Livewire Article – The financials that will sail through the storm

01 Jun 2018

The Royal Commission findings have sent a shockwave through the broader financial community. Here we look at potential opportunities it is creating outside of the main banks.

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Fear-based selling creates good buying?

There were numerous commentators suggesting the Royal Commission would be a waste to government time and resources. These views have now unanimously been retracted. It’s worth recalling just how significant the financial sector is in the domestic market – the 26 financial companies in the ASX200 account for over 30% of the index.

Financials, led by the four banks, are the single biggest driver of the ASX. And it is further noteworthy just how financially tied Australians are to their success, or otherwise, through their superannuation funds and personal holdings.

Whenever there is an unexpected shock to a perceived homogenous sector, such as the financials, there is the ‘fear-factor’ that induces broad-based sectoral selling.

So whilst the outcomes of the Commission have been a shock, the subsequent response has not been a surprise.


“Just buy the banks” no longer

I’m not a proponent of trying to bottom-pick a market, nor do I like investing into sectors that will be exposed to a significant structural change, even if they do offer better value than they had in the past. It is difficult to determine the future impact presently as the legislated changes to the sector are still far from concrete.

But what is currently obvious is the severe reputational damage the household financial names have sustained. This is not likely to be a short-term blip, investors’ views toward these companies is likely to result in a long-lasting derating.

“Just buy the banks” is now about as helpful stockbroking advice as “Buy Telstra for the dividend”.


Who stands to benefit from reallocation of capital in the sector?

Where there is opportunity in this event is in the collateral damage: those companies that have been impacted by the negative sentiment swirling about any business that operate in the ‘finance’ sector – but that are unlikely to be directly impacted by any the Royal Commission outcomes.

It would appear the pinch points of the commission are poor lending practices, inadequate fee disclosures and the vertical integration financial services that has led to less than independent advice and client outcomes. These issues largely relate to retail clients and small business.

The companies that are likely to sail through this storm safely are the corporate facing companies with little retail or SME exposure:

Macquarie Group’s (MQG) share price has continued its upward trend with barely a pause.
Moelis (MOE), dubbed the mini-Macquarie, has seen its shares under some pressure but continues to build out its profitable asset management, corporate lending and advice business.
The other beneficiaries, as the market is already beginning to recognise, are alternative retail asset management plays:

The platforms:

  • Hub24 (HUB)
  • Netwealth (NWL)
  • OneVue (OVH)
  • IOOF (IFL)

The managers:

  • Pinnacle (PNI)
  • Challenger (CGF)
  • Platinum (PTM)
  • Magellan (MFG)
  • Pendal Group (PDL)

I think it’s highly likely that these businesses will enjoy a meaningful flow of funds away from the big banks.

There is also a strong probability of corporate opportunity as some of the bank’s troubled financial planning arms are divested.