The weekly wrap: NAB winning favour

After a month of global stock markets trending sideways the greater than expected monthly US unemployment figure was enough to rekindle nervousness on equity markets. Commodity prices in particular looked rather overdone in their rally. Oil had risen 125 per cent from US$32/bbl to US$72/bbl and was overdue a correction. The 14 per cent fall in a week is not astounding, but it has reintroduced uncertainty nevertheless.

In the US, this has meant a stock market which has seen some rapid switching out of risk sectors such as energy, materials, industrials and consumer discretionary, and back into defensive sectors such as consumer staples, healthcare and utilities. The net impact on indices has not been significant, however, given such switching has not meant a wholesale divestment of stocks as an asset class, as was the case in late 2008, but rather a realignment of portfolios into a more cautionary stance.

In between lies the financial sector. Despite US banks having rallied 100 per cent as a sector since early March, the impact on bank stocks in this week's correction of sorts has not been significant. After two years of turmoil, it seems banks are no longer the top of the risk trade ladder.

And when it comes to Australian banks, there continues to be a growing belief that perhaps things are not going to be quite as bad as analysts had earlier resolved themselves to assume. This week the not-so-bad Australian jobs number and another mighty consumer confidence number have made the GFC seem all a bit like a storm in a tea cup.

The ASX 200 fell 3.3 per cent this week (ended Thursday) while the big four banks lost only 0.4 per cent on average. Within the group, National Bank rose 2.7 per cent while its peers all fell. Arguably deemed the most risky bank when analysis was at its most dire, NAB has suddenly become flavour of the month as quietly views have begun to change. NAB is trading at the greatest valuation discount within the big gour given its UK exposures and collection of toxic assets left over from the original "subprime crisis".

NAB was thus afforded two broker upgrades this week. BA-Merrill Lynch analysts are still wondering exactly what NAB's toxic CDOs might really be worth, but now believe a 25 per cent discount to their valuation is too much to warrant an underperform rating. Merrills has taken NAB back to neutral, and at the same time UBS has quietly moved its rating from hold to buy.

Fuelling the UBS analysts' newfound enthusiasm is the bank's shift of Peter Thodey from head office managing staffing to the job of divesting the bank's troublesome assets. UBS suggests NAB will separate the "bad bank" from the "good bank" and in so doing address a below-peer return on equity, leaving a slimmer model better leveraged to economic recovery.