The breathtaking rally in ASX bank stocks ensured that financials were the best performing sector on the S&P/ASX 200 Index (Index:^AXJO) on Wednesday.

Adding to the “wow factor” was volume. The big surge in big bank share prices was on the back of very high turnover.

The Australia and New Zealand Banking GrpLtd (ASX: ANZ) share price led the charge with an 8.6% rally to $17.94. Westpac Banking Corp (ASX: WBC) is close behind with an 8% rise to $17.61, while National Australia Bank Ltd. (ASX: NAB) gained 7.8% to $17.94.

The Commonwealth Bank of Australia (ASX: CBA) share price was last in line but shareholders are unlikely to complain about its 4.9% jump to $64.30.  

This buying frenzy suggests a couple of things about our market and where we might be heading.

Pent up demand for bank stocks

The first is that institutional investors who have been underweight banks may now be having a change of heart.

While it’s hard to tell who was frantically buying bank stocks today, many professional investors had shunned the sector due to worries that a wave of loan defaults from the COVID-19 pandemic would bring the sector to its knees.

But a string of better than expected economic data and updates from numerous ASX stocks exposed to discretionary spending showed things might be springing back to life as coronavirus restrictions are eased across Australia.

This is further evidence that the worst of the coronavirus fallout is behind us and the big discount on ASX bank stocks are starting to unwind.

Bank dividends on the way back up

This is why three of the big banks are outperforming CBA. These stocks were trading at around a 20% discount to book value to reflect their lower quality balance sheet relative to CBA, while the outlier was trading at around 1.5 times book value.

What I also believe is that NAB will be the only bank raising capital during this downturn and that ANZ and Westpac will resume paying dividends at their next profit results.

CBA shareholders are the lucky ones. Our largest domestic bank has a different reporting cycle and didn’t have to declare its profit and dividend during the height of the COVID-19 disaster.

This doesn’t mean it won’t lower its final dividend in August, but even if it does, I suspect it won’t be as much as the market expects.

Rotation from defensive stocks

The final observation is that investors are using defensive shares to fund their purchases of bank stocks. This includes outperformers like healthcare leader CSL Limited (ASX: CSL) and gold producers like Evolution Mining Ltd (ASX: EVN).

This trend could continue, particularly for healthcare stocks, although I think it would be a mistake to go underweight on gold stocks in this environment.

Foolish takeaway

But this isn’t to say the banks have a clear run ahead. There are questions about what happens when the government’s JobKeeper payment ends and goodwill from loan repayments and rents run out.

There are also concerns about falling house prices as property investors desert the market and structural changes that can shake the foundations of office and retail properties.

However, I think these risks are manageable unless house prices fall by substantially more than 10%, we get a big second wave of COVID-19 infections, or both.

If you have no or limited exposure to the big banks, you should be adding these stocks to your portfolio.

More reading

• 2 outstanding ASX 50 shares to buy today
• Soaring share price: Is CBA a buy?
• ASX 200 up 0.1%: Big four banks rocket, Afterpay sinks lower
• Why the NAB share price is surging higher today
• Why Afterpay, CSL, Fortescue, & Newcrest shares are dropping lower

Brendon Lau owns shares of Australia & New Zealand Banking Group Limited, Commonwealth Bank of Australia, Evolution Mining Limited, National Australia Bank Limited, and Westpac Banking. Connect with me on Twitter @brenlau.

The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of CSL Ltd. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

The post Is now the right time to be buying ASX bank stocks? appeared first on Motley Fool Australia.

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With the share market now out of its bear market, it could be a great time to start investing.

Even if you only have $500 to invest, I would suggest you consider putting it into shares.

Although it may not seem like a life-changing sum to invest, if you do it consistently you can generate material wealth.

If you were to invest $500 every three months ($2,000 a year) and earned a 9% per annum return, in 30 years your investments would be worth $300,000.

But which shares should start with? I think the 3 ASX 200 shares listed below would be great long-term options for investors:

Altium Limited (ASX: ALU)

I think this electronic design software platform provider could be a long term market-beater. This is due to its extremely positive outlook thanks to its industry-leading software and the tailwinds of the Internet of Things boom. Its exposure to this rapidly growing market looks set to drive strong demand for its software for many years to come. In fact, management is targeting 50,000 software subscriptions this year, but then expects to double it to 100,000 subscriptions by FY 2025. I believe it is well-positioned to achieve this target. Which, combined with its other growing businesses, should support strong earnings growth for years to come.

NEXTDC Ltd (ASX: NXT)

Another top option for investors to consider buying is this innovative data centre-as-a-service provider. As with Altium, the wind is firmly in NEXTDC’s sails right now. This is because of the rise of cloud computing which is driving increasingly strong demand for data centre services. And given how its centres are among the highest quality in the world and strategically situated in key capital cities, I believe NEXTDC is well-positioned to capture this demand. I expect this to lead to strong earnings growth over the next decade as its scales.

Ramsay Health Care Limited (ASX: RHC)

A final option to consider investing $500 into is Ramsay Health Care. Although the leading private healthcare company is not having the easiest time right now, I’m optimistic that these headwinds will ease in the coming months. After which, I believe it is well placed for solid long term growth thanks to the ageing populations tailwind. Ramsay is better positioned than most thanks to its massive footprint. At the last count it had 480 facilities across 11 countries.

More reading

• Top broker says this ASX stock is a better buy than Afterpay
• If the ASX 200 crashes again, which shares should you sell?
• After hitting $50, the Afterpay share price has pulled back. Is it good value?
• The ASX 200 stock hit by the Brazilian COVID-19 wave
• ASX 200 up 0.1%: Big four banks rocket, Afterpay sinks lower

Motley Fool contributor James Mickleboro owns shares of NEXTDC Limited. The Motley Fool Australia owns shares of Altium. The Motley Fool Australia has recommended Ramsay Health Care Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

The post New to investing? Put $500 into these top ASX 200 shares appeared first on Motley Fool Australia.

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