Investing in undervalued securities worldwide

Weekly Update 17 July 2023

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UK banks have underperformed continental European banks this year. The STOXX Europe 600 Banks index has posted a return of +16%, while UK bank shares have gone nowhere.

The reason is that the UK ($EWU) faces more severe economic challenges than either the US or the euro area. Inflation in the UK is running at 9%, compared to 3% and 6% in the US and euro area. At the same time, economic growth in the UK was only 0.2% year-on-year according to the latest data, while the US and the euro area grew at 1.8% and 1%.

Investors are afraid that the Bank of England will be forced to tip the UK economy into recession to get inflation back under control.

As a result, UK banks are hated and in the bargain bin. $BARC.L (Barclays) and $NWG.L (Natwest Group PLC) trade at 5x 2024E earnings, $LLOY.L (Lloyd’s Banking Group PLC) at 6x. These are far below the typical bank valuation multiple of 10x.

So how risky are the UK banks really?

Maybe not as risky as some fear, indicates a stress test released last week by the Bank of England. No bank failed the test, and Lloyds and NatWest passed with flying colours. Barclays also passed, although more narrowly, due to its higher-risk business model.

The Bank of England test simulated a scenario in which GDP falls 5% and house prices fall 31%. This is a far more severe scenario than the 10% drop current market forecasts for house prices imply, even if in the longer run, house prices could indeed fall more sharply because houses are currently severely overvalued in the UK.

Nevertheless, the most likely scenario given current global trends is that inflation will come down, the Bank of England can stop raising rates, and house prices will fall gradually over the next 5 years, giving UK banks the time to adjust.

We view the valuation level of 5x earnings as grossly exaggerating the risk of a financial crisis developing in the UK. That is why UK banks make up 20% of the portfolio.

If the UK economic situation stabilises, the three UK banks in the portfolio have more than 50% upside potential, should they return to a historically average valuation.

2023 performance YTD
@triangulacapital +15.7%
$SWDA.L +17.1%

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eToro is a multi-asset platform which offers both investing in stocks and cryptoassets, as well as trading CFD assets.

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 76% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work, and whether you can afford to take the high risk of losing your money.

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Your capital is at risk. Other fees may apply. For more information, visit

Pietari Laurila is not a registered investment advisor and does not offer investment advisory, fund management or wealth management services.

Triangula Capital is a brand name, not an incorporated entity.

This page is provided for information purposes only. It is not a recommendation to copy the Triangula Capital strategy or to invest in any fund or security.

2009-2020 performance figures are from Pietari’s personal Interactive Brokers account. They are time-weighted returns calculated in accordance with the Global Investment Performance Standards (GIPS).

From 2021, performance is calculated by eToro.

Past performance is not indicative of future results.

Track Record

It is often said that past performance is not a guarantee of future performance.

That is true. But there is also some evidence indicating that portfolios that performed better in the past, do perform better in the future.

“[…] top-decile prior-alpha funds produce annual future alphas of about 150 bps, net of fees” Source

Risk warning: That is only one study. In general, past performance is not indicative of future results.

Aligned Incentives

Pietari invests the majority of his net worth in the strategy. This ensures that his interests are aligned with investors who copy the strategy.

“Funds with high-incentive contracts deliver higher risk-adjusted return, and the superior performance remains persistent. The top incentive quintile of funds outperforms the bottom quintile by 2.70% per year” Source

Risk warning: Pietari holds accounts with multiple brokers and may therefore have a conflict of interest when deciding which accounts he should trade in first.

Unconstrained Investments

The strategy has fewer constraints on its investments than traditional mutual funds.

The strategy portfolio can be invested in stocks, bonds or cash and these allocations can vary over time.

Compared to traditional mutual funds, the strategy also:

  • holds fewer securities
  • trades more
  • avoids following the index

Each of these points has been shown to be an important predictor of portfolio performance.

“We […] find that portfolio concentration is directly related to risk-adjusted returns for institutional investors worldwide” Source

“A one-standard-deviation increase in turnover is associated with a 0.65% per year increase in performance for the typical fund” Source

“We find that truly active funds significantly outperform closet indexers. Further, we find that the truly active funds are able to outperform their benchmarks on average by 1.04% per year” Source

Risk warning: Concentrated portfolios with few positions can suffer large losses if bad news arrives about any of the companies in the portfolio.

Cheap Stocks in Cheap Sectors

The strategy invests in geographies and sectors where values have collapsed due to macroeconomic problems.

Within these geographies and sectors, the strategy overweights stocks that trade at low valuations on measures such as price-to-earnings or price-to-net asset value.

Every stock in the strategy portfolio must also be a good company, with no obvious red flags or long-term threats to its business model.

The aim of the strategy is to maximize returns, even if this means taking more risks than usual.

Risk warning: The strategy portfolio tends to be concentrated in risky stocks, which means that its losses in any market downturn will likely exceed those of the market index.