Foreign hedge funds are talking up a collapse in the local housing market and taking short positions in the big four banks, but their enthusiasm is misplaced, Aurora Funds Management says.
Hedge funds have stepped up their positions in the “widow-maker” trade of short-selling Australia’s banks, anticipating falls on the back of what they see is a housing bubble due to burst.
Short-sellers have enjoyed some success. Share prices in the big four had fallen between 20 per cent and 30 per cent since capital requirements sent them tumbling from, or near, record highs last April.
Yet, the housing market wasn’t in crisis, despite the hedge fund doomsaying, Aurora senior portfolio manager Hugh Dive said.
Foreign investors apply the same metrics that have seen the Irish, Spanish and US housing market decline in the past decade.
“Whilst Australian housing can be viewed as expensive globally, we see a range of factors that strongly encourage Australian households to maintain mortgage payments,” he said.
“These include recourse lending, homes are exempt from capital gains tax and strong cultural desire to own one’s own home.”
Foreign investors are also sceptical of the scale of Australian banks. All four sit in the top 15 globally by market capitalisation, beefed up by record-banking profits, their attractive yields, and higher interest rates relative to Europe, Japan and the US.
“The basis of their thesis is that four banks from a small backwater in the financial world have little business being among the largest in the world,” Mr Dive said.
Of the top 10 banks by market capitalisation, four are from Australia and Canada, despite the more than 20 per cent falls in their respective currencies in the past two years.
Mr Dive said, historically, owning the world’s biggest (and most loved) banks in 1985, 1995 and 2005 proved to be a poor investment over the following decade.
Yet, the position of local banks in the global landscape had more to do with the losses and fines incurred in Europe and the US during the global financial crisis relative to Australian banks rather than any “world-conquering strategy”, Mr Dive said.
The banks’ record profits and healthy interim profits and updates posted this reporting season and bad debts at historically low levels meant the banks still had a place in local investors’ portfolios, he said.
“There is a little too much pessimism towards Australian banks,” he said.
“The underlying fundamentals are still very strong. The likes of Deutsche Bank and Credit Suisse would be delighted to be reporting profits that CBA are reporting.”
Reporter: Vanessa Desloires. Read more here.