If correct, the call would signal a major turnaround for such stocks. Financials outperformed significantly in 2012 but as of October 30 are lagging global equity index returns on a one, three and five-year view, according to figures from MSCI.
In the wake of 2008’s financial crisis, developed market banks in particular have faced a number of regulatory pressures that have weighed on shares, as has the restructuring of balance sheets.
In its 2016 global equity strategy outlook, however, Barclays has tipped the sector as its principal global equity overweight. It recommended a weighting of some 31.9 per cent for global investors, compared to the MSCI All Country World index weighting of 21.5 per cent.
Its strategists pointed to a strong pick-up in the rate of money supply growth as an early indicator of a better environment for financials.
The note said: “The inflation-adjusted pace of money growth has had a nine-month lead on the performance of the global banking sector. Money supply growth globally is accelerating, now growing on a real basis at near the strongest levels seen since 1984.
“If this relationship continues to hold, today’s pace of money growth is suggestive of strong returns from bank stocks in the near future.”
The strategists also noted that a rise in interest rates would be supportive of the sector, but noted that global banks are now trading near “the lowest levels of relative [price to earnings ratios] since 1996”, despite these prospective tailwinds.
Accordingly, they suggested banks are “severely underpriced”.
This view is shared by other investors. Kleinwort Benson chief investment officer Mouhammed Choukeir said he viewed financials as “among the cheapest sectors” following global equities’ strong run since the 2009. “It is an area that is quite compelling,” he said.
Barclays’ 2016 outlook, meanwhile, also suggests returning to an even more unloved area: emerging markets.
On a technical level, the bank’s strategists said emerging market equity inflows have been two standard deviations below developed market flows over the past 12 months, which points to “outperformance for emerging market equities over the following six months”.
Barclays’ “key call” in the region is China, because of hopes for positive developments both in terms of monetary policy and company performance.
Its note said: “Monetary support for the economy appears to be improving. The acceleration in excess liquidity (measured as real money growth less industrial production) is supportive of a re-rating of the MSCI China index from today’s low of 9.5 [times earnings].