend yields are unlikely to compensate for any fall in share prices. We believe there are better opportunities out there, and see no reason to follow the herd.

With its legendary, fully franked 28 cent dividend, Telstra is the darling of Aussie investors. Chances are even if you don’t own Telstra shares directly, your superannuation fund does. But with its share price skyrocketing over the past year, is Telstra past its prime? Click here for our brand-new report: Buy, Sell, or Hold Telstra?

More reading

The Motley Fool’s purpose is to help the world invest, better.  Click here now  for your free subscription to Take Stock, The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead.  This article contains general investment advice only (under AFSL 400691). Motley Fool writer/analyst Mike King doesn’t own shares in any companies mentioned.

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