Who Keeps Buying CBA
Because it's not us. Aussies are selling the thing like it's a used car with a weird noise.
We all sit here staring at the screen, watching CBA moon and think, surely this thing has to come down. And yet it won't bloody quit.
We sit here and think, what in the world is happening? Maybe there are some clues in that inflection point. 30 Sep 23 as marked in that vertical line, keep that in mind, it'll come up a few times now.
Thinking About Where You're Overweight
I despise index overweights, it means I'm being forced to actually think about something and have a view on a position. I've been banging my head on why CBA keeps getting bid up, so to answer the question, let's think not of ourselves for a moment and think about why there might be more buyers than sellers.
Firstly, lets tackle the industry super/mysuper question off the bat. If the flows are to the index then shouldn't all boats rise equally? Why should the biggest index constituent become bigger? Is it reflective of a tight capital structure and low free float? Low free float in the biggest stock on the ASX? Yeah, nah.
I'm finding that the reason a company goes up or down within an index is not passive flows, but rather active flows.
It's All About Relativity
Some hedge fund manager in NY who probably hasn't slept since 2019, staring at his Bloomberg screen at 3am, thinking about where to allocate. Already loaded to the gills on US equities, already at limits on Europe and don't really want to allocate more to socialism, can't go China because that's unamerican.
Straya mate.
Looking in, our little backwater country had the audacity to trade at parity to the US dollar about a decade ago and recently it traded down to the low 60c mark. The dollar snapped from the high 60s down to the low 60s in lets round it to 30 Sept 2023.
What if you could bet on the Aussie mean reverting to the US Dollar? And what if you could hold an AUD asset of the highest quality that could even pay you a yield to hold, the ultimate carry trade, you get paid to take on a mean reversion.
Which Bank? Why Our National Spirit Animal
Everyone looks at CBA and sees an appliance. Camry, bulletproof, reliable & totally dull. Exactly what scares every investor into thinking they're missing something. And that's the trick, there's nothing to miss.
But looking from offshore, there are a few things interesting from a global perspective. Excellent domicile where the law works, a rational (over)regulated banking industry with few players, and shareholders are treated like kings.
A Trade
For anyone with that view (ie an offshore investor), AUD + CBA could potentially have been an amazing asymmetric trade.
Judging this as a US based investor back in Sep-23, the AUDUSD was around 64c and CBA traded at $100. Inflation was coming down, rates looking like they've peaked. And you could back this bank that traded flat since covid around the $100 mark while paying around 4.5% pa.
Noting the chart has CBA downside increments by $10 and upside by $20. Returns don't include the dividends (circa 4.5% back in Sep-23) and today is highlights in yellow.
Pile into this trade you can't lose money! At some point the AUD bounces and, the payout is amazing, you can easily underwrite 10%+ IRRs. And more importantly, because of the yielding nature of the bank, you're getting paid to take on the mean reversion risk. If the Aussie goes to 50, great, buy more. If it goes 70+, sell and buy yourself another boat.
Am I right or wrong? I don't know, this is just a guess. I could be soooo wide of the mark here. Maybe it's the same investor, but instead they're buying APAC exposure because the ASX looks relatively cheap on a global basis back in Sep-23.
Reading Tea Leaves
What I'm trying to show is that investors could justify holding CBA (Sep-23?) from an offshore perspective, and the reason CBA has ramped from $100 at it's current pace is due to offshore influences. Not kidding, the clues for this stuff exists. Data from CBA.
Domestic investors have been responding to the price rise by quite logically selling. And offshore buying ramped up at the 30-Sep-23 mark like someone flipped a switch.
But the more damning chart is the one that shows Retail ownership, a drastic shift in the ownership of CBA.
We can all have a theory about why offshore institutional investors are buying, but we can definitively say that the rise in price since September 2023 has been due to offshore buying. Back to the share price chart.
There are more buyers than sellers. The buyers are not Aussies. Aussies are net sellers.
Beauty Is in the Eye of the Shareholder
Some truths and some maybe some fictions in the above, but this isn't enough. As I said, I'm being forced to think about this because these pricks have bid up CBA so much that it's still outperforming my own BTC/Gold holdings. And I need to know why, why does our Jolie laide continue to be so attractive to others.
So let's stick to facts for a moment. CBA generates decent yields but more importantly, unlike any other bank in the world, management clearly states they will distribute whatever they can and the payout ratio is absurd. It is the hidden golden nugget.
Management have stated payout ratios between 70-80% vs the rest of the world around 30-40%. This inadvertently points to quality. Quality just everywhere, balance sheet, market position, capital ratios, profitability, no need for additional capital elsewhere, overall capex needs. And you know what, the friggin app works so well! No one can doubt just how good their tech platform has been for years from a consumer perspective.
You can argue leverage ratios are high, which is true, but capital ratios are best in class.
Super well capitalised, management don't do anything silly, the consumer touch points are pretty good, and they're determined to distribute whatever they make. When you factor in regulatory capture, CBA isn't a bank, it's practically infrastructure. It's a utility. And utilities are supposed to be boring and profitable, sounds familiar.
A no brainer? Quite literally the best bank in the world and a bet on CBA is a bet on Australia right?
Do I Buy or Do I Sell?
I'm still stuck, but I know I can justify holding it with what I've outlined here. The fact is it's probably the best bank in the world with more buyers than sellers today. Something changed in September 2023 and I'm not sure what, I'm just worried now that it might change back to the previous state without notice.
Do I buy or do I sell? The answer is the risk the market gives you is not a risk you need to take on as an investor. The market gives you a certain type and amount of risk at any given time. The risk has a term structure too. Its your job as an investor to not just take the risk the market gives you but rather trade around the risk.