It follows recent strong results by the Australian banking sector that some analysts believe have made the stocks at fair or overvalued.
“There is no doubt that Australian banks are great businesses; they are a guaranteed oligopoly, they all produce the same product at the same price and if they were to ever get into trouble, the government is guaranteed to bail them out,” Paul Moore, chief investment officer of PM Capital said.
However, the investment fund believes there is some concern around the balance sheet of the banks that warrants a more conservative investment approach to the stocks.
“There is an anomaly in Australia - the bank with the highest leverage has the highest P/E ratio. This highlights that people are forgetting how balance sheets work and assuming home loans will be fine forever, which is exactly what happened in 2008 in the US,” Mr Moore pointed out.
The investment fund believes there are greater opportunities offshore, particularly in America.
“The S&P banking index is trading around a 50 per cent lag to the pre-GFC peak of 115,” Uday Cheruvu, PM Capital banking analyst said.
PM Capital also pointed out that the economic climate in the US has improved significantly.
“We are also seeing economic fundamentals recover. Consumer borrowing growth has turned positive in the US, housing prices are the lowest they’ve been since 1987, whilst debt service levels are the best they’ve been since 1994,” Mr Cheruvu stated.
Despite this, the specialist equity fund warns that US financials are not without risks.
“I would also remind investors that returns do not come without volatility, but that the stock market is far more volatile than the underlying businesses it represents,” Mr Moore said, but added, “To us, these represented good buying opportunities.”
PM Capital is a Sydney-based specialist equity fund manager that aims to deliver returns through selective and concentrated long-term investments in undervalued businesses.
