Banks have been one of the best performing sectors since the middle of October driven by hopes of a quick economic recovery. It would be logical to expect strong outperformance from the sector in the early part of an expansion on the expectation of improving margins and higher demand for loans. However, we think that low rates are here to stay for the foreseeable future and banks may have taken on loans that they would avoid in other circumstances. Valuations are attractive, but we fear this is not enough to warrant too much enthusiasm for the sector in the long term, though we think short-term momentum may continue.
Banks outperformed global equities by 12.5% between 14th October 2020 and 26th November leading us to wonder if the highly anticipated rotation into so-called value stocks has begun. We view the enthusiasm for the sector as primarily a reflection of hopes for higher economic growth and higher inflation. Higher inflation would mean that central banks could start pausing and reversing easy monetary policy eventually leading to higher interest rates. That environment has been better for banks’ profitability in the past. Should we consider changing our Neutral stance on banks?
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