Investors certainly seem to be jittery lately.
Was it the 9% the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) has added in a little over two months?
Maybe it was the 12 straight positive days in a row during late January, early February?
Whatever the reason, a few down days has the media screaming asset bubbles all over the place. Certainly many economists and analysts think Australia's property market has gotten out of control, particularly in Sydney. Even the Reserve Bank (RBA) has warned of 'very concerning developments in Sydney's property market.
According to CoreLogic RP Data, average Sydney house prices have gained 13.7% in the past year, compared to Melbourne's rise of 7.4%, and well ahead of other capital cities. Driving that growth is the low interest rates on mortgages. Most banks and lenders are offering variable rates below 5% these days.
For the RBA, it's stuck between a rock and a hard place. Unemployment is gradually rising, while mining investment is dropping rapidly and the central bank needs to stimulate other sectors to take over from the resources industry to drive growth.
Low and getting lower interest rates also means term deposits are lucky to offer investors 3%, so investors are pouring funds into the stockmarket. And much of that is headed into the usual big cap stocks paying high dividend yields – or at least they used to.
Telstra Corporation Ltd's (ASX: TLS) dividend yield is now 4.7% while Commonwealth Bank of Australia's (ASX: CBA) is even lower at 4.6% as share prices are driven up. The big four banks Australia and New Zealand Banking Group (ASX: ANZ), Commonwealth, National Australia Bank (ASX: NAB) and Westpac Banking Corp (ASX: WBC) have been expensive for some time now, and are getting pushed up to ever-new highs.
The problem is that the RBA has left the door open for further rate cuts, which could usher in a new wave of property price hikes and new share price highs for many of the big dividend payers. A lower cash rate could also see our exchange rate drop from the current level of around 78 US cents into the 60's. That would make it even cheaper for international investors, who have also been attracted by our relatively high yields.
It's no wonder then that investors are concerned about a large pullback. In fact, it's something we may even need, but if you have a large portfolio allocation to the big four banks – look out below.
