Australia's Big Four bank shares have been on fire in recent months, but one fund manager thinks the good times could soon come to an end.
According to The Australian Financial Review, Marc Chatin, a manager at British hedge fund Parus, nominated the big four banks as a top short idea at the recent Sohn investment conference in London. Simply put, that means the fund is betting on the share prices of the big four banks falling in the near future, potentially reversing some of their strong recent gains.
As can be seen in the chart below, Westpac Banking Corp (ASX: WBC) has lifted more than 11% since the middle of September. Its rival National Australia Bank Ltd. (ASX: NAB) has risen nearly 13%, while Commonwealth Bank of Australia (ASX: CBA) and Australia and New Zealand Banking Group (ASX: ANZ) have both gained north of 15%.
However, ANZ Bank is the only one of the major banks sitting on a positive return since the beginning of the year. Its shares have risen 6.6%, while its rivals have all slipped between 2% and 6%.
According to the newspaper report, Mr Chatin highlighted the sector's reliance on, and vulnerability to, Australia's house prices. If house prices were to decline – or even if they were to plateau – that could certainly put pressure on the banks' abilities to grow earnings given their enormous mortgage loan books.
The possibility of further capital raisings also remains. If the banks are required to shore up more capital to strengthen their balance sheets, that could impact their returns on equity, or ROE, and could hinder their ability to grow or even maintain their dividends.
Indeed, many investors have piled back into the banks in recent months, which comes largely at the expense of higher growth businesses – many of which have enjoyed remarkable returns in recent years. In part, this is likely due to the prospect of rising interest rate, which could help expand the banks' net interest margins – or the level of profitability the banks generate on the loans they write.
Should you sell your bank shares?
Mr Chatin does have justifiable reasons for shorting the banks. However, many others before him have tried, and failed, to make money by betting against the banks' shares, so this shouldn't necessarily serve as a warning for shareholders to rush for the exits.
That said, although I won't be following Mr Chatin's call to short the banks, I won't be buying them either.
Australia's big four banks are among Australia's most well established businesses going around. They also offer great, fully franked dividend yields, which act as a powerful combination for attracting investors around the country – particularly those who are less inclined to invest in more risky alternatives.
The problem is, they aren't cheap. And, as my colleague recently highlighted, the banks could certainly struggle to find new avenues for growth over the coming years, particularly with the potential headwinds that are currently facing the local economy.
Foolish takeaway
You are neither right nor wrong to own shares in the big four banks. The shares have, for the most part, delivered fantastic gains for investors over the years and could continue to do so over the coming years, both in the form of capital gains and/or dividends.
However, given the potential headwinds facing the banks, I would stress the importance of maintaining a properly diversified portfolio. That doesn't mean having your wealth distributed evenly among the big banks. Instead, it means ensuring your wealth is exposed to different corners of the market (across industries) and even across geographies.
That way, if Mr Chatin is right and the banks do fall, your investments are more evenly spread and less likely to endure a sharp correction.
