Commonwealth Bank of Australia (ASX: CBA) is not far from the point where the “tsunami” of buying that has driven it to “crazy” levels will disappear, according to a leading fund manager.
Solaris Investment Management Chief Investment Officer Michael Bell said the factors that had driven the price of Australia’s largest company included switching from United States and Chinese stocks to the “big liquid names” in Australia.
He said money had also transitioned away from fund managers that had performed poorly with no banks in their portfolios to fund managers that owned banks and into passive investment portfolios that included CBA.
Of the A$25 billion that investors received from takeovers of Australian-listed companies in the last 12 months, about $20 billion was reinvested across the market, including in banks.
“So we’ve had this tsunami of buying across CBA and some of the larger stocks in our market and it’s actually led to a capitulation amongst the big super funds and some funds managers,” Bell told the Morningstar Investment Conference.
“The big super funds…can’t take the risk associated with the position that some of the fund managers have got so they are buying CBA shares themselves, either via synthetics or derivatives.
“Additionally you are seeing fund managers who are materially underweight (CBA) being told by their clients and their asset consultants that they are taking on too much risk and reducing that exposure as well, so they’re buying banks.
“So we are seeing this tsunami of buying in the banks which has led us to this point and a lot of it is technical and it won’t continue forever.
“Valuation does matter and in the case of CBA the technicals will go away and we are not far from that point.”
The CBA share price has risen 72% over the last two years while its earnings are forecast to grow between 1% and 3% each year up to 2028, giving it a price to earnings ratio of 28 times, a price to book ratio of 3.6 times and a dividend yield below 3%.
“While it's trading on a growth multiple it’s getting value-type earnings,” Bell said.
“So fundamentally CBA is crazy expensive.”
