almost 4 years ago • 2 mins
Pennywise investors may be attracted by big financial stocks’ depressed valuations, which appear to be overestimating the effects of coronavirus. But then again, as Friday’s hit to recovering oil prices proves, there’s always a risk that complacency sees your fortunes sucked down the drain… 🤡
US bank and insurance shares have fallen 30% this year, with a failure to participate in the S&P 500’s post-March bounceback leaving the sector 20 percentage points adrift – its worst performance ever.
But while analysts expect earnings to take a knock, some think the scale of the selloff – with $1 trillion of lost market value rivaling the dark days of 2008 – is overdone. Banks have taken pains to significantly shore up their finances since then, and the nature of the current crisis means it’s unlikely to cause another eight straight quarters of declining profits.
Financial stocks were quick to rally after the last three “bear markets”. This time, however, investors may be worried about more than just an increase in loan defaults. The US central bank may follow the UK’s lead in demanding belt-tightening cuts to company dividends – and, most controversially of all, the specter of profit-pinching, European-style negative target interest rates remains looming in the background 👻
Despite big banks recently suspending juicy share buyback programs, analysts from BlackRock and KBW think the threat to financial dividends is generally overblown – with Wells Fargo and Goldman Sachs among the 10% of more doubtful cases. While much depends on next month’s “stress tests”, buying US bank stocks may be a good-value way to back economic recovery: compared to the overall S&P 500, they’re currently the cheapest since 2009 😳
Investors elsewhere may, indeed, be feeling optimistic about that recovery. Energy is the only sector to have performed worse than banks in 2020; despite falling on Friday, however, the price of oil has now risen for four consecutive weeks as Chinese demand reportedly reaches 90% of pre-virus levels. Hedge fund Andurand, fresh from its hugely successful bet on oil’s spectacular crash, is predicting further increases…
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