A year rarely starts as well as 2023 has done. In the first half of January our strategy returned +10%, doubling the +5% return of the market index ($SWDA.L).
The catalyst for the rally has been an improving economic picture, especially in Europe. Some analysts no longer expect a European recession. Goldman Sachs, for example, expects the euro area economy to grow 0.6% in 2023.
Can the rally continue? No one knows for sure, but the banks in our portfolio remain cheap. $BARC.L (Barclays), for example, trades at 6x forward price-to-earnings, while historically it has traded at 9x. 50% upside potential remains.
The next few weeks are a busy period for company earnings. The first banks have already reported. In our portfolio, the two banks that kicked off the Q4 2022 earnings season ($BAC (Bank of America Corp) and $WFC (Wells Fargo & Co)) posted earnings that the markets were happy with, as the stocks rallied after their earnings were released on Friday.
Both banks’ results were similar. Interest income grew because of higher interest rates, more than offsetting a decline in fee income due to lower mortgage, trading, and investment banking activity. Credit quality remained good, and the banks are well capitalised. Sometimes, the reaction to earnings is as important as the numbers themselves.
The fact that the two banks’ shares opened down a few percent, but rallied during the day to end up in the green, indicates that investors thought the shares were too cheap after the results. This gives us confidence before European bank earnings start to come in over the next few weeks.