EU and Swedish Banks

EU and Swedish Banks

15 July 2019 from Mikael Syding

Swedish SEB belongs to the winners of OMX as of Friday 12 July, after having reported a
strong net interest income. SEB also brings up the other Nordic banks. Otherwise, the banks
have lost ground to OMX in the last three months, but just last month they picked up

I understand that low P/E figures and high direct yields may look attractive, especially if you, as an investor, feel a bit of high terror elsewhere on the stock exchange. However, remember that banks are not rated like other companies, and there is often good reason to hold down the ratings of banks, in particular, late in a boom. In the short term, however, it may still be time to buy banks as a trade, but more about it further down.

If we look south of Scandinavia, European banks have gone really badly over the last 18 months. The SX7E bank index has fallen from over 140 to low 90, including the operation of Deutsche Bank. Deutsche Bank has gone badly for a long time and, despite a series of attempts since the 2008 crisis to rescue it with proposals for mergers and restructuring, it was again forced to submit a redundancy programme for almost 20 000 people the other day.

DB is not alone, as I said; almost all major banks in Europe are approaching their lowest levels for a long time in a steadily declining trend. However, it can also be interpreted as there is technical support around here, which could give an unexpected rally and force cover for short positions. Such a development would in any case be a little contrarian, because no one seems to like European banks at the moment.

Fundamentally, lower interest rates and inverted interest rate curves mean that banks are
making money. It is also clear that the German ten-year rate co-varies with the bank index: The
lower the interest rate, the lower the bank rates. It also becomes self-fulfilling, because weak
banks cause a weaker economy, which leads to lower interest rates, which then undermines the
banks further. The recent recourse by the US Fed to interest rate reductions from increases does not make this any easier, because if the US lowers it will (and will) definitely have to be done by the ECB. Falling inflation expectations and weak PMI measurements recently further support the theory of lower interest rates (and lower stock prices for banks).

At the same time as European banks are dying of slow deaths, the foundations of the global financial system are shaking. It is Bitcoin and business-linked digital currencies that threaten the dollar's status as a reserve currency, and may undermine the monetary control of various nations. Moreover, this development is in line with the cycle of the global financial system, which has undergone major changes approximately every 30-40 years (1873, 1914, 1944, 1971).

In practice, the system has been playing overtime since Draghi's famous 'Whatever it takes' speech in the summer of 2012. Perhaps it could be said that we already started the last monetary paradigm, which meant a transition to unlimited monetary pressure, also known as Modern Monetary Theory or Magic Money Tree. But I think that QE should be seen as a way to prolong the cycle before the real change takes place. Last year, in particular, we have seen the way in which the central banks of the world have started to hammer gold in a way that reminds us how France led a process whereby in the 1960s the United States lost half of its gold before Nixon stopped in 1971 and the next monetary era began.

Spectacularly, the monetary cycle coincides with the so-called Fourth turning point, which warns too much of the upheaval for the next ten years, when institutions that have dominated the economy and politics for 80 years may change significantly or even be overturned. This applies not least to phenomena such as the dollar reserve currency status and the petrodollar system, but also, for example, to the UN and the EU. In such a process of transformation, the amount of gold a country is sitting on may be an important factor in determining which countries, institutions and currencies gain market confidence.

As a symptom of the seriousness with which the authorities view the changing conditions for conducting monetary policy, Facebook will be questioned by the US Congress on 16-17 July about the plans for a digital currency (Libra) and its implications for US monetary policy and financial stability.

And in China, the South China Morning Post recently wrote that it is reviewing the possibilities of launching its own digital national currency (alongside the private AliPay and WeChat Pay). The reason is that it sees Libra as a threat to China's financial system, especially if Libra can be considered a dollar-centric, which in practice will be if its currency basket is based on the current global weight of the dollar. India also sees cryptographic currencies as such a threat that it is now evaluating the criminalisation of all use of cryptocurrencies sanctioned with prison sentences.

In any case, the current trend of ever lower interest rates means that the profitability of Swedish and European banks is under constant pressure. Furthermore, the situation may deteriorate further if banks' activities are threatened by alternative systems of payment solutions, loans and savings. The long trend is undeniably negative for banks. In addition, the risk of a new
financial crisis is always hanging over the banks as a Damocles sword when the last 10 years
have passed, so it is hardly possible to buy the banks with the plan to keep them forever.

However, it may well be that the last month's outperformance is just the start of a sufficiently
long journey upwards to be worth following. Swedish banks have decent upside of 10-20%
purely technical, if the investors decide to rotate from cyclical to bank. However, large European
banks (such as Barclays, Société Générale, BBVA, Credit Suisse and UBS) can easily
rise by 30%, and in many cases more than that, without any significant change in the appearance of their course charts.

It looks like there may be a really interesting short-term contrarian trade in long-standing runways ahead. But remember that even though the banks may seem cheap, they are
probably not, especially not risk-adjusted. So be prepared to have to change foot quickly.


Important legal information

Legal notice

This information is in the sole responsibility of the guest author and does not necessarily represent the opinion of Bank Vontobel Europe AG or any other company of the Vontobel Group. The further development of the index or a company as well as its share price depends on a large number of company-, group- and sector-specific as well as economic factors. When forming his investment decision, each investor must take into account the risk of price losses. Please note that investing in these products will not generate ongoing income.

The products are not capitalprotected, in the worst case a total loss of the invested capital is possible. In the event of insolvency of the issuer and the guarantor, the investor bears the risk of a total loss of his investment. In any case, investors should note that past performance and / or analysts' opinions are no adequate indicator of future performance. The performance of the underlyings depends on a variety of economic, entrepreneurial and political factors that should be taken into account in the formation of a market expectation.

13/06/2021 06:34:29


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