Both countries’ financial services are near identical twins

But Australian financial services stocks are trading at large discounts, have high payout ratios, and outperform their Canadian counterparts – with less volatility, says Hamilton Capital

Ruth Saldanha 23 January, 2019 | 6:00PM

 

 

Ruth Saldanha: Should you invest in Australian financial services right now. Morningstar Australia has been bullish on banks and has maintained a wide moat rating on the big four Australian banks. Despite negative sentiment on the back of a tighter regulation weakening housing markets and slowing credit. This positive outlook is shared by Hamilton Capital which recently launched the Hamilton Capital Australian Financials Yield ETF. Rob Wessel, Managing Partner at Hamilton Capital is here to talk about why he looks the region and this sector. Rob, thank you so much for joining us today.

Rob Wessel : Thank you for having us.

Saldanha : Why an Australian financial services ETF right now.

Wessel : Well, there are several reasons the first is Australia is a great country and because Canadian investors are so attached to their Canadian financials holdings and typically have maximum weightings, and the Australian financials are almost a near identical twin to the Canadian financials, but at the same time don’t have super high correlations its very good – for those people who like Canadian financials they would almost by definition like the Australian financials. In terms of right now I think like everybody else we are looking at the global financial sector. It was very weak in the later part of last year as everything was globally. The Australian financials represent we believe very good value and in part because of the regulatory overhang and clarity or the overhang from an upcoming Royal Commission and the resolution of that is likely coming in and around February. But I think there is really any time Australia is arguably or has been the world's most successful developed economy in the past 30 years and is forecast to be the highest growing economy next year. So there is a lot to like about Australia.

Saldanha : What are your expectations from the Royal Commission report next month and what impact do you think it will have.

Wessel : So that's a two dimensional question. The first thing is we hope that the Australian financials, because as you know the Royal Commission has affected or is evaluating all aspects of the Australian financial sector not just the banks. That because this has been going on for so long that we believe that a lot of the banks have in some respects and financials have preemptively dealt with the presumptive recommendations. And so our hope is that when the recommendations come out on February 1st that the recommendation will be tied back to actions already taken that would number one.

Number two is it's not clear that the worst outcome isn’t already reflected in valuations. So the Australian financials are trading at very large discounts to where they have before because they have such high dividend yields there is a lot of downside protection. And this is typically a sector that has long term outperformance versus the Canadian financials while at the same time with the same or marginally lower volatility. So we knock on woods we hope that it is a bit of a non-event. Now having said even if it is good or a bad outcome there is no guarantee that the government of the day which also may change because there is an election coming whether or not they even accept those recommendations or modify them either more strictly or in a more forgiving fashion.

Saldanha : Let's talk about your fund now. What are some of the main features of the fund?

Wessel : So it is really a proxy for Australia. So Australia is one of the world's most successful economies it hasn’t had a recession since the early 90s. They typically over the last 10 or 15 years have had about 100 basis points a year of additional or higher GDP growth than Canada. The sector I mentioned or as you may know has no aspirations for foreign expansion. So therefore the sector has very higher payout ratios and therefor very high dividend yields. And so our hope would be that we will see some multiple expansion a reversion to more or less historical EPS growth and supported by very, very healthy dividend yields which in some respects the fund we hope to have a yield of 6.5% or higher.

Saldanha : Thank you so much for joining us with your perspectives,

Rob.

Wessel : Thank you for having us.

Saldanha : From Morningstar, I am Ruth Saldanha.

About Author

Ruth Saldanha  Ruth Saldanha is Senior Editor at Morningstar.ca