Our strategy has performed poorly since the end of January, with a -7% return.
Banks, our main focus, have underperformed this year. A few banks failed in the US in March and April, leading to higher costs for all US banks. The US bank index $KBE is down 20% for the year.
European banks have done better, up 10%. Due to stricter regulations, they have avoided the liquidity problems that hit US banks. But they, too, have failed to outperform.
Behind this underperformance are changes in economic expectations. Expectations rose from October 2022 to February 2023, helping banks, but since February, expectations have again declined. Banks are extremely sensitive to the state of the economy, so when economic expectations worsen, banks tend to underperform.
tradingeconomics.com/euro-area/zew-economic-sentiment-index
A good time to buy banks is usually when economic expectations are low, because then they have plenty of scope to improve. Conversely, a good time to sell is usually when economic expectations are high.
At the moment, expectations are below average, though not extremely low. However, bank shares have in some cases returned to their last October levels, when economic expectations hit rock bottom. This is true of for example the UK domestic banks Lloyds and NatWest, Deutsche Bank, Bankinter and Societe Generale.
Given their poor performance this year, we view bank shares as discounting plenty of bad news already. This is not to say they can’t decline further. If higher interest rates lead to a financial crisis, further declines will be inevitable.
A crisis would most likely be caused by inflation staying high and interest rates having to go even higher than at present. It seems, however, that the worst of the inflation problem is now behind us. This is especially clear in the US, but European price indicators also point to a slowdown.
tradingeconomics.com/united-states/ism-manufacturing-prices
tradingeconomics.com/united-states/ism-non-manufacturing-prices
www.newyorkfed.org/research/policy/underlying-inflation-gauge
It is likely that banks will start outperforming again when central banks have enough evidence in front of them that their war against inflation has had its intended effect.
2023 performance YTD
@triangulacapital +8.4%
$SWDA.L +12.6%
Portfolio changes
Allianz was sold, Amundi bought.
