16 APRIL 2010

All Ordinaries Reaches 5,000… Our Banking Sector’s Strong Performance

Our market (All Ordinaries) reached the 5,000 mark during the week and has subsequently closed above that level on three occasions this week.  The last time the All Ordinaries traded above the 5,000 mark was on the 26th of September 2008.  What a difference a year can make (or 13 months to be precise) since the market bottomed out on the 13th of March 2009.  Since this point in time, the All Ordinaries is up 61.52% and a lot of this has to do with the performance of our banking sector over this period of time.

Not too long ago, many analysts and investors were proclaiming the end of the world with global share markets being pummelled by the US financial crisis.  However, the latest data shows that the value of banking shares on the Australian bourse has hit record highs. 

Market capitalisation of the Banking industry sector is now valued at $307 billion, up 125 per cent from the lows recorded in January 2009 (The Banking sector includes ANZ, Bendigo, Bank of Queensland, CBA, NAB, RHG Ltd, Westpac), The more than doubling in Banking sector capitalisation has come via a combination of new equity issuance and higher share prices.  The Banking share index has lifted by 98 per cent over the same period. 

Aussie banks never experienced the problems of their overseas peers but they were still sold off over 2008 in line with other financial firms across the globe.  But when the recovery came it was always likely that Aussie banks would out-perform overseas peers as well as out-perform many other sectors on the local share market.  And that’s proven to be the case. 

No doubt many investors have done very well over the past year in picking up banking shares at fire-sale prices and taking part in equity raisings.  But what the experience highlights is the value of taking a ‘big picture’ view of the fundamentals and separating facts from noise, fear and innuendo.  There are still some analysts and commentators attempting to highlight the next ‘X-factor’ that will lead to a major share market correction or new downturn for the global economy.  There will always be the ambulance chasers, but for ordinary investors it is a case of remaining rational in troubled times and identifying value and opportunities. 

The rise and rise of the Banking sector raises an interesting point about the concentration of our share market.  Just 22 months ago Banks accounted for 14 per cent of the All Ordinaries.  Today the market share stands at 22 per cent.  If we just focus on the big four banks and throw in BHP Billiton and Rio Tinto, these six stocks now for almost 35 per cent of the All Ordinaries, up from just over 25 per cent in mid 2007. 

Add in the next four biggest companies – Telstra, Wesfarmers, Woodside Petroleum and Woolworths – and the market share of the 10 biggest companies stands at 46 per cent.  If we switch our focus to the ASX 200, the top 10 stocks account for a whopping 53 per cent of the index. 

By comparison, the top 10 stocks in the US only account for 20 per cent of the S&P 500 index and 17 per cent of the broader S&P Composite 1500 index.  If our biggest companies continue to grow in relative terms compared with the remainder of the market there will certainly be more focus on the extent of market concentration existing on the Australian share market. 

Patrick Malcolm
Senior Para-Planner
Authorised Representative No. 278061

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