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Banks take the hit as markets point to recession
The huge sell-off in bank shares since the New Year is driven by fears that we could be heading for a Japan-like depression.
by Daniel Grote on Feb 10, 2016 at 18:14
Few predicted at the start of the year that banks would endure such a calamitous start to 2016. With investors fretting over the impact of China’s slowing economic growth and the price war being waged by the Opec cartel of oil producing nations, the beaten-up energy and mining sector remained at the top of most investors’ ‘sell’ lists.
But it is the banks that have been heaviest hit in the sell-off that has hit markets since the turn of the year. Barclays (BARC) and Standard Chartered (STAN) have lost more than a quarter of their value in the space of just over a month, while losses on shares in Lloyds (LLOY) and Royal Bank of Scotland (RBS) are around the 20% mark, and HSBC (HSBA) is down 17%.
In Europe losses have been even more severe. A third of Deutsche Bank’s value has been wiped off while Credit Suisse has tumbled nearly 40%, sending it lower than even during the depths of the financial crisis.
In the UK, banks are now being priced at levels not seen since the eurozone crisis, prompting chancellor George Osborne to postpone a planned sale of Lloyds shares to private investors.
Why? Because investors fear we are heading for recession. While there are plenty of reasons why investors are shunning banks, such as low interest rates that could fall into negative territory, like Japan’s, and make it yet harder for banks to generate a margin, worries that the global economy is in a much worse position than previously thought trumps all of them.
Bad news for banks
‘The market is saying we are in for a recession,’ said Will Meadon (pictured), manager of the JPMorgan Claverhouse (JCH ) investment trust. ‘That is bad news for banks’.
While economic growth in the US and the UK has persisted at slow, but steady, levels, investors appear not to believe the figures. And if recession is on the cards, banks – just as in the financial crisis of 2008 – are the first sector to bail out of.
He argued the banking sell-off was part of a broader dumping of ‘cyclical’ stocks – those more susceptible to the economic cycle – amid recessionary fears.
These fears have been heightened by the commodities crunch, and the risk of heavily indebted oil companies and miners going to the wall, leaving the banks they borrowed money from to pick up the tab.
‘In this kind of risk-off environment, a lot of people aren’t willing to take on that risk,’ said Meadon.
The current stresses on banks cut to the heart of the bearish case against them – that despite emerging with flying colours through the various regulatory ‘stress tests’ post financial crisis, they won’t be able to cope with the real stress caused by a slowing global economy.
‘We’re in a world of low numbers,’ said Meadon. ‘Low interest rates, low growth, a flat yield curve. Most companies’ business models aren’t predicated on that scenario.’
He said investors’ biggest fear was that developed economies were entering a Japan-style prolonged deflationary environment, which would be particularly punishing for bank margins.
‘What do you do if people think they can buy something cheaper tomorrow?’ he said. ‘It’s really difficult to get out of,’ he added, a situation worsened by the fact that interest rates are already at historically low levels. ‘The policy cupboard is pretty bare.’
Despite his bearishness, Meadon does hold some banks in his trust. Claverhouse's policy is not to take big deviations from FTSE All Share. While he is ‘underweight’ the sector generally, and HSBC and Barclays in particular, his third largest position is in Lloyds, which is perceived as a ‘safer’ bank due to its high street focus. ‘Even that has consistently managed to snatch defeat from the jaws of victory’,’ he said.
Sell-off an 'overreaction'
Gergel (pictured) owns the same three stocks, but is more positive on the prospects for banks, arguing the sell-off was ‘a bit of an overreaction’ and that recessionary fears seemed overdone. ‘The macroeconomics don’t look that bad,’ he said. ‘The UK is predominantly a service economy and has had modest growth for quite a while.’
Matthew Jennings, investment director in fund group Fidelity’s UK equities team, argued the banking sell-off represented an opportunity for investors.
‘This is an example of market sentiment and market prices becoming detached from the fundamentals,’ he said. ‘All of the price movement has been driven by a rerating of valuations – there have been no earnings downgrades.
‘There is potentially an opportunity for investors to observe that disconnect between fundamentals and price action.’
He pointed to Lloyds, which has broadly doubled its tier one capital ratio – a common measure of the financial strength of banks – over the last four years.
Private investors appear to agree. Figures released by Hargreaves Lansdown show their customers buying up Lloyds shares in their droves in January, making up nearly a quarter of FTSE 100 share purchases on its Vantage platform. Similar figures released by rival online stockbroker AJ Bell paint the same picture.
‘Hundreds of thousands of investors were waiting for the government’s sale of Lloyds,’ said Laith Khalaf, senior analyst at Hargreaves Lansdown.
‘But many now appear to be placing purchases on the stock, after the market had delivered a price cut far in excess of the discount the chancellor was offering.’
More about this:
Look up the shares
- Barclays PLC (BARC.L)
- Standard Chartered PLC (STAN.L)
- Lloyds Banking Group PLC (LLOY.L)
- HSBC Holdings PLC (HSBA.L)
- Royal Bank of Scotland Group PLC (RBS.L)
Look up the investment trusts
Look up the fund managers
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