Banks, consumer discretionary and tech traded in tandem into the March 23 low. However, since that time, consumer and especially tech have bounced substantially, while banks have barely moved. I’m looking at these three sectors together because together they represent the more cyclical exposures in the market. These are the companies most exposed to the health of the underlying economy.
So what’s happening under the hood and what is the reason for the divergence?
Looking at the banks, the big four, in particular, have suffered severe drawdowns during March and hardly recovered at all during April. NAB, WBC and ANZ are all languishing very close to their GFC lows, which is extraordinary. They’ve all essentially traded sideways for the last ten years. CBA, on the other hand, was able to put in a much more robust recovery out of the GFC but has also broken below a long term trading range and is currently sitting at levels last seen in 2010.
At the GFC low, the big four banks traded at around one times book value. This multiple was down from extravagant levels before the GFC of between 2.5 and 4 times book value. They then made their way back to the 2-3x level at their post-GFC highs in 2015. WBC, ANZ and NAB have now crashed to between 0.7-0.8 times book value. CBA has collapsed to a low of 1.24x.
From this, I can only surmise that the market is expecting significant damage to bank balance sheets and profitability in the coming months.
Consumer discretionary stocks fell in tandem with the banking stocks at the onset of the current crisis, however, rebounded much more strongly in April. This action is in contrast to how they behaved during the GFC, where there was significant underperformance from the consumer sector. The banks also recovered faster coming out of the GFC.
Taking a look at some of the big caps in the sector:
And some of the smaller caps:
Both groups have shown strong bounces in April in contrast with the banking stocks.
Technology stocks also fell in tandem with the banking and consumer discretionary sectors, however, recovered a large portion of the decline in April. By the end of April, the sector average was down only approximately 8%, after having been down 42% when it bottomed out on March 23.
The strength of the bounce in technology stocks is not as surprising as the strength in the retailers. This behaviour is more in line with historical precedent. However, we are wary of discounting big techs exposure to the consumer, small business and the economy in general. These companies will struggle alongside everyone else in the event of a significant economic contraction.
The top five largest technology stocks by market capitalisation, which account for more than half of the entire technology index include Xero, Afterpay, Computershare, Wisetech and Altium. Each has exposure to the underlying economy, and each will find growth harder to come by in the event of a system-wide contraction.
Xero’s stock price has recovered to within 15% of 52-week highs. Afterpay is flirting with new highs today, following news of Tencent’s new 5% stake in the company. Neither of these companies will be immune in the event of a recession.
Xero’s customers are the small businesses most exposed to this crisis. Volume growth in Afterpays consumer payments business is sure to slow in the event of a recession, not to mention the potential credit exposure from customers who’ve lost jobs and are unable to make repayments.
This piece is not a prediction of the future. I’m merely pointing out the growing divergence between the banking stocks and some of the other cyclically exposed stocks.
The banks are telling one story, while the consumer discretionary and technology stocks are saying something else entirely. Both have exposure to similar risks in varying degrees.
The banks have told us more. ANZ, NAB and WBC have each reported half-yearly results in the last week or two. Each set of results included hefty credit impairment charges and a deep sense of concern for what to expect in the months ahead. This concern is being reflected in their share prices, while other cyclically exposed stocks are currently reflecting hope.