Reviewing Pan European banks’ performance in 2012, and assessing the opportunities and threats that lie ahead….
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For professional investors and advisers only.This document is not suitable for retail
However, while – unlike some – we see banks very much as an investible sector where we can make money, it is also a sector where a cautious investment stance remains appropriate. We saw a similar rally this time last year as well as in mid-2010. Both were undone by euro and regulatory concerns.
The key positive for the sector remains valuation – in absolute terms and against history. A credible euro solution, coupled with success in dodging a material recession in Europe could easily see the sector rally 30-40% from here. Sure, banks in the periphery of Europe face numerous pressures, but these banks (in Spain, Italy, Ireland, Portugal and Greece) account for just 20% of the sector. In this sense – at a sector level – the drag is contained.
The key negative is that the euro crisis is unlikely to be resolved without further pain. Greece, in particular, represents a material pothole on the road to redemption. In addition, regulatory pressures will continue to bite over time while many banks (and their customers and governments) are likely to face a protracted deleveraging cycle – hardly a healthy backdrop for the sector.
We continue to favour banks, which have an ability to carve out attractive returns for shareholders and which are already broadly compliant with future regulatory norms. Different banks in Europe will likely face materially different prospects. The market still fails to reflect this appropriately (as is typical when the market moves in a top-down indiscriminate manner) – an opportunity for the active stockpicker.
The views and opinions contained herein are those of the Kevin Murphy and Nick Kirrage, Specialist Value UK Equity Fund managers and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds.
For professional investors and advisers only.This document is not suitable for retail clients.
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Source: IFAWorld – Schroders