The Santa Rally Coming to the ASX

The Santa Rally Coming to the ASX

We just found out what international investors think of the banking Royal Commission. They couldn’t care less.

Did you see the news? Westpac just raised $US1.75 billion in the US as part of its funding needs.

The Australian cites a credit analyst who says this works out to be the cheapest five-year funding for a major bank since the global financial crisis.

Yep. For all the political hissing and gnashing of teeth over Australia’s big banks, business is going along at a nice clip, even if their public image takes a bath every other week.

If you’re inclined to think that higher interest rates are coming to kill off the Australian property market, this suggests you’re going to be wrong…

Offshore pricing is a bullish signal here

The banks raise huge amounts of money offshore. If that’s getting cheaper, then the property party can keep going as interest rates stay relatively low.

No doubt this will make bank investors feel chuffed. Mind you, there was plenty of cheer coming anyway.

Three of the big four banks are going to pay out a total of $8.2 billion in dividends between 13-22 December. That’s plenty of spending money in time for Christmas Day.

It’s going to get even better. The traditional ‘Santa’ rally in the Aussie market has the right ingredients to happen again.

You might not be familiar with the statistics on this. December has been the best performing month for the ASX since 1950.

There’s no reason why it can’t happen again. It’s more likely than not.  The Australian stock market has plenty of scope to rise from here.

Just look at the banks. The big four still have dividend yields that range around 5-6%. Provisions for bad and doubtful debts are at historic lows.

Credit growth is ticking over nicely, at least according to the Reserve Bank’s latest Chart Pack.

The Australian Prudential Regulation Authority (APRA) released its quarterly data last week.

It shows the banking sector’s profitability — using return on equity — jumped up over 2% during the last year. Interest-only loans have come down in a big way too. Capital ratios look strong across the sector.

None of this suggests major problems anywhere. In fact, it’s the complete opposite.

We now have the news that the Royal Commission is going ahead. That means this ‘bad’ news is public and open, and priced into the outlook for the banking sector. The market will now look beyond it.

And what will it see?

The US keeps clocking in great numbers for employment. The Fed will raise rates this week and further signal the expansion of the US economy.

Australia’s population is surging ahead, and developments continue to proceed all over the country. The latest GDP figures put growth at 2.85%.

In today’s Australian,there’s a story on a new $550 million development planned for the northern end of the Gold Coast. There’s a predictable sequence of events playing out here.

The boom in Sydney and Melbourne is drenching existing landholders in windfall gains.

However, a lot of those not already in the market are either priced out completely or can’t raise the deposit needed. A final cohort don’t want to be debt slaves for some dumpy place in a boring outer suburb and a massive commute.

They’re looking elsewhere, and immediately the eyes go further out to regional areas, or completely out of state, usually to southeast Queensland. I read over the weekend that the price gap between the southern capitals and Queensland is at a historic high.

This will close as buyers move in and property investors chase areas that don’t have such a massive upfront cost.

The fact that people can continue to suggest the property ‘bubble’ will soon burst is beyond me. I have read such claims for years, and not one of them has been right.

How to take advantage of this?

Stay long stocks, and continue to accumulate as many assets as you can.

My strategy is to use a bit of leverage to take advantage of a rising Australian market, and look for small and midcap stocks that appear primed to break out for a run.

And, of course, bitcoin has been a nice little earner in the last few weeks. We can’t forget the opportunities in the crypto market.

Now’s the time to be making profits. Don’t wait around. I was playing cards the other weekend. A bullish case for bitcoin was put forward around the table. One of my buddies said he’d ‘think about it’.

Afterwards, bitcoin proceeded to go up about US$10,000 in about five days. As far as I know, my friend is still thinking.

If you ask me, the ASX is brewing for a run into the end of the year.

After all, opportunities come and go all the time, but Christmas only comes once a year.

Best wishes,

Callum Newman Signature

Callum Newman
Editor, The Daily Reckoning Australia