Australian Banks: Global Sanctuary

Australia | 10:05 AM

Trump's tariffs have sent offshore investors scurrying to find safe havens outside US markets. Australia's banks have been beneficiaries, fundamentals be damned.

-Australian banks outperform during global uncertainty
-Flight to safety outweighs fundamentals
-Little upside risk from reporting season

By Greg Peel

While Australian banks' strong share price performance largely stalled through the March quarter, banks have outperformed the ASX200 by 3% since March. Not because they had been deemed undervalued, or because earnings forecasts were being upgraded, but because they are seen as "safe".

While US stock and bond markets have stabilised and regained some ground since April 9, when Trump announced a 90-day pause on global tariffs announced on "Liberation Day", that one week period set off sheer unprecedented market turmoil.

When stock markets plummet, investors typically shift funds to the safe havens of US bonds and the US dollar. But from April 2, both the US stock and bond markets were crashing and the US dollar was spiralling a panic that allegedly led to Trump's pause after sane heads intervened.

The pause has not nevertheless brought lasting relief, and peak uncertainty remains. In the week April 21-25, Australia's AA-rated banks, servicing an AAA-rated economy, outperformed the index by 2%, including an astonishing individual 4% pop for Commonwealth Bank ((CBA)) on the Tuesday.

Who was buying?

"Whatever the theory," noted Citi, "the common thread is that buyers look price indiscriminate, in that they are more concerned with the exposure they are avoiding (ie USD, resources, China risk, tariff risk) than the price that they are paying for Australian banks."

Tariff Escapees

Investor feedback and Macquarie proprietary flows data suggest offshore investors in particular have been moving into Australian financials given their relatively limited impact from US tariffs. Indeed, the data suggest offshore investors increased their cumulative net buying of financials by some 22% since "Liberation Day".

Macquarie's analysis of the data from share registries suggests offshore investors and domestic investors (largely superannuation funds) remain buyers of the banks. Data from banks suggest international and domestic institutions both bought around $800m of bank shares in the March quarter.

By contrast, retail selling totalled -$2.7bn.

While retail investors were clearly in panic mode, super funds were playing the "fireman trade" (running in when everyone one else is running out). But super funds are mostly passive index-trackers, by default constant buyers, receiving incremental compulsory inflows with every pay cheque which then need to be deployed.

ABS data showed super funds remained net buyers of the banks (including Macquarie Group ((MQG)) over the year to December. However, despite this large buying, their relative positioning in banks (relative to the index) was largely unchanged, Macquarie notes, meaning these purchases were driven largely by inflows. Net contributions increased to a record $68bn in the year to December and are likely, Macquarie points out, to increase to $70-80bn ahead.

Interestingly for Macquarie, allocations to Australian equities in general pulled back modestly in December, albeit remain near decade highs. Looking forward, with several funds noting they are reaching capacity for Australian investments, the broker believes incremental inflows will increasingly move offshore, meaning super funds will potentially be a relatively less important driver of domestic flows than they have been over the last one-two years.

Australia's major banks have outperformed many global peers and the ASX200 since the start of April because they are viewed as defensive stocks in a defensive market. In Morgan Stanley's view, this investment thesis requires stable margins, single-digit loan loss rates and better capital ratios in the upcoming May reporting season (beginning with Westpac ((WBC)) on May 5).