The Institute of International Finance (the global association of the financial industry) struck a particularly optimistic note: “Bank stocks have resumed their outperformance of the broad market in recent weeks, and look to continue to benefit from a number of recent developments," it said recently.
"Steeper yield curves are expected to boost net interest margins, and more robust growth will boost the level of financial activity more broadly (e.g. mergers and acquisitions, IPOs etc.), which should bolster banks' non-interest income,” it added.
Trackers that follow the sector have seen significant inflows over the past year. In July alone, financial sector ETFs saw net inflows of €1.3bn from European investors.
“We added exposure to financials after the Trump elections as growth and inflation expectations rose,” says Alvaro Martin Sauto, head of funds of funds at Bankia in Madrid. “Then we recently added again as we believed it was oversold and valuations were looking attractive.”
American banking stocks have been on an extraordinarily wild ride since Donald Trump’s elevation to the US presidency. From early November, they embarked on a remarkable four-month rally on hopes of tax cuts, financial sector deregulation and a boost in inflation and growth, gaining more than 37% and outpacing the wider S&P 500 index by almost three times.
“We like restructuring stories in the European banking sector, companies that have had liquidation issues and are trading at a discount to book value, such as Commerzbank" - Guy de Blonay
Bank stocks then fell slightly as the Trump trade faded, but in recent weeks the sector reached new all-time highs as markets moved to price in another Federal Reserve rate hike this year, while the Trump administration unveiled a fresh outline for tax reform.
And fund managers believe financials will be some of the prime beneficiaries of an acceleration in growth (expectations), even though the sector has already significantly outperformed the S&P 500 over the past year.
“Banks are expected to outperform if growth expectations accelerate again. That’s also what they did after Trump’s election,” says Jeroen Huysinga, manager of the JP Morgan Global Focus Fund.
While Luca Paolini, chief strategist at Pictet AM, is negative about US stocks in general, he makes an exception for the banks. "Fed rate hikes should benefit the banks – and we have raised exposure to financials," he says.
Guy de Blonay, manager of the Jupiter Financial Opportunities Fund, is also bullish: “It’s possible that GDP growth will come in closer to 4% next year, and if that happens it would be very positive for banks.”
An annual GDP growth rate of 4% would mean the US economy would grow far above the long-term trend (which is estimated by most experts as 2-3%), increasing the risk of overheating, especially in a scenario where interest rates are also rising.
“You can’t ignore that risk,” agrees De Blonay. But US financials still look to tempting to resist, compared to other stocks in the market, he says.
“If you look at valuations today, while financials are not cheap, they are growing their earnings more than twice as fast as other stocks, at 11-12%.”
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