The market has been kind to our portfolio this year.

Banks started the year trading cheaply. Too cheaply, I thought. Banks were being valued at 6x earnings. This kind of valuation had previously been reached only during financial crises in 2008 and 2011. In the beginning of 2024, there was no financial crisis.

It appears a few other investors reached the same conclusion this year, and bought banks. So European banks are up 25%. Yet that leaves them valued at only 7x earnings, a level that in my view is too low for the current macro circumstances.

The European economy is growing. Banks are returning 10% a year to shareholders via dividends and buybacks. Banks’ loan books are in good shape. There is no crisis, and yet valuations remain such that 20% further upside would be required for them to normalise.

This does not make sense to me, so I remain long European banks.

Is there anything that could derail this trade? One problem could be (US) inflation. The US economy is so strong and the labour market so hot that wages will continue to grow at 4% a year going forward. This may lead to inflation stabilising at 3% instead of 2%. It will be up to the Federal Reserve if they will tolerate this or tighten policy again, which would lead to a market correction.

Inflation is more of a problem in the US than elsewhere, which is why most of the portfolio is concentrated outside the US.

2024 performance
@triangulacapital +32.0%
$SWDA.L +10.4%

Portfolio changes
Amundi was sold, Man Group bought.