Following a 5% fall in October, our strategy is up +14.6% for the year to date. The strategy has beaten the +6.5% return of the MSCI World index by 8 percentage points.
This is a result I am happy with, given that the areas that I invest in have not done particularly well this year. US banks are down 20%, US regional banks 30%.
Only European Financials have performed decently, up 10%. In my view, some of the biggest opportunities in today’s market are in European banks, which remain undervalued.
Where will the market go from here? On the negative side, positioning is still neutral. Investors have not capitulated or panicked; there is no palpable fear visible.
On the other hand, leading economic indicators remain positive. The OECD composite leading indicator points up; the Conference Board leading economic index appears to be bottoming; inflation is coming down.
Overall, there is no clear signal about market direction either way, with positives and negatives balancing each other out, in which scenario I stay invested.
How about the upcoming recession? Is it wise to hold an aggressive portfolio of Financials into one?
On this question, I would concur with Michael Hartnett, Bank of America’s chief investment strategist. Hartnett argues that investors are currently excessively long safe “no landing” plays, in particular the Magnificent Seven (Nvidia, Tesla, Meta, Apple, Amazon, Microsoft, Alphabet). At the same time, investors are cautious on leveraged risky plays such as REITs, banks, retail, utilities and small caps.
Hartnett believes that as soon as the next recession starts, the Fed will start cutting rates (2024 is after all an election year), which will help the under-owned leveraged plays, as their risks will then reduce. Thus, 2024 could be the first recession when leveraged stocks outperform high-quality stocks.
I agree with that argument and so am happy to hold Financials into a 2024 recession. However, to control risks, the portfolio does have a quality bias at the moment – with higher-quality banks such as Bankinter and JPMorgan overrepresented. I’m avoiding lower-quality banks, especially US regionals, as I am not confident about their capital trajectory.
The earnings season has brought about some reshuffling of the portfolio, as the macro exposures of the portfolio are managed.
Euronext and Amundi, two capital market plays, were sold. NatWest was sold before earnings due to bad earnings by Barclays, another UK bank. This turned out to be the right decision as NatWest earnings also disappointed and the shares fell 12%.
New positions are:
– Bankinter, a high-quality Spanish bank that recently reported strong Q3 earnings
– Wells Fargo and JPMorgan, two large US banks. I chose Wells and JPM over Bank of America because the latter has more unrealised losses on its balance sheet and is more risky.