Conduct Unbecoming but Outlook is Brightening

Whilst so called ‘green shoots’ of Australian and developed world economic growth are well and truly in ascendancy a significant part of our domestic economy is going through a crisis of confidence. We are of course referring to the banking and financial services sector, the dirty linen of which are exposed daily in the media as the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry grinds away, laying bare shocking evidence of misconduct, negligence and even outright fraud. The fact is that this industry makes up almost 40% of the market capitalisation of the 200 largest companies listed on the Australian stock exchange.

All the big banks and, particularly the major financial services company AMP, are taking a pasting in this enquiry, the proceedings of which are still in the early stages of its work.

Leaving the moral aspects of the major offending parties aside, does this mean that the major banks are on the rope, and should we urge their shareholders to abandon ship? It would be understandable if some investors decide to sell their bank shares on account of the many examples of bad behaviour attributable to their staff, management and even to their Boards. But from a pure financial investment point of view, the answer is no – our banks are very strong with solid prospects for, just modest, growth in a growing economy and the ability to maintain their level of attractive dividend payments. Until the Commission has run its course and the Government has decided on any more regulative restrictions that may be imposed on the sector we cannot know the extent to which the reputational damage done may affect future profitability, but the current weakness in the sector’s share prices may present a good investment opportunity. And whilst we certainly should not try to offer any defence for the many examples of unbecoming conduct by the perpetrators, we should acknowledge the medias’ propensity to highlight sensationalist events and negativity in their news coverage, which is likely to have a relatively short-term effect.

In line with the brightening outlook for economic growth our share market has done quite well, in spite of increased volatility, with the exception of the financial services sector which, as outlined above makes up such a significant portion of the broad share market indices. Looking at growth in company profits, and other factors, we are optimistic that there is potential for further gains, but at the same time we are likely to experience further corrections requiring investors to hold their nerve.