Currently, the ASX200 is a little bit like the S&P 500.
One very small part of the market is driving the index to all-time highs (albeit, at a time of low volume trading).
What stock is responsible? Commonwealth Bank (ASX:CBA).
Just last week, the stock hit a fresh all-time high near $120.00.
But in the same way the “magnificent 7” megacap tech stocks are driving US market gains, Commonwealth is largely driving the ASX200 to its recent record highs.
But that’s a dangerous position to be in.
Reality miles away from broker consensus
Not a single broker in Australia currently rates CBA a ‘Buy’. This has been the case for months.
The bank’s net interest margins (NIM) came under pressure early last year along with its peers and this was when the tide began to turn.
While the banks enjoyed the last few years on higher interest rates, what growth they could squeeze from that dynamic dried up.
The broker consensus on CBA is absolutely disparate compared to its recent gains in 2024.
Year-to-date (YTD) performance is up 2.76 per cent, but given that CBA has a $192.3 billion market cap – Australia’s second largest stock after BHP – that reflects a huge increase.
All in all, the mood in the room is that CBA’s price gains are currently reflecting an irrational trading thesis. Broker consensus overwhelmingly supports this.
Finance firm Barrenjoey told its clients earlier this week, without actually saying it, the stock is overvalued.
Fundamentals don’t support the bull case at all. It’s not controversial to call the situation “irrational”.
Of course, CBA is also Australia’s best-performing bank for returns.
That reputation makes it hard to break up with.
What’s going on with shares, then?
It’s not too easy to say what exactly is going on without interviewing every single person who has bought shares in CBA this year, which it goes without saying, is basically an impossible exercise.
But several other things are happening nearby to consider.
- Institutional investors are likely shifting money out of China as stock markets there tumble and economic malaise carries on.
- Hedge funds are likely shorting the Shanghai and Hong Kong exchanges while putting money into Australia’s most trusted stocks to cover their positions.
- Institutional investors may be seeking to reposition the structure of their holdings portfolios back into underweight positions.
- The hype effect of a still-rising price is attracting technical and algorithm-dependent traders.
- The stock remains one of the most liquid in Australia and a general looming sense of uncertainty towards the rate cut trajectory may be making CBA look attractive.
Saxo Australia CEO Adam Smith was also quick to point out that the falling AUD against the USD has also made Australian stocks cheaper for foreign buyers.
“The drop in AUD means investing in Australian shares becomes cheaper for overseas investors.
“The ASX200 index is highly concentrated around banks and the large miners, so these two factors – alongside the potential for a better global growth outlook in 2024 – have combined to drive the ASX 200 to new all-time highs.”
Of course, a lot of retail traders were shaken out of the market in 2024.
Lower volumes are having the effect of driving stocks higher.
Westpac, according to reports, is now Australia’s largest mum-and-dad-held bank stock.