Forget the downbeat outlook for our big banks as weak credit growth, rising regulatory pressure and embarrassing revelations at the Banking Royal Commission may not be enough to hold back the sector from its seasonal surge.
That's the conclusion of Bell Potter's high-profile broker Richard Coppleson who is urging investors to buy shares in Australia and New Zealand Banking Group (ASX: ANZ), National Australia Bank Ltd. (ASX: NAB) and Westpac Banking Corp (ASX: WBC).
The best performing sector in March has historically been banking with the group rallying 2.6% on average over the last 18 years, according to the broker who also pointed out that the sector has finished up in three out of every four years.
If you thought those were pretty big odds, consider this – the banks have staged a March rally in every year since 2006 and the average gain over the 12 years is 4.1%!
What's more, the bank rally tends to continue into April with average gains of around 2.5% since 2000.
"One reason I think has to do with the fact that the 3 big banks – not Commonwealth Bank of Australia (ASX: CBA) – all report in early May, and as a result, investors buy them ahead of reporting," said the broker.
"With the February reporting season now over and most stocks going ex-dividend around now – investors look to where they can next 'harvest' income."
I can't think of another sector that pays more dividends than our big banks. It is worth noting that ANZ, Westpac and NAB paid dividends worth around $8 billion in December. In contrast, total dividends paid by the rest of the market in March stands at around $14.5 billion, according to Bell Potter.
Given the 45-day franking rule (or 47 days if you include the day you buy and sell the stock), investors may already be rotating into ANZ as the broker estimates that there is 38-odd days before the bank goes ex-dividend (ex-div).
The assumption here is that the stock will go ex-div nine days after it hands in its earnings report card. If so, the next bank to go ex-div is NAB on May 17 followed by Westpac on May 21.
The only thing that will stop the big four banks from outperforming again this year is a global sell-off, said the broker.
That doesn't sound like a far-fetched risk even though the current economic environment is conducive for risk assets. You only need to read the front pages of the news to be reminded of a potential global trade war, which poses the biggest near-term threat to our bull market.
Big bank stocks could prove to be a rewarding short-term trade, but there are other blue chips that are better placed to outperform over the medium to longer-term.
The experts at the Motley Fool have picked their three favourite large cap stocks for 2018 that have a more positive fundamental outlook than the banks.
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