In today’s Money Morning…can the ASX run continue?… Australian capital ratios are good for now… where to look for ASX dividend stocks and how to effectively throw in the yield towel…and more…
Editor’s note: In today’s video I discuss some of the big name dividend stocks, low (or negative) interest rates, and the hunt for yield. Click here or the thumbnail below to view.
Finally, some signs of life in the ASX 200 [XJO] after the budget jolt.
To be fair, there were signs of life in the broader ASX long ago.
Just below the radar of many old-fashioned investors that only trust the big companies (top 200).
Meanwhile, the S&P/ASX Emerging Companies Index [XEC] is in the midst of a NASDAQ-like lift-off at the moment.
But can the run continue?
I’ve said it before and I’ll say it again.
Always bet on more spending, more debt, and bailouts.
The fiscal pedal is on the floor, and the RBA has maybe a millimetre to go before its foot is completely down.
Which is why we are seeing a small heartbeat flutter to life in the ASX 200.
The defibrillator is well and truly out now.
Which indicates to me that the ASX, at least the XJO, will continue to go up in the short to medium term.
Ever so gradually though.
No doubt risks are growing, in a global context.
And I think if there is to be trouble, it’s not going to emanate from domestic sources.
Australian capital ratios are good for now
Bear with me on this.
The Australian Financial Review’s survey of top Australian economists indicates that they all think a further rate cut is on the cards — they just don’t know when.
And you may be thinking — I thought rates were pretty much zero?
Well apparently, the rate could shift from .25% to .1%.
Talk about drawing blood from the money-printing stone.
Meanwhile the Bank of England is sounding out their big banks about their ability to cope with negative rates.
Not should we do it?
Or how would you react if I told you…?
Instead it’s, can you deal with it?
As always with low and negative rates, margins will be squeezed.
And some doom-mongers may then point to declining capital ratios.
This is the amount of reserve cash that banks need to keep on hand.
In Australia, a risk-averse country by nature, our capital ratios are still quite high.
In June, S&P Global Market Intelligence said:
‘J.P. Morgan expects ANZ’s CET1 ratio to remain stable at 10.8% in the second half of the current fiscal year that ends on Sept. 30, according to a May 18 note. It expects Westpac’s CET1 ratio to climb to 11.0% in the second half and NAB’s CET1 ratio to come in at 10.9% in the second half. CBA’s CET1 ratio is expected to drop to 11.2% in the second half from 11.7% in the first half.’
And more recently this month, the RBA said that:
‘There is significant uncertainty about the impact that the pandemic will have on banks’ credit losses and risk weights, and whether it could affect banks’ capital in other ways. Nevertheless, capital buffers at Australian banks should remain at a sufficiently high level to support continued lending. Analysis using the Reserve Bank’s stress testing model, suggests that – assuming that banks maintain a moderate pace of lending growth – the combined impact of credit losses and higher risk weights would subtract around 2 percentage points from major and mid-sized banks’ capital ratios under the downside scenario for the economy.’
Now at the risk of getting too nerdy, I will sum it up succinctly.
I think Australian banks’ capital ratios are good for now.
Europe and the UK, well that’s another matter.
This doesn’t mean a renaissance for the Big Four either.
I’m still bearish on the Big Four’s prospects due to technology or competition risk.
Which brings me to a final point.
Where to look for ASX dividend stocks and how to effectively throw in the yield towel
The old nutshell.
Investors are desperately grasping at straws for yield.
Investors Mutual senior portfolio manager Hugh Giddy, was quoted in the Australian Financial Review as saying the following:
‘You can’t earn any money in the bank, what you’re getting out of a bond is poor, even a rental yield if you own a property is poor because of these low-interest rates.’
Giddy, ‘a value-oriented investor,’ likes Telstra Corporation Ltd [ASX:TLS], Tabcorp Holdings Ltd [ASX:TAH], and Metcash Ltd [ASX:MTS].
I’m non-committal on these stocks because I’ve got a small-cap focus.
You can even find the rare small-cap that is profitable and has a dividend as well.
Cast your net far and wide and you may be surprised what turns up.
Alternatively, you could simply chase the most exciting stocks available, regardless of yield.
Throw in the yield towel, in the best way possible.
If you want to learn how to do that, check this out.
For Money Morning
Lachlann is also the Junior Analyst at Exponential Stock Investor, a stock tipping newsletter that hunts for promising small-cap stocks. For information on how to subscribe and see what Lachy’s telling subscribers right now, please click here.