News analysis: Banks backed for revival

twitter-iconfacebook-iconlinkedin-iconmail-iconprint-icon
Search supported by
News analysis: Banks backed for revival

Analysts at Barclays have pinpointed “severely underpriced” global banks as their biggest bet for 2016, suggesting a variety of tailwinds can usher in a period of soaring returns for the sector.

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].

“Moreover, the outlook for earnings in China also appears to be improving. We find that historically, one of the best leading indicators for Chinese earnings has been the property market, where after smoothing out the monthly volatility, the uptrend in floor space sold is suggestive of an improvement in earnings growth prospects over the next six months.”

The comments follow a dismal year for emerging markets in general. According to FE Analytics, as of November 23 the MSCI Emerging Markets index had shed 7.4 per cent in 2015, with the Investment Association (IA) Global Emerging Markets peer group down by 7.6 per cent.

While difficulties in this area are not new – according to FE Analytics, both the peer group and the index have weakened by some 4.2 per cent on a three-year basis – these have been compounded by fears of a slowdown in China, which precipitated a global market tumble at the end of August.

The investment community had appeared jittery about the Chinese economy for much of this year, with the IA China/Greater China sector suffering consistent net retail sales outflows in the seven months from March to September.

This nervousness has even spread to central bankers, with the Federal Reserve’s Janet Yellen pointing to growing risks from the China slowdown in her September press conference as one reason for not raising rates.

With these concerns now easing – Bank of America Merrill Lynch’s October fund manager survey showed a significant decrease in the proportion of managers fearing the repercussions of a China slump – investors are showing interest.

For Kleinwort Benson’s Choukeir, emerging market equity prices must fall another “15 to 20 per cent” before he would consider buying back in. But James Calder, research director at City Asset Management, expressed more interest. Mr Calder, whose firm has no weighting to emerging stocks, said he was looking for idiosyncratic opportunities.

He said: “We are holding an emerging markets review. We are looking at going back but we want to look at the new funds nobody has heard of.”