Short positions on Australia's Big Four banks—Commonwealth Bank of Australia, Australia and New Zealand Banking Group Ltd., Westpac Banking Corp., and National Australia Bank Ltd.—collectively soared 50 per cent this year to $6.46 billion, with hedge fund managers believing that the housing market is close to a downturn.
"Australia now has one of the biggest housing bubbles in history," said asset manager Jonathan Tepper from US-based hedge fund consultancy Variant Perception. Among the shares he recommends in anticipation of a major property downturn are Australian banks.
And it appears like there is a reason for this assumption, as ANZ became the nation's first major lender to cut its dividend since the global financial crisis following millions worth of bad debt charges and shrinking net profit.
"Short sellers are likely to deem Australian banks as mispriced based on dividend and earnings risk," said Nicholas Vidale, portfolio manager at hedge fund Man Group.
Moody's Investor Service also added to investor concerns, forecasting weakening bank earnings and rising bad debts. Similarly, banking analysts at Morgan Stanley, Goldman Sachs, and UBS predict more dividend cuts.
"One doesn't have to be overly negative to expect Australian bank earnings growth to stall," Vidale said. "Dividends are likely to be higher than what the banks can sustain."
Despite these, Australia's Big Four banks are benefiting from expectations that the Reserve Bank will further cut official cash rates from a record low of 1.75 per cent.
"Australia's major banks don't make good shorts," said Andrew Macken, a fund manager at Mongomery Investment Management in Sydney. "Even if their profit prospects may look weaker than in the past, they're still some of the most profitable in the world, competition is limited, and they enjoy an implicit government guarantee."
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