FYI | Feb 05 2014
By Peter Switzer, Switzer Super Report
As a feedback freak – I don't think you get better unless you listen to objective and subjective feedback – there are two issues I want to talk about that explains why I will buy banks this year. And it’s all related to why I have said I think the S&P/ASX 200 index will go to 6,000 in 2014.
This 6000 call was never meant to be a precise call, but is an indication that I think stocks will head up this year. Picking an index’s exact finish is a mug’s game, as Matt Williams of Perpetual once admitted to me on my TV show. Professor Ron Bewley, who is a regular contributor to the Switzer Super Report says 6,000 looks too hard given the start in January and has it at 5,850, which I’d be happy with and so would most of my subscribers.
The point of it all
And that’s the point – I only tip a number so as to give some reference to my level of bullishness, which I think is even more relevant when volatility is making many of us nervous. Not so me, as I am looking for companies I like at lower prices, and that’s where my bank story comes in.
Last week I interviewed Tim Samway, the managing director of Hyperion Asset Management on my Sky News Business program. This has been a good-performing fund, historically, and he said his fund only had an exposure to the banks of 4%!
They once held above 20% in the banks and have cashed out to buy other stocks. When questioned why, he explained that the banks were fully valued, or words to that effect, but I pressed him.
If you bought the banks at good prices and are still receiving a very healthy dividend, why would you sell them? Tim said they could see their capital shrink in the future, but I then said if they can tolerate their capital going up and down, provided their dividend flow is relatively maintained, then why wouldn’t you stay long banks?
He conceded under those circumstances holding banks makes sense. These sorts of people would buy more banks at lower prices and especially so if the falls were big and that’s because they are really playing a dividend game.
Play the game
In a way, share playing can become like playing property. If you owned Gold Coast or Palm Beach property, your resale values of these properties could have fallen 30% over the GFC. However, provided you still got the same holiday rental income, or even a little less than absolute boom times, then the fact the property would sell for less, would only be an issue if you had to sell!
From where we are now, the S&P/ASX 200 has to go up close to 20% for my 6000 call to come true but I’d be happy with 10% plus, say 5%, for dividends, without grossing up.
So, lets say the banks have a sub-index year and rise 3% from the dips we see now and later, then with dividends it’s 7-8% plus grossing up. You still could get 10% with some of the best banking names in the world!
I know there will be better buys this year but they might not be stocks you will want to have in a crash, because not only will the share price fall by more than the banks, so will the dividends.
If you’ve never done this click here and see what CBA’s dividend has done since 1991. When you express these dividends as a chart, it’s an upward-sloping line at about 45 degrees, while the line for term deposits looks like a flat line around 5%!
Follow the leader and buying opportunities
Right now our market is playing follow the leader with Wall Street, which has had a huge year last year and an overdue correction is meeting tapering, emerging economies’ crises and good earnings news but with average guidance statements. And China’s soft patch is not making matters great, but it is creating a healthy pullback and a buying opportunity for those who believe this bull market has a few years to run.
Macquarie’s economics and investment research team told me, and I told you, that they expected the economy and stocks to be in a slow grind up situation. I reckon they are right and I expect this year to be a volatile year but with an upward trend.
I expect that trend to bend up even steeper when the current bad news is swamped by a run of much better news, which should come from the improving economic outlook that both the IMF and the World Bank have tipped.
For the naysayers, in the 17 times that the S&P 500 was up over 20% in one year, the index failed to go up in the ensuing year only three times.
If the global economy was looking sick I’d be punting on a bad year ahead, especially with the Dow down 5% in January, but I am sticking with the optimists who are buying on the dips.
Peter Switzer is the founder and publisher of the Switzer Super Report, a newsletter and website that offers advice, information and education to help you grow your DIY super.
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