Underlining this point, Russ pointed out that European banks have historically and remain highly correlated to US yields as is evident from the graph below which plots the performance of European banks relative to the MSCI Europe in grey and the US 10-year yield in green.
It is not, however, only within the context of Europe that investor interest in banks has been piqued.
Speaking on a recent Podcast, Guy Monson, CIO at Sarasin & Partners said that in recent years, the power of central bank intervention has been so massive, that it has tended to crowd all other investment themes out of the picture.
However, he is of the view that this is beginning to change and that if the “repression bull dozer” moves a little out of the centre of the picture it will open up a chink that will start to let out a number of other “tremendously exciting drivers” – one of them being the rehabilitation of banks.
“We have a vast range of investments today that have benefited hugely from repression and we have one that has been penalised – banks.”
Adding that if the world is, indeed at the beginning of a normalisation trend, then banks could move front and centre.
Asked where he is looking, he said: “The obvious place is the US where the train is furthest down the business cycle. And it is interesting to note that in the second half of this year, banks have been the third best performing global sector having been distinctly the worst for the previous five quarters. secondly they seem to be meeting their targets reasonably well and thirdly there are huge efficiency and cost gains. And I expect the returns to be slightly more utility like rather heavily regulated, simple business models, but unlike utilities like a rising rather than a falling interest rate.”
Theoretically, banks stand to benefit from an increase in interest rates and a steeper yield curve that would accompany them, but as has been clear in recent years, theory and practice haven’t always walked hand in hand. And, while there is a growing cadre of investors that are beginning to look favourably at the space, all remain understandably cautious. It is clearly a space to watch, but perhaps not quite yet an allocation decision to take to the bank.
