All Hyped Up: Banks And Gold

Recently, most investment online and offline talk that I have been reading are about two things: local banks and gold. The run-up of share prices and bumper dividends of DBS and UOB (and probably OCBC who will be announcing on 26 Feb 2025), and the spike of gold inching towards the landmark USD 3,000 price level, had caught the attention of mainstream investors wanting a piece of the action pie.

A common anecdotal indicator on whether something is being hyped up is when non-investors, like the oft-mentioned friendly neighbourhood barber/hairdresser, start to talk to you on the hyped asset. This is a strong, but not the ultimate, sign of an overhyped or overheated market, in general and/or for the asset concerned.

However, looking at the fundamentals of the local banks and gold, in my opinion there is still some potential upside; let us start with banks. 

 

The Big Three

 

(Picture credit: Jason Goh from pixabay.com)

 

All three banks are experiencing revenue growth over the past three years, which results in higher valuations. Figure 1 shows a snapshot of selected valuation ratios of DBS, OCBC and UOB.

Banks	DBS	OCBC	UOB
Price/Book Ratio (P/B)	1.93	1.38	1.29
Price/Earnings-to-Growth Ratio (5 year expected) (PEG)	8.85	2.61	1.58
Forward Price/Earnings Ratio (P/E)	11.95	10.31	9.78

 

Fig.1: Selected current valuation ratios for DBS, OCBC and UOB. Source: Yahoo Finance as of 22 Feb 2025.

Based on the numbers alone, UOB is currently the “cheapest” among the three, but before concluding, a deeper dive is needed because each bank’s business model and geographical exposure is different. On the latter point, for instance, UOB’s foreign concentration is more in the Southeast Asia region, while DBS’ is skewed into Greater China, and OCBC’s is mixed between Greater China and Southeast Asia. Hence, in conducting fundamental analysis (FA), do not just focus on the valuations and price alone; a holistic approach is required, i.e., the Bedokian Portfolio’s three-level FA method¹.

Being the only major financial institutions in Singapore, the banks represented its economic stability and health. As Singapore is one of the top five financial hubs in the world, DBS, OCBC and UOB, in my opinion, are positioned for further growth.

 

The Shiny Yellow Metal

 

(Picture credit: Soofia Tailor from pixabay.com)

 

Since the beginning of 2024, gold had broken the resistive USD 2,000 mark and went on a steep curve upwards towards the USD 3,000 line, resulting in a near 50% growth rate for the past year. There are a few reasons why gold prices spiked, like the current geopolitical tensions (trade wars and actual wars), economic uncertainty, hedging against inflation, central bank purchases, etc., and all these factors are intertwined with one another.

Unlike other asset classes which use securitization (i.e., legal “pieces of paper”) to denote ownership value, which may have a (very low) risk of being made worthless, gold (and other non-perishable hard commodities like metals) holds value on its own, depending on its demand and supply. Between 1971, when gold was delinked from the US dollar, and Mar 2024, gold had an average annual return of 7.98%². Despite losing out to equities in terms of returns over the same period, it is a finite resource, and its worth would go higher as time goes by.

 

Is It Too Late?

Another way to put this question is: what is the right price to enter. True that prices of banks and gold had gone up significantly over the past year, and there is a possibility of investors suffering from buyer remorse due to a possible fall in price after vesting in them. Although this can be seen as a form of averaging up for those who are vested and having the price margin of safety, for new entrants these deemed “high prices” proved a challenge.

The important thing here is to gain a toehold on them first by investing a token amount, and then average up or down from there. We do not know which direction the price movements will be, but if they are fundamentally sound going forward, then this is one possible way of starting on them.

Disclosure

The Bedokian is vested in OCBC and physical gold.

Disclaimer

1 – The Bedokian Portfolio (2^nd Ed), Ch 11

2 – Average annual return of gold and other assets worldwide from 1971 to 2024. Statista. 25 Jun 2024. https://www.statista.com/statistics/1061434/gold-other-assets-average-annual-returns-global/ (accessed 22 Feb 2025)