ASX bank shares are hitting one-year or more highs but their rally may not yet be over as there are two reasons to think they can go higher.
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ASX bank shares are hitting one-year or more highs but their rally may not yet be over.
The Australia and New Zealand Banking GrpLtd (ASX: ANZ) share price jumped 2.2% to $29.34 – its highest since August 2018.
Can ASX bank share keep outperforming?
Some may be wondering if their golden run is over as banks aren’t trading at a discount to book value as they once did.
However, Morgan Stanley believes that ASX bank stocks can keep outperforming thanks to economic growth and central bank action.
You might think that growth and loose monetary policies are good for all shares, particularly high-growth ASX names like tech shares. But these factors are more supportive of ASX shares that are trading on lower valuations.
Why ASX bank shares are in a sweet spot
One reason is because, unlike the more volatile 2020 environment when growth was scarce, investors don’t have to cough up a big premium for shares with earnings growth potential.
There is another reason and it’s to do with rising bond yields, particularly longer-dated bonds. Yields have been rising due to the improved economic outlook and rising inflation expectations.
“While central banks have remained resolute in fixing low short-end yields, the messaging around long-end rates has been one of managing the pace rather than the level of yields – particularly as driven by expectation of fiscal stimulus,” said Morgan Stanley.
“This has put some pressure on valuations, with the market [12-month forward price/earnings] multiple derating from 19.6x to 18.3x through February.”
Don’t fear the market de-rating
But the switch to value shares will cause a further de-rating in the S&P/ASX 200 Index (Index:^AXJO). This happens when the average price-earnings (P/E) multiple for the market falls as expensive stocks are sold off.
“In our view a market derating is to be expected given the strong level of earnings recovery (and extent to which this was anticipated) – and does not signal a wholesale shift in risk appetite,” said Morgan Stanley.
“Rotation remains the more important theme – with earnings recovering we want to be exposed to those companies that are participating in the uplift.
“And with growth less scarce those with a valuation premium are likely to be less in demand.”
Two ASX sectors to be overweight on for 2021
The two key sectors that Morgan Stanley is encouraging investors to be “biased” towards are ASX banks and ASX resources shares.
These two sectors have good earnings growth potential in 2021 and are still trading on reasonable valuations despite their recent run-up.
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Motley Fool contributor Brendon Lau owns shares of Australia & New Zealand Banking Group Limited, Commonwealth Bank of Australia, National Australia Bank Limited, and Westpac Banking. Connect with me on Twitter @brenlau.
The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
The post Can ASX bank shares keep rallying after hitting 52-week highs? appeared first on The Motley Fool Australia.