Banks and miners: Where to from here for the Australian stock market?

In the 2024 calendar year, the ASX200 delivered a total return of approximately 11.5%. However, most of this growth was driven by just three banks: CBA, Westpac, and NAB, which collectively contributed around 6.5% of the index’s total return.  

On the other hand, the two major miners, BHP and Rio Tinto, negatively impacted the index’s return, with their share prices dropping by 19% and 12% over 2024, respectively. 

This highlights that if you invest in the broad Australian market, your returns will likely be significantly influenced by the performance of just a handful of stocks.  

In fact, the two miners and 5 major banks account for approximately 36% of the ASX200 index. Therefore, forming a clear outlook for these key stocks is essential, as it should significantly influence how you structure your ETF portfolio.  

CBA 

Last month, Morningstar concluded that CBA is the most expensive bank globally based on the price-to-book ratio, which is the most common valuation metric used for banks. 

In our firm’s experience in mortgage broking, CBA undoubtedly deserves a premium compared to its peers due to its superior technology, robust systems, and the largest loan book and customer base among Australian banks. CBA serves over 17.6 million customers, which represents a remarkable 64% of Australia’s population! This extensive customer base gives CBA access to low-cost deposits, helping to fund its substantial lending portfolio. Additionally, CBA holds about a 25% market share in the profitable home loan market, significantly ahead of Westpac, its closest competitor, which sits at around 20%. 

CBA was a standout performer in the share market throughout 2024. Its share price started the year at $113 and peaked at $167 by mid-February 2025 and has since retreated to approximately $150-155 at the time of writing. Despite this recent pullback, CBA’s share price remains significantly higher than its Covid low of just $60 in May 2020. 

According to Lonsec, CBA’s current forward price-earnings (PE) ratio is approximately 24 times, which is substantially higher than its historical median of about 16 times over the past 10 to 15 years. If the PE ratio were to revert to this longer-term average, and earnings remained unchanged, the share price could decline by more than 30%. 

It’s interesting to note that fundamental indexing, which weights stocks based on underlying fundamentals (measured by sales, cash flow, book value, and dividends), rather than market capitalisation, allocates just 6.8% to CBA. In contrast, a market-cap-weighted index allocates 11.4%. This substantial difference further supports the argument that the large weighting given to CBA by market-cap indices is not justified by fundamentals. 

Additionally, out of the 15 international and Australian brokerage firms that cover CBA, 14 currently rate it either a ‘sell’ or a ‘strong sell’. This consensus likely reflects their view that the stock is significantly overvalued. 

While a valuation premium is justified, investors need to critically assess whether the current share price already fully reflects CBA’s upside potential. For investors to achieve substantial returns going forward, CBA would have to exceed already lofty market expectations. We feel this is less likely, so investors that own CBA shares should consider locking in profits by reducing their exposure to this stock. 

Macquarie Bank 

Of the seven stocks discussed in this blog, Macquarie Bank stands out as the best-performing investment over the past decade. According to research house Lonsec, shareholders have enjoyed an annualised return of 16.8% during this period, translating to nearly a fivefold increase in value. 

The primary driver behind Macquarie Bank’s impressive share price performance has been consistent revenue and profit growth. Earnings per share (EPS) have grown at an average annual rate of 9.1% over the last ten years. 

Currently, Macquarie Bank trades at a price-to-book ratio of approximately 2.4 times, which is notably lower than CBA’s ratio of 3.3 times. Additionally, Macquarie’s forward PE ratio is around 21 times. While this PE ratio might appear high at first glance, it‘s arguably reasonable given the bank’s strong and consistent past earnings growth. 

Considering Macquarie Bank’s track record of solid performance and its relatively attractive valuation metrics, we believe investors should continue holding this stock. 

NAB, ANZ and Westpac 

NAB, ANZ and Westpac have consistently underperformed over recent decades. According to Lonsec, shareholder returns over the past decade were just 5.6% p.a. for NAB, 4.1% p.a. for ANZ, and 3.9% p.a. for Westpac. Essentially, investors in these banks have received dividends but have seen virtually no capital growth. To illustrate, the current share prices for these three banks are around the same levels as just prior to the Global Financial Crisis in 2007, meaning shareholders have experienced no meaningful growth in almost 18 years! 

The only redeeming feature of these 3 banks is their dividend yield, which is forecast to be between 7.3% and 7.7% p.a. on a grossed-up basis (i.e., including franking credits). That is a pretty good return if your capital value is relatively safe – it’s not, of course – shares can be volatile.  

Currently, Westpac and NAB have forward PE ratios of around 15 times, while ANZ trades at about 12.4 times. These are relatively low valuations, and it is possible that in the future, they might appreciate to a PE of circa 16-18 times; the current valuation arguably reflects these banks’ poor historical performance. In fact, Lonsec specifically regards ANZ and Westpac as overvalued, whereas NAB is viewed as fairly valued. 

