The prices of European banking stocks have fallen to their lowest level in more than 30 years. The banks are weighing on a further recovery of the European indices, which have too few ‘asset light’ business models.
Until 30 September, the return of the European banking index stood at -43.66%. Over the past three years, the return is -24.39% and over the past five years it’s -13.36%.
Fears of bad loans, negative interest rates, money laundering scandals and a poor reputation in general have battered the sector. If Europe finally wants to catch up with the US, the banks must also recover. For the time being, however, the Bloomberg graph below inspires little confidence.
In an interview at the end of March with Investment Officer, NN IP’s European equity fund manager Maarten Geerdink also showed little optimism for the European banks: ‘The steeper interest curve may bring some relief, but it is still quite flat. Moreover, often complex IT projects and anti-money laundering (AML) efforts incur high costs. The dividend policy is being curbed too.’
Striking contrast
The performance of technology, the asset-light business model par excellence, contrasts sharply with the banks. The technology shares also show resilience in the correction. Most have fallen back to their 30- and 40-weekly moving averages, where they are supported.
The correction at the beginning of September has curtailed the excessive optimism about technology stocks, but the doubts about the European recovery and the postponement of the vote on a second recovery plan in the United States have created too much uncertainty for a massive shift to cyclical stocks.
Similarly, the US elections, which, on the basis of the first debate between Trump and Biden, have become a disgrace, the gloomy outlook for Brexit and tensions between China and the US, including over TikTok, are weighing on sentiment. The fact that the markets are in a downward spiral does not therefore look illogical, says Enguerrand Artaz, fund manager at La Financière de l’Echiquier.
However, the decline is proceeding without panic. Trade volumes are not peaking and call options remain more popular than put options. The success of some recent IPOs and the massive inflows into certain ETFs at the beginning of last week also indicate that there is still some risk appetite. Moreover, there is not only gloomy news to report. For example, the business climate is improving in Germany, where the IFO index rose again in September. The same applies to France, according to the French statistical office INSEE.
Artaz: ‘In some of the emerging countries most affected by the virus, including India, the pandemic is starting to slow down and hopeful news about the search for a vaccine regularly appears. On the monetary front, the ECB, through François Villeroy de Galhau, governor of the French National Bank, is resolutely broadening its horizons. Moreover, European banks have borrowed more money from the central bank via the TLTRO system than expected, which is good news for the transmission of monetary policy to the real economy.’
Value or growth?
Investors are in a very difficult position, because they have to choose between the cheap value sectors (including banks) and the expensive growth stocks, which continue to perform strongly for the time being. A good example of this is the recent IPO of Snowflake.
The stock was floated on the stock exchange at an extremely high price, but revenue expectations are also sky-high. According to market observer and former fund manager Puru Saxena, the expensive companies in e-commerce, the cloud, artificial intelligence and similar sectors are the ‘new utilities’: nobody can ignore them anymore, and everyone needs them. Thanks to powerful network effects and a loyal customer base, these companies have a wide ‘moat’ as Warren Buffett likes to call it. Consumers reliably use their products, so revenue becomes fairly predictable, and so do profit margins.
Another good example is Adyen, the Dutch success story in online payments. The penetration rate of e-commerce reached 27% in Q2 2020 according to the latest figures. Adyen benefits from this extraordinarily strongly. Is Adyen expensive then? At the moment it is, but online payments and financial solutions are like the producers of ‘spades and pickaxes’ who also benefited disproportionately from the gold rush in the United States in the 1930s.