By: Dale Gillham- Chief Analyst at Wealth Within On: May 16, 2017 In: Expert Advice, Market Commentary Comments: 0

 

Scott Morrison’s budget measures will take something from the “fat cats”, or will it? Remember, this is not the first time a Government has tried to take a swipe at the big Aussie banks billion dollar profits and failed.

As banks are the only companies permitted to create money out of thin air, a practice particular to the accounting methods enjoyed by banks, shouldn’t they be asked to contribute more to the economy when profits rise?

I believe this is a reasonable decision for the Government, given our debt position. However, playing hard ball with banks could be dangerous given the broadcasted contest likely to follow.

That aside, banks will find a way to recoup these funds from customers. So who’s really paying?

 

Big bank shares have fallen, however, they were already dropping on 2 May 2017, prior to the budget announcement on 9 May 2017. That aside, it’s typical for bank shares to experience periodic falls of 10% to 15%. So far this month, ANZ has fallen around 13.5%, WBC dropped 9%, CBA 9.3% and NAB 7%.

Given banks occupy a fair percentage of superannuation savings, a temporary fall in bank shares can have a dramatic impact on your super balance. However, given the size of the charge to bank profits proposed, I believe the current decline in bank shares is temporary.

What do we expect in the market?

The Australian share market demonstrated its resilience on Wednesday and Thursday when it rose strongly back above 5900 points. Driven by optimism that the Federal Budget is likely to provide “better days ahead”. However, on Friday as the news sunk in the market again fell back below this level, which is timely as the next short term low is overdue. I would like to see the market come back by between at least 1.5% and 3.5% over the next two to six weeks.

Measures to make the big banks pay more is likely to once again split the market. In the months prior to the budget announcement, mining and financial sectors where moving in opposite directions; from mid- February to 1 May 17, the Materials sector fell by approximately 7%, while Financials rose by around 5%. From here we may see banks remain soft in coming weeks while Materials attempt to push off the recent low.

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