Fund Manager Geoff Wilson thinks the big four banks are a decent bet for investors over the next 12 months, but the overall market could be around 5% lower over the same period.
Given the banks, Australia and New Zealand Banking Group (ASX: ANZ), Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd (ASX: NAB) and Westpac Banking Corp (ASX: WBC) make up nearly 28% of the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) by themselves, Mr Wilson must think most of the index fall will be generated by other companies.
Mr Wilson oversees over $2 billion in funds through Wilson Asset Management's four listed invested companies. They are WAM Capital Limited (ASX: WAM), WAM Active Limited (ASX: WAA), Wam Leaders Ltd (ASX: WLE) and WAM Research Limited (ASX: WAX).
According to the Australian Financial Review (AFR), he is predicting the ASX 200 index will be around 5% lower towards the end of 2017, compared to the current level of 5,322 points. Most of that will come from rising headwinds thanks to more attractive bond yields – which have already started rising. Mr Wilson also thinks many companies have had their valuations pushed beyond sensible price earnings multiples due to low interest rates, a lack of high yielding investment alternatives and a flood of cheap money.
He points to the share prices of infrastructure stocks like Transurban Group (ASX: TCL), Telstra Corporation Ltd (ASX TLS) and Sydney Airport Holdings Ltd (ASX: SYD), which are expected to fall over the next 12 months because of the shift in bond yields – having already seen some falls.
Conversely, banks are likely to be suitable investments for a couple of reasons. Bad and doubtful debts don't appear to be getting much worse, and Mr Wilson thinks they are unlikely to get caught in a property market slide.
"The big banks look slightly cheap on a relative P/E basis. I think they'll probably perform pretty well," he said.
Of the big four, Mr Wilson favours NAB because of its disciplined lending practices, cost-cutting and a focus on the small-to-medium business lending market.
He also thinks interest rates in Australia won't go any lower and the next move will be up. A gradual rise in interest rates will also help the banks' margins but are usually negative for stock markets.
