Question 1: If we have rate cuts in 2024, is this a positive or a negative for the share prices of the major banks? I hear two different stories: firstly, it’s a negative since the NIM (net interest margin) will reduce; but secondly, it’s a positive since the dividend income will become relatively more attractive resulting in more demand for bank shares.
Answer: This is a really interesting question. My view is that in the short term, rate cuts will have a bigger impact (negative) on the share prices than the influence of dividend yields making bank shares look more attractive.
Rate cuts will reduce the NIM (net interest margin) because banks can’t reprice “zero interest” or “near zero interest” deposits. The reduction in overall lending rates will be more than the overall reduction in deposit rates, leading to a fall in profits. On the other hand, bank dividend yields will look relatively more attractive compared to term deposit or cash account rates. However, this tends to influence the market over the medium to long term, rather than the near-term (immediate) impact of reduced profits as deposit rates falls.
Question 2: There is increasing voice online warning of a serious pending recession led by the US because of the massive total US business debt to GDP, and similar market hype prior to GFC as seen in Dec 2023. What is your view on this risk of recession in 2024? Should we sell now while the going is relatively good?
Answer: I think that a recession in 2024 is most unlikely – less than a 20% chance. I hear so much “talk” about debt levels I am almost immune to them. This is not new … pessimists have been preaching this “scary stuff” for some years. If you are uncomfortable with the market, then by all means, take some money off the table. But I don’t think “recession risk” arising from high levels of debt is a particularly strong reason.
Question 3: I hold options in Magellan Global Fund (MGFO). I received an email from Magellan Financial Group saying they would be purchasing a further 100 million options at 10 cents per option. They are doing this on the ASX. I don’t quite understand what my situation is and what I ought to do (if anything).
Answer: The options expire on 1 March. They give you the right to “acquire” (invest) in more units of the Magellan Global Fund (MGF) at a 7.5% discount to the then NTA (net tangible asset value). MGF is currently trading on the ASX at $1.91, its last NTA was a fraction over $2.00.
So before 1 March, you do one of three things:
- Let your options expire (worthless); or
- Exercise your options and invest in further units of MGF by paying approximately $1.85 per unit; or
- Sell your options on the ASX for 10 cents.
Magellan’s offer follows on from a “deal” it did with Nick Bolton (an activist shareholder). Following this deal, the discount to NTA has closed considerably. You won’t find a better offer than the 10c being offered by Magellan Financial Group, so I would sell the options on the ASX (code is MGFO). You can place the order online with your broker.
Question 4: I see that Metrics Master Income Trust (MXT) has extended its unit purchase plan. Should I take part?
Answer: It hasn’t actually extended the Unit Purchase Plan…it was always in two parts. Bottom line: you can still take part, the offer closes on 30 January. Metrics is offering unit holders the opportunity to contribute further monies at an offer price of $2 per unit, up to a maximum of $30,000. While this is about 2.5% lower than the current ASX price of $2.05, it is only fractionally lower than the last NTA (net tangible asset value) of $2.
Metrics has proved to be a pretty good operator of debt funds (this is a higher risk credit fund). If you have spare cash and are chasing income, this is probably worth contributing to. However, as a debt fund, the price isn’t going to “run-away”, so at an offer price that is basically NTA, this is no bargain. I am somewhat ambivalent.