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No adverse impact from royal commission

Water drop.

Nikko AM says the banking royal commission is unlikely to cause wider market ripples.

The royal commission into the banking sector should have minimal influence on the overall Australian equities market during 2018, according to Nikko Asset Management.

“The royal commission is obviously an outstanding issue, but it’s actually quite narrow in its scope,” Nikko Asset Management head of Australian equities Brad Potter told a media briefing in Sydney today.

“We’re going to hear of some pretty disappointing and horrible stories because that’s what it’s asking for, but there have been a lot of changes from the banks which the regulators have been pushing, like on lending practices and so forth.

“So it’s difficult to see it as a material issue, even though it’s certainly hanging around and it’s going to cost banks a lot of money both in management and time, and also lawyers.

“And I think value is pretty compelling at the moment.”

Potter pointed to recent Merrill Lynch research that highlighted valuation was the one common factor in periods of sustained bank outperformance since 1999.

It found headline-grabbing issues, such as earnings per share growth, return on equity and other political or event risk headlines, were much less reliable return signals.

According to Nikko Asset Management, Australia’s long-term sustainable earnings valuation suggested the banks were great value versus the market, albeit with little growth.

At the SMSF Association’s latest Sydney Local Community briefing, head of technical Peter Hogan warned the SMSF sector would not be immune from the royal commission hearings even though it was not directly part of the process.

“We believe that there will probably be a certain amount of mud that is going to be thrown our way, even though we are not formally part of the process,” Hogan said at the time.

The SMSF Association will make an official submission to the royal commission.

Hogan reiterated that while the sector’s exclusion from the commission was a positive endorsement from the government, the association recognised the move did not mean SMSFs would have no problems to address.

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