The Commonwealth Bank of Australia, the nation’s largest company by market cap, has approached a $170 share price this month, with the big four banks continuing to hold record levels. CBA’s stock surged 10 per cent in April alone.
In March, Fitch Ratings revised its outlook on CBA from “stable” to “positive”, highlighting the bank’s robust earnings profile.
However, Martin Conlon, head of Australian equities at Schroders, argued that CBA’s soaring share price reflects a broader shift in investor behaviour, with fundamental analysis taking a backseat as market participants seek safer havens amid ongoing volatility in more vulnerable sectors.
Namely, looking back at investor behaviour in April, Conlon said investors bought into CBA near all-time highs, along with a slew of defensive and technology stocks, many yielding earnings at or below bond yields – some significantly so.
CBA, Wesfarmers, Coles, Telstra, Woolworths, Transurban, Goodman Group, NAB, ASX, The Lottery Corp, Stockland, Mirvac, Dexus, GPT, Vicinity Centres, Scentre Group, IAG, and Suncorp all saw gains of over 5 per cent. Meanwhile, Pro Medicus, Life360, TechnologyOne, REA Group, Car Group, Wisetech Global, Xero, Block, Netwealth, and HUB24 also posted gains exceeding 5 per cent.
The pattern, he said, is clear: avoiding earnings risk now overwhelmingly trumps concerns over valuations.
“Numpties like me who perceive some risk in paying $24 billion for the $200 million of revenue generated by Pro Medicus – more than the value of Alcoa and South32 put together – are receiving regular reminders of the stupidity of placing any emphasis on valuation,” Conlon said.
“While CBA may be the poster child evidencing the diminishing importance of fundamental analysis in setting equity market pricing, the cohort of stocks suggesting business valuation is an antediluvian pastime is broad.”
Conlon admitted that “frustration” might be the most fitting word to describe watching CBA’s valuation soar to 25 times earnings and approach four times book value, despite the bank’s lacklustre growth and “negligible bad debts”.
However, the local equities specialist noted that, particularly in recent months, it hasn’t been logic driving the market’s reaction to global events, but rather emotion.
“As Björk’s 1993 lyrics suggest, we should be ready to be confused by human behaviour,” Conlon said.
He observed that the domestic equity market has risen as defensive stocks, banks and gold offset losses in mining and energy sectors.
“We are struggling with the logic behind these moves, but human behaviour – even if it is in the form of computer-coded portfolio rules – sets share prices,” he said.
“As has become ever more the case in recent years, starting valuations appear meaningless, it is only the direction of the next move which matters. We live in the era of the increment.”
