Relative performance of global banking sectors
Eoin Treacy's view It has long been a Fullermoney maxim that the outperformance of banks is an
important contributor to the bullish case for any medium-term trend. In common
sense terms, since banks are liquidity providers they should do well when the
cost of capital is comparatively low, liquidity is abundant and demand for credit
is increasing. In normal circumstances banking shares are often leaders because
they are sensitive to changes in demand for and supply of liquidity.
Of course since the banking sector was at the epicentre of the problems that resulted in the 2008 crash, they have been slow to recover in the USA and Europe. While liquidity is abundant and the cost of capital is historically low, demand has been constrained by the deleveraging that is occurring in the US and European consumer sectors As a result sentiment among affected investors remains cautious and the volatility that has predominated over the last few years has amplified the perception of risk.
Against this background, I thought it would be appropriate to review the relative performance of banking sectors globally in an effort to ascertain whether their performance is a tailwind or a headwind.
Given the depth and extent of the USA's capital market it is possible to take a nuanced view of the banking sector. For example the S&P500 Diversified Financials (1.75%) has returned to its relative 2009 lows against the wider market and has been performing more or less in line over the last couple of months. The current region represents a potential area of support from which a period of outperformance could unfold. (This article from Bloomberg on Goldman Sach's earnings may also be of interest).
The S&P500 Banks Index (2.06%) has been mostly rangebound relative to the S&P500 since 2009 but has held a progression of higher reaction lows since October. These would need to be broken to question medium-term potential for continued outperformance.
Following a period of outperformance in late 2011 the KBW Regional Banks Index (2.2%) has been performing in-line with the market since January. It will need to sustain a breakout from the seven-month range to reassert medium-term outperformance.
Both the Dow Jones Stoxx 600 Banks Index (3.32%) relative to the Stoxx 600 and the Dow Jones Euro Stoxx Banks Index (2.98%) relative to the DJ Euro Stoxx Index hit new relative lows this week extending their respective downtrends. The Swiss Banks Index relative to the Swiss Supplemental Index (0.34%) shares a similar pattern. These charts represent where the greatest perception of risk lies at present. The underperformance of the banking sector at a time when the wider market has recovered somewhat suggests that more will need to be done to bolster confidence in the financial sector if this crisis is to finally be overcome.
The FTSE-350 Banks Index (3.88%) relation to the FTSE-350 has been ranging in the region of the 2009 lows since October and will need to break out of the current range to begin to suggest a return to financial sector outperformance.
The Topix Banks Index 3.32%) / Topix Index ratio has exhibited a rounding characteristic over the last couple of years consistent with banking sector accumulation. A break below the May low would be required question medium-term scope for additional financial sector outperformance.
Among commodity exporting countries, the S&P/ASX 200 Australian Financials Index (6.33%) relative to the S&P/ASX200 ratio has rallied impressively since December to test the upper side of the more than four-year range. While a process of consolidation is becoming increasingly likely, a sustained move below 0.978 would be required to question medium-term potential for additional outperformance. The Canadian S&P/TSX Financials (4.16%) Index relative to the S&P/TSX ratio has also returned to test the upper side of its multi-year range where it has been consolidating for the last few months. A sustained move below the early June low would be required to question medium-term potential for continued outperformance. The FTSE/JSE Banks Index (4.57%) relative to the FTSE/JSE All Share has a similar pattern.
Elsewhere in Asia, the Korean Financial sector trended lower relative to the wider market throughout 2010 and 2011 before losing momentum from January. A breakout from the seven-month range will be required to signal a return to outperformance for the sector. The Taiwanese Banking (2.28%) sector ratio found support in the region of the 2009 and 2010 lows from April and continues to rebound. Singapore's financial (3.63%) sector retested its 2009 low late last year following a steep relative decline but has since rebounded impressively to break the two-year progression of lower rally highs.
The Hang Seng Financials Index relative to the Hang Seng Composite has been trending lower since 2008 and while it has paused since last year, it will need to sustain a move above 1.1 to suggest a return to outperformance beyond the short term. The mainland banks have fared better with the S&P/Citic Banks Index (2.87%) outperforming the S&P/Citic 300 Index since August. Against a background when the wider market has continued to deteriorate, the relative performance of the banks sector is a notable positive.
The Bombay Banks Index (1.41%) hit a new all-time high versus the BSE500 this week and a sustained move below 1.7 would be required to question medium-term scope for continued outperformance.
Following a strong rebound from its 2008 lows, the Indonesian Financials (1.84%) ratio has been mostly ranging with a mild upward bias over the last few years. It will need to hold above 122 if medium-term potential for outperformance is to continue to be given the benefit of the doubt. The Thai Banking (2.7%) sector continues to outperform the SET Index as it rallies towards the upper side of the eight-year relative range. The Malaysia Finance Index (4.27%) outperformed impressively from 2009 to August 2011, when it entered a process of relative consolidation. The ratio found at least short-term support in June and would need to sustain a move below that low to question current scope for continued outperformance.
In conclusion the relative performance of banking sectors globally highlights the weakness of the European sector in particular, not only against its wider market but when compared to the sector globally.
The outperformance of banks in Canada, Australia and Singapore compared to their domestic markets and their attractive yields suggests they have fewer obstacles to garnering increased investor interest.