Banks approaching "maximum pessimism" and on the slide: Cadence Capital

Australian banks are on a slide and investors should keep their distance as the industry reaches,” maximum pessimism,” a leading fund manager has warned.

That is the view of Cadence Capital’s Managing Director and Portfolio Manager, Karl Seigling, whose company uses a variety of metrics to determine where industries and individual stocks are in a ‘boom and bust’ cycle.

He said that the first rule to making money on the stock market was, “you never buy a falling stock and don't sell a rising stock,” and that, currently, the banks don’t meet the criteria of a solid investment.

“They don't meet our fundamental criteria and they do not meet our technical criteria either,” he said. According to Seigling, they have gone nowhere since the Global Financial Crisis with the prospect of rising interest rates and the various inquiries into the industry weighing down on it.

He claimed that because banks trade around 2.5-times their Net Tangible Assets it makes them, “potentially dangerous,” and the headwind uncertainties rising rates created could adversely affect the banks.

But, he conceded his reasoning could be partially clouded due to the influx of negativity the sector has courted.

“Royal Commission, Hayne, conflicts of interest, vertical & horizontal integration, everything you’ve read in the paper - it may be that temporarily we have formed a point of maximum pessimism because it is just so negative.”

Indeed, the only way Seigling sees any value in the banking stocks is to attain them for such a such a short period he would not call it an investment.

“The way you would do it is to ‘trade’ the position - we would not call that an investment,” he said. “That’s what we would do over six to 18 months period with bank stock.”

“During that period we can do a bit of dividend arbitrage [...] and at the other end of it, when it rolls over, we are able to short that stock and money when it goes down as well.”

On when the banks could recover,  Seigling was unsure but indicated it rested on their valuations.

"I would have never thought that during the Global Financial Crisis that [banks] would drop to nine-times [Price-Earnings Ratio] but it happened very quickly. They halved in about three months."

"It all comes down to valuation - if they fall far enough and their growth and their earnings growth improves, their compelling from a fundamental view."

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