Authored by Jan-Patrick Barnert and Michael Msika via Bloomberg,
The EU300 Billion Race to the Bottom of Europe: Taking Stock
As we approach the end of a dismal year for European stocks, the question is: which sector had the worst year of them all?
With a few trading sessions left before the end of 2018, banks and autos are in a tight race to the bottom. As of Thursday’s close, lenders are the biggest losers, with a quarter of their market value down the drain, a wipeout of roughly 300 billion euros in shareholders’ money.
Banks haven’t seen such a bad year since the heat of the euro-zone sovereign debt crisis in 2011.
As the final ECB meeting of the year confirmed, the central bank will keep rates unchanged at least until next summer and the grim outlook for the sector highlighted in one of our earlier Taking Stock columns remains valid.
Any attempt by the sector to break out from its downward trend in 2018 has so far failed.
Perhaps it’s not a surprise as banks face a wall of worry from investors and nothing seems to be able to help them move forward. Repeated calls from some analysts that the sector is cheap hasn’t triggered any significant buying. A good example is Credit Suisse’s buyback and dividend announcement on Wednesday. That didn’t even raise investors’ interest with the stock hovering near its low. While any return of capital to shareholders is welcome, the dark clouds over its investment banking outlook seemed to weigh more.
Here’s the grim silver lining:
…it doesn’t matter much to the rest of the market: Since the financial crisis a decade ago, the influence of banks over the broader European gauge has fallen dramatically, to a point where they now barely move the Stoxx 600.
So what could help the shares regain their vigor? Although merger talk seems to find fruitful (speculative) ground, large cross-border deals remain a fantasy. But domestic love stories might be one theme to keep an eye on next year. Most prominent is the ongoing chatter about Deutsche Bank and Commerzbank, the worst and third-worst performing stocks in the Stoxx 600 Banks index. While any merger is far from certain, market reaction shows that investors, or at least algos and punters, are betting on any consolidation as the last resort to improve bottom-lines.
Italy’s banks have also been very much in the spotlight this year as the country’s new populist government and its fight with the European Union over its deficit target, pushed up the country’s yields. The FTSE Italia All-Share Banks Index is down 26 percent since the start of the year with the nation´s largest lenders, UniCredit and Intesa, down 30 and 23 percent respectively.
“Top-down factors remain the biggest share price drivers for Italian banks (and ‘calling’ the political outlook remains tough),” Jefferies analyst Benjie Creelan-Sandford, said in a note earlier this month.
“To the extent that bottom-up drivers are taken into account, the focus has been on read-across to capital and funding positions from weaker sovereign sentiment.”
Concessions from the Italian government about the budget, coupled with a shift in focus toward France’s potential target-breaching deficit next year, may be the catalyst Italian banks needed to regain investors’ favor.
While some may view the sector as cheap, it still seems that being bullish on banks is a contrarian view. This made Deutsche Bank’s recent strategist call even bolder. They forecast a 15 percent outperformance for European banks by the end of the first quarter of 2019, as euro-area PMIs improve and Bund yields rise. Yet after the ECB President Mario Draghi said risks to the euro-area economy are worsening, 2019 isn’t likely to start on the most optimistic note.
And if you are gloating at the “fortress balance sheet” US banks, as BMO’s Brad Wishak notes, price and time are playing a familair hand in US bank stocks…
Finally, BofAML strategists summed it all up very succinctly this week:
“What we learned in 2018: That central banks trump everything, when global liquidity peaked in Q1, markets peaked; that we remain in a deflationary world which cannot handle a 10-year Treasury yield above 3%; That investors have no satisfactory answers to the existential questions of ‘If not stocks, what?’, ‘If not tech, what?’ ‘If not the U.S. dollar, what?'”…
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