At time of writing, the share price of Commonwealth Bank of Australia [ASX:CBA] is down 0.77%, trading at $81.25.
At the end of July, we suggested that the CBA share price had hit resistance in the $82–$83 range after a prolonged rise which started as the Banking Royal Commission was wrapping up.
Since then, CBA shares have traded sideways. This chart gives you a quick overview of what has happened in the last two years:
Analysts at Morgan Stanley, UBS and JP Morgan are now forecasting a tumble for the CBA share price. We look at their reasons for thinking this and discuss three investment alternatives in a low interest rate environment.
Brokers turn bearish on CBA shares
In a growing chorus of ‘sell!’, The Australian Financial Review reports that Morgan Stanley has cut its price target to $66.50.
This goes along with UBS and Morgan Stanley downgrading CBA shares to a ‘sell’ rating last week.
There are a variety of reasons for Morgan Stanley’s stance on CBA.
On the topic of broker notes and analyst opinion, it is important to be cognizant of what they say simply because they can move the market.
Their assessments are valuable because other people think they are valuable.
It’s a kind of manufactured value. But value nonetheless.
Here’s why Morgan Stanley revised their outlook.
Basically, the investment bank made the recommendation based on asset sales, risk of a dividend cut and the spectre of RBA rate cuts.
RBA rate cuts loom as the most important.
Margins could be reduced because 20% of bank deposits already pay less than 0.5% and as a result cannot be cut any further. An additional 15% only pay between 0.5% and 1%.
So CBA has little room to manoeuvre when it comes to passing on the cost of rate cuts.
The AFR also notes that interest rate traders are expecting the RBA cash rate to hit as low as .5% by this time next year.
As a result, after outperforming the other Big Four bank stocks both during and after the conclusion of the Banking Royal Commission, now may be an opportune time to lock in the appreciation in value since October.
The CBA results release is due to take place Wednesday, 7 August.
We take a more comprehensive look at the threat to bank dividends here.
Where to invest when interest rates are low?
In a hypothetical scenario, what then do you do with the capital you initially allocated to CBA?
If income investing is your plan of attack, our ‘Top 5 Dividend Stocks for 2019’ is a great place to start.
One of the selections profiled is a fixed interest ETF. Not generally a source of great excitement, but could be considered a lower-risk defensive play in choppy markets.
For those with a greater risk-appetite there is the constantly evolving world of fintechs.
These are the companies gunning for banking sector profits with innovative financial services and products.
Finally, one way to approach the prospect of near-zero or even negative interest rates is to go long on innovation. Completely change your mindset and back technology of the future. Some of these companies have higher beta values (meaning they hinge more individual announcements than the movements of the general market).
And what technological innovation is more exciting than Artificial Intelligence (AI)?
We look at four ASX-listed AI stocks here.
There are a variety of options on the table then, each with their own set of associated risks and potential rewards.
The bottom-line is this though, many of the big blue chips like CBA, even BHP and RIO, are increasingly looking like less of a safe bet in a turbulent low interest rate environment.
For Money Morning