NEWS + VIEWS – 21/11/2025
MARKETS
Share markets are in the midst of a pullback, which is not that surprising as valuations were around 18.7 times earnings for the ASX 200 index. The ten-year average is 16.3 times and the longer term average even less.
Since late October the ASX 200 has fallen around -7% and is heading towards a correction (-10%). Investors ‘buying the dip’ have been somewhat overwhelmed by negative sentiment. Bear in mind that a correction or two each year is not unusual.
The dip buyers are buoyed by strong consumer sentiment and NAB’s business survey suggesting improved trading, stronger company profits and good employment numbers (unemployment down to 4.3%). On the flip side, that means the chance of further interest cuts are fading, particularly as the last inflation reading was high. The stronger employment numbers are a little misleading when assessing the health of the economy as the majority of the 42,000 new jobs were in the government. These are low productivity roles, consequently the spending is inflationary.
At a sector level, Mining prospects appear good, but this is not protecting the sector from the sell-off. Discretionary Consumer has been very much weaker after being very strong this year. The banks are not enjoying the prospect of higher than previously expected interest rates.
In the US, the longest government shutdown has ended. The Federal Reserve will be relieved but due to lack of data it is still somewhat ‘blind’ to what is going on economically. Economic activity is improving and company earnings are strengthening. Investors are wishing that interest rates will continue to fall.
COMPANY NEWS
Commonwealth Bank (CBA) and the other banks
CBA reported an increase of 4% in underlying operating expenses for the September quarter. It could be worse since this time of the year is seasonally low in technology spending. Net interest margins were down slightly while lending and deposit growth was in line with the industry average. If that is becoming a trend, then CBA does not sound like a high growth company, which is what the share price has been reflecting.
The chart below shows that each of the major banks is trading around 20 times (trailing) earnings, which is expensive by world standards. Note that the banks are leading the current pullback.
Source: David Tuckwell ETF Shares, Bloomberg
The big attraction for Australian investors is the franked dividends being delivered by the major banks. The banks’ dividends are consistent as a result of the large sources of revenue from low-risk housing loans.
Australian investors demand higher dividends from non-bank companies as well, again usually backed by franking credits. This is a big reason why payout levels are significantly higher than offshore companies (see chart below).
Source: Bloomberg Data as of July 2025
Gerard O’Shaughnessy
P 0423 771 330
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