Given the disappointing long-term returns, we suggest investors holding these stocks consider reallocating their capital to more attractive investment opportunities. 

BHP and Rio Tinto 

Share prices of Australia’s two largest miners, BHP and RIO, are significantly influenced by three main factors: commodity prices (particularly iron ore and copper), global commodity demand (especially from China), and movements in the Australian dollar. 

At the start of 2024, the iron ore price was around USD 120 per tonne, dropping to a low of USD 90 by September 2024. Currently, iron ore is approximately USD 100 per tonne. Over recent years, it has traded in the range of USD 90 to USD 150. However, iron ore does face some headwinds. China strategically stockpiles iron ore, and its current stockpile is relatively large. Plus, China’s property market downturn suggests reduced steel demand ahead. Many analysts predict iron ore prices will decline further to around USD 75. Clearly, this would negatively impact both BHP and RIO. 

Conversely, copper is expected to enjoy strong demand growth driven by China’s increasing focus on renewable energy. Copper is a critical component in solar panels, wind turbines and electric vehicles. This shift has already driven copper prices up by 26% in the past year, recently reaching record levels above USD$5 per pound – it has retreated over the past week thanks to the volatility in the US. Copper is particularly important for BHP, accounting for around one-third of its revenue, while RIO derives about 14% of its profit from copper. 

Another positive factor for these miners is the weaker Australian dollar, benefiting both companies as significant exporters. 

Considering valuations, according to Lonsec, BHP and RIO currently trade on forward PE ratios of around 11 to 12 times, which is cheap (below the long-term average). In my view, this adequately accounts for the risks mentioned above.  

Additionally, both stocks offer attractive dividend yields. Over the next two financial years, BHP and RIO are forecast to provide grossed-up (including franking credits) dividend yields of approximately 6.3%-6.5% per annum and 7.3%-7.5% per annum, respectively. This means investors should achieve reasonable returns even if share prices remain relatively flat during this period. 

Given these factors, we recommend that clients maintain their existing investments in Australia’s two largest mining companies. 

Concentration risk 

As discussed above, these seven stocks represent 36% of the ASX200 index, creating significant concentration risk. This means a large portion of the index is heavily weighted towards the Financials and Minerals sectors. 

The table below illustrates the sector allocations of the ASX200 index compared to the index excluding these seven major companies. Clearly, removing these large-cap stocks results in a more balanced sector exposure, providing investors with broader diversification across various industries.  

The argument for sticking with traditional market-cap indexing, despite the concentration risk, is that large-cap stocks have substantial market values for good reason. Investors typically perceive these companies as valuable, stable, and profitable. Vanguard points out that these companies are “large for a reason,” as their size generally aligns with solid fundamentals, consistent earnings growth, and lower volatility, making them ideal as core portfolio holdings. 

However, valuations are critical. Historically, when large-cap stocks become expensive, their returns over the subsequent decade tend to fall below average. Thus, investors should evaluate concentration risk by carefully considering valuations and projected future returns. 

As noted earlier, CBA appears overvalued, and the other six large-cap stocks face considerable challenges. Consequently, you may form a view that these stocks are likely to underperform in the short to medium term, potentially dragging down the overall performance of the ASX200 index. 

Other stocks in the top 10 

The remaining four stocks rounding out the ASX top 10 also face some challenges (note that RIO is not included in the top 10): 

• Despite CSL delivering excellent returns between 1994 (when it floated) and 2020, its share price has been stagnant for the past five years. It pays a very small dividend and could face additional pressure due to potential US tariffs (50% of its revenue is generated in the US market). Therefore, we think investors should strategically reduce exposure to CSL if they have a direct holding.   

• Goodman Group has performed exceptionally well recently off the back of data centre hype but now appears fully valued, trading on a forward PE ratio of about 26 times. We have a neutral stance on this stock. 

• Telstra has underwhelmed investors for decades, remaining trapped in a longstanding trading range of $2.50 to $6.00 per share for nearly 25 years: strategically divest.  

• Wesfarmers also appears relatively well valued, currently trading at a high forward PE ratio of around 30 times. It has delivered good returns to shareholders over the past decade. We have a neutral stance on this stock.  

Possible solutions to consider  

One way to manage the potential underperformance of these large-cap stocks is by diluting, not eliminating, your exposure to them. 

You can achieve this by combining investments in traditional market-cap weighted indices like A200 and VAS with indices designed to reduce large-cap concentration, such as an equal-weight index (MVW) or an ex-top-20 index (EX20). 

Both MVW and EX20 provide more balanced industry sector exposure and reduce reliance on the seven large-cap stocks discussed above.  

However, it’s important to note that these indices increase exposure to mid and small-cap stocks. Although mid and small-cap stocks typically generate higher long-term returns, they also tend to experience greater volatility, which investors should carefully consider.