The manager of the European Alpha and Alpha Plus funds said the beleaguered sector was undergoing a shift from being “dog” holdings to becoming the sector darlings, with nine out of 10 fund professional investors currently underweight the sector.
He said: “To state the obvious, in a sector so unloved, given these stocks are trading way below fair value, a subsequent increase in their share prices would be incredibly painful for the many portfolios with little to no exposure.”
From a valuation standpoint, he said they ranged from “very” to “outrageously cheap”.
“For example, one of the better northern European banks might typically offer a 6% dividend yield. Venture to Italy and one can find dividend yields in the double digits. Not bad if you have spare cash for investment in a world where interest rates are 0% and over half of all European government bonds globally yield less than 1%.”
He said while – since the global financial crisis – the market has tended to view the banking sector’s level of profitability as unsustainable, citing legal and regulatory pressures and technology as structural threats, he said the bigger threat in the short term has been central bank monetary policy.
“There is no doubt that the alphabet soup of ZIRP/NIRP/QE has damaged banking profitability, and for the duration these policies are in place it will continue to do so.
“For those lucky enough never to have had the misfortune of trying to digest a bank’s financial statements, it’s perhaps enough to observe that since Mario Draghi announced QE in January 2015 forecasts for banking sector profits are down by over 20% and share prices by more than 30%. So we’ve identified the problem – excessively loose monetary policy.”
Yet he noted that such loose policy might be coming to an end, having failed to stimulate demand and inflation as was the intention.
“Consider that Japan has tried ZIRP for 20 years and in the West it’s approaching a decade. And economic growth has been virtually non-existent. As an aside I respectfully suggest the neoclassical economists’ models, which tie low rates to booming economies, might need a rethink.”
Warning that tighter lending criteria might hamper productivity rather than encourage it, Sym said the return of inflation – as the oil price looks to be stabilising – should see bond yields rising, returning to a ‘normal’ environment and less manipulated market.
