Geopolitical Hedging A Boon For CommBank

This story features COMMONWEALTH BANK OF AUSTRALIA. For more info SHARE ANALYSIS: CBA

The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

How CommBank became the poster stock for tactical asset allocation in a world of rising geopolitical risks and weaponisation of capital flows and the US dollar.

-CommBank shares look excessively inflated, so why are US investors buying it?
-CBA shares now represent more than 11% of the ASX200 index
-Tactical allocation does not always align with stand-alone valuation

By Danielle Ecuyer

Domestic versus foreign investors

It’s hardly a surprise when brokers and fund managers are expressing disbelief at the remarkable rise in the CommBank ((CBA)) share price to an all time high of $182 before the long weekend. The price has risen around 30% since October 30, 2024, and is up from $120 a year ago.

This increase comes at a time when the bank’s valuation had already seemed stretched, and its prospective dividend yield compressed. The stock currently trades around 29x FY26 price-to-earnings (forecast), with a prospective circa 2.8% dividend yield and an FNArena consensus target price of $109.248.

Australia’s highest-valued bank has now replaced the Big Australian, BHP Group, as the largest index constituent locally, representing circa 11.5% of the ASX200.

While Australian super funds were purchasing shares in CommBank throughout 2024, US-based funds have now seemingly taken over the reins in 2025, further propelling the bank’s stellar share price (and valuation).

For domestic retail and institutional investors, buying shares in what is now considered the world’s most expensive bank might appear as sheer recklessness, especially when assessed against a stand-alone valuation. However, from the perspective of overseas investors, several reasons can be identified as to why Australia’s largest bank, and now the largest stock by market capitalisation in the S&P/ASX200, has become a prospect for capital inflows.

Much of the investment decision-making can be traced to how large international institutions allocate capital based on a risk-adjusted return for their investors. For example, consider a major US-based fund, which recently acquired $1bn worth of CommBank shares. The person in charge of asset allocation behind such a purchase arguably took a broader, top-down view of global markets, with a particular focus on the rising uncertainty and volatility in US assets.

The rationale behind this decision lays in a growing concern over the direction of US assets, including equities, the dollar, and treasury yields. Many institutional investors are questioning whether these assets have become increasingly risky, given geopolitical uncertainty as the US Administration flexes both its muscles around trade and capital incentives.

In this context, asset allocators are reported as shifting their focus, not just to individual US stocks, but to broader trends in global markets such as the re-arming of Europe and Japanese deregulation.

Is a weaker US dollar changing capital flows?

Several macro-economic factors have contributed to this shifting investment landscape. For one, there are concerns over global geopolitics, including wars, supply chains, and the unwinding of the global free market.

Tariffs raise the prospect of US inflation, plus a shrinking immigrant workforce too is contributing to economic uncertainty in the US. The Los Angeles riots, which protest the forced deportation of alleged illegal immigrant workers, are just one example of how domestic issues in the US could have a more far-reaching impact on investor sentiment.

Perhaps even more critically, questions about tariffs and their potential effects on the US economy are exacerbating worries over the country’s ability to service its fiscal deficit.

A particular concern for investors is the uncertainty surrounding the US dollar, which has been under pressure in recent months. The volatility surrounding the dollar has prompted many foreign investors to seek ways to hedge against this risk.

As a former colleague from my institutional broking days in London pointed out recently, “How much of a discount (i.e., US dollar or equity valuation) will offshore investors demand to hold US assets under a more uncertain and volatile backdrop?”

Morgan Stanley has framed this view similarly, stating the differential between US dollar assets and yields reflects “how much more additional compensation investors are demanding to maintain dollar exposure as a proxy for multiple uncertainties around tariffs, inflation, US growth, and fiscal policy including the much-debated ‘One Big Beautiful Bill.'”

This bill proposes, among other things, a controversial tax hike on foreign individuals and companies whose tax policies the US considers discriminatory. Section 899 of this bill, titled “Enforcement of Remedies Against Unfair Foreign Taxes”, aims to increase tax rates on these entities, which could have profound consequences for foreign investors, including sovereign wealth funds, pension funds, and even retail investors with US investments.

The growing concerns over Section 899 and the potential tax impacts have led to a rising global disquiet. If enacted, foreign investors could react by reducing, halting, or selling their direct US investment exposure. This would likely create significant ripple effects on US jobs and economic growth, with major implications for Australian companies and their investors too.

The Financial Times has reported dozens of executives are heading to Washington this week to lobby against the bill, underscoring the stakes involved for global investors.

Last week, Oxford Economics noted a broader shift in investor preferences away from US dollar-denominated assets. This shift reflects concerns about the long-term viability of holding US dollar assets, particularly considering rising geopolitical risks and economic uncertainty.

While the notion of the US dollar’s demise is likely exaggerated, multiple market commentators and sell-side strategists have started questioning the US exceptionalism theme.

Global asset allocators seek out total returns

Returning to the perspective of overseas asset allocators, their strategic decisions are largely shaped by a broader set of considerations.

These investors are making large tactical calls on global equity markets, and currency is one of the most critical elements in such decisions. Changes in currency values can have cascading effects across various asset classes, making it crucial to forecast the relative performance of domestic currencies.

In the same way as Australian investors have benefited from a rising US dollar to boost their total returns from US equities, they may now be seeking to diversify their exposure to a weakening US dollar.

US investors are equally seeking assets that can offer a hedge against the potential risks in US assets.

This is where CommBank comes into the picture. The bank’s relative capital/balance sheet strength, its position in a politically stable country, and its exposure to Australia’s potentially expanding economy boosted by a declining interest rate environment, make it a safe and attractive option on a relative basis for foreign investors.

Moreover, CommBank’s share liquidity and corporate quality provide a safer, more reliable investment compared to more volatile assets, such as commodity exposed resource companies with exposure to China.

Valuation, while important, is less of a concern in this context. As an asset allocator, the primary focus is on ensuring positive risk-adjusted returns.

In the case of CommBank, this means despite its lofty valuation, the investment makes sense when considering a broader strategic, probabilistic calculation. The focus here is on total return, factoring in the USD-to-AUD exchange rate, rather than just share price or dividend yield.

For example, the trade-weighted US dollar has declined -6.2% calendar year to date, a top-decile decline since 2000, Morgan Stanley explains.

The investment bank is flagging further US dollar weakness and if, for example, it declined another -5%, a US investor who had bought non-USD denominated assets at the start of 2025 would have gained over 10% in USD terms before any capital appreciation or dividend yield pick-up.

While the case for owning CommBank shares might not be as clear cut, the example emphasises the point that investment diversification is as much about the currency as it is about the performance of the shares in their domiciled market.

Given the performance of UK and European banks this year, it is likely asset allocators like those US funds investing in CommBank, are buying other high-quality banks outside the US, suggesting a global thematic tilt to the financial sector.

In summary, while domestic investors might balk at buying into Australia’s largest bank at a time when its valuation appears extremely elevated, the story might look fundamentally more attractive for foreign investors.

Their decisions are shaped by broader, macro-economic factors, uncertainty around US assets, the risks associated with a volatile dollar, and the urge for diversification into more stable, politically secure assets.

Ultimately, CommBank offers a way to navigate global uncertainties while maintaining strong risk-adjusted returns, even if its valuation –in isolation– might suggest otherwise.

The author’s SMSF owns Commbank shares. The views expressed in this article are solely the author’s based on a former career as an Institutional Equity adviser in London.

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