The widow trade – shorting the shares of Australian banks – is back in the headlines.
In an Australian Financial Review article titled "Is it time to short Aussie banks? One Wall St guru says yes", Bank of America strategist Michael Harnett says that after falls in consumer stocks, the next shoe to drop will be Canadian and Australian banks.
With Australian house prices having fallen in August at the fastest pace in 40 years, the AFR article notes:
"There's certainly some appealing logic in the idea that where house prices go, the Australian banks – stacked to the gills with mortgages as they are – will follow."
Harnett is widely seen as one of the biggest bears on Wall Street and, with the S&P 500 and Nasdaq indices down 18% and 27% respectively so far this year, it's been a great time to be a bear.
"Harnett's view is that persistent inflation will force the Federal Reserve to take rates to 4% and hold them there perhaps until 2024, when inflation finally gets back towards the Fed's 2%," the AFR article says.
Australian banks have long been in the sights of offshore bears, including the occasional short seller. They have traded at premium valuations compared to overseas banks and, coupled with housing affordability in Australia being amongst the worst in the world, logic says the only way is down.
Is this time different? Rising interest rates are a double-edged sword for banks. Bad debts rise as consumers come under pressure to pay off their loans and mortgages. But net interest profit margins also rise as interest rates increase as banks benefit from a greater spread between funding costs and lending rates.
I've said previously the Commonwealth Bank of Australia (ASX: CBA) looks downright expensive. Even from a dividend yield perspective, CBA shares only trade on a 4% fully franked dividend yield.
Australia and New Zealand Banking Group (ASX: ANZ) shares trade on a much more attractive trailing 6.3% fully franked dividend, but a share price that's fallen 21% over the past five years hardly inspires confidence.
It's mostly the same story with the Westpac Banking Corporation (ASX: WBC) share price; good dividend yield, shares down 31% over the past five years. National Australia Bank (ASX: NAB) shares fare slightly better, being flat over the same period.
We know Australian investors – particularly retirees and SMSFs – love the Aussie banks for their fully franked dividends.
CBA shares apart, what they've been missing – during a heady five-year period when interest rates were falling and house prices were rising – is share price appreciation.
With inflation high and interest rates on the rise, we're headed into an altogether different and tougher operating environment for many companies, particularly banks.
Looking back, the "short Aussie banks" sentiment has actually been mostly on the money, given the poor share price performance of three out of the four big Australian banks over the past five years.
Short sellers are unlikely to target Aussie banks – they prefer fads, loss-makers and frauds, and look for quick profits – so I wouldn't expect sharp falls in the share prices of the big banks.
More likely is a slow grind lower as, in the case of the CBA share price, the air comes out of its premium valuation and for the three other banks, they face headwinds from falling house prices and consumers tightening their belts.
Given their weighting in the ASX 200 index, investors might also expect the benchmark index to struggle to make meaningful headway in the months ahead.
