by Her Eleftherias Kourtalis
Long positions in Greek banks are recommended to investors by Goldman Sachs, pointing out that from a macroeconomic point of view, the Greek sector is absolutely attractive globally and also in the context of the emerging market region, its shares being clearly undervalued.
Specifically, as Goldman points out, May has already brought two major developments to the global banking sector: first, the Fed may have made its last rate hike (25 basis points) of this cycle, and second , recent surveys indicate that lending standards and credit availability are not deteriorating faster than expected. In other words, it makes sense for the market to remove some of the risk it previously attributed to asset prices. In today’s analysis, Goldman assesses the market and macroeconomic factors that drive the performance of bank stocks to identify the best area for massive bank stock purchases. assuming that risk premiums could fall further.
The MSCI World Banking Index has fallen 8% since March, with the MSCI World Index rising 2% over the same period – one of the rare cases of a major sector falling sharply without dragging the market lower in its together. Goldman is therefore looking for investment opportunities in this underperformance.
Banks are the most sensitive equity sector to credit spreads (because they are providers of credit, so it’s not surprising) and interest rate fluctuations. Goldman compares recent moves in bank stocks to moves in the fixed income market and concludes that most developed market banks look expensive relative to emerging market banks in this regard.
More generally, the macroeconomic evolution of the credit/GDP ratio provides a strong “signal” on the relative performance dynamics of the bank’s banking stocks, particularly on emerging indices. Assuming credit growth slows in the coming months, markets with large “credit spreads” should see their bank stocks underperform.
On the other hand, banks in the Middle East and Africa region (mainly Qatar and Saudi Arabia), Chile, Colombia, Thailand and Greece are attractive opportunities from a macroeconomic point of view, points out Goldman Sachs .. Thus, he recommends that investors go long on these banking stocks, especially against stocks in the consumer staples sector.
As Goldman explains, to reach the above conclusion and assess which global banks are an attractive investment right now, we consider three aspects: (1) Recent performance, (2) Valuation versus return on equity ROE and (3) Macro credit growth trends.
Starting with performance, compares the recent performance of bank stocks to historic episodes of financial stress and recent interest rate developments. In the historical performance chart below, he compares the economy-wide average bank stock returns to bank stock returns during the recent period of financial volatility. Historical episodes are periods of “bank-specific” risk characterized by high volatility in US banks, but otherwise stable movements in other stocks, allowing market relationships to be examined in more isolation. . Historically, banks in Brazil, South Africa and Greece tend to fall the most when US banks face an idiosyncratic shock.
In terms interest rate movements, most emerging market banks, including Greek banks, outperformed interest rate moves, Goldman concludes.
In terms of valuations, looking across geographies, banking industries have a fairly wide range of return on equity (ROE) and P/B metrics.
Against this backdrop, most banks in developed markets, particularly in Japan and Europe, look quite expensive, while banks in Greece, Colombia and Qatar look undervalued.
Finally Goldman explores credit growth trends as a way to assess investment opportunities in bank stocks. The credit-to-GDP ratio (defined as domestic credit to the private sector provided by banks) has generally increased in all emerging markets over the past two decades. Two notable declines include the period 2002-2005, due to deleveraging in parts of Asia and during the Covid-19 pandemic. In contrast, the credit-to-GDP ratio has steadily declined in developed markets since the global financial crisis, mainly due to deleveraging in Europe. Banks in the CEEMEA region (Central and Eastern Europe, Middle East and Africa) look attractive in terms of “credit gap”, he notes.
Thus, Goldman identifies the most attractive banking stocks internationally, using these three criteria but also comparing them to the consumer staples sector, because it is the sector least sensitive to the credit environment.
Thus, the banking stocks of the MSCI indices of Qatar, Saudi Arabia, Chile, Colombia, Thailand and Greece appear the most attractive. and Goldman recommends investors hold long positions against MSCI’s broader Emerging Markets Consumer Goods sector. This trade covered the underperformance in March, but looks attractive over the medium term given the valuations and credit spreads described above. More generally, these banks typically do better during periods of stable or appreciating currency markets, a theme that Goldman says will continue into the summer.
