While the ASX 300 index has risen by 20 per cent over the last 12 months, State Street Global Advisors head of active quantitative equities Toby Warburton noted that expectations of falling interest rates in the first quarter of 2017 put downward pressure on financial sector share prices.
“Banks are expected to be beneficiaries of a reflationary, or growth, environment; their earnings tend to increase as growth increases, interest rates and bond yields rise. In such an environment bank share prices should also benefit – this is exactly what we saw in the second half of last year,” Mr Warburton said.
“However, in an environment where expectations are for falling interest rates, bank earnings should, in theory, deteriorate – and share prices would be expected to follow.”
Despite this, Australian banks “continued to outpace the market” in the first quarter, which Mr Warburton attributed to the high dividends they paid, noting that financials contributed 40 per cent of dividends paid by the ASX 300 over the last 12 months.
“If expectations are for falling rates – then although there is downward pressure on bank earnings, the dividends become more attractive for income-seeking investors, propping up share prices,” Mr Warburton said.
“The dividends for Aussie banks therefore serve to cushion the effect of interest rates and smooth the share price path.”
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