His Eleftherias Kourtalis
Goldman Sachs advises investors to be long Greek banks, noting that from a macroeconomic perspective, the Greek sector is absolutely attractive globally and also in the context of the emerging markets region, with its stocks being significantly undervalued.
More specifically, as Goldman points out, May has already brought two important developments to the global banking industry: first, the Fed may have delivered its last rate hike (25bp) of this cycle, and second, recent surveys indicate that standards conditions and the availability of credit is not deteriorating faster than expected. In other words, it makes sense for the market to remove some of the risk it used to attribute to asset prices. In today’s analysis, Goldman assesses the market and macroeconomic factors driving bank stock performance to identify the best area for bank stock buyouts. assuming that risk premiums can decline further.
The MSCI Global Banking Index has fallen 8% since March, with the MSCI World Index rising 2% over the same period, one of the rare cases of a major sector falling sharply without the broader market falling. Goldman therefore looks for investment opportunities within this underperformance.
Banks are the most sensitive equity sector to credit spreads (since they are credit providers, so this is not surprising) and interest rate movements. Goldman compares recent movements in bank stocks with movements in the fixed income market and concludes that, in this regard, most developed market banks look expensive relative to emerging market banks.
More generally, macroeconomic trends in credit-to-GDP ratios provide a strong “signal” about the relative performance dynamics of the bank’s bank stocks, particularly in emerging market indices. Assuming credit growth slows in the coming months, markets with large “credit gaps” are likely to see their bank stocks underperform.
In contrast, banks in the Middle East and Africa region (mainly Qatar and Saudi Arabia), Chile, Colombia, Thailand and Greece are attractive opportunities from a macroeconomic perspective, Goldman Sachs notes.. Therefore, he recommends that investors go long on these bank stocks, especially against stocks in the consumer staples sector.
As Goldman explains, to reach the above conclusion and gauge which global banks are an attractive investment right now, we consider three things: (1) Recent performance, (2) Valuation against return on equity ROE and (3) Macro credit growth trends.
Starting with performance, compares the recent performance of bank stocks with historical episodes of financial stress and with recent movements in interest rates. In the historical performance table below, compare the average return of bank stocks across the economy with the performance of bank stocks during the recent period of financial volatility. Historical episodes are periods of “bank-specific” risk characterized by high volatility in US banks but otherwise stable movements in other stocks, allowing market relationships to be examined in more isolation. Historically, banks in Brazil, South Africa and Greece tend to fall more when US banks face an idiosyncratic shock..
In terms interest rate movements, most emerging market banks, including Greek banks, have outpaced interest rate moves, Goldman concludes.
In terms of valuations, looking across geographies, the banking industries have a fairly wide range of return on equity (ROE) and P/B metrics.
Against this backdrop, most banks in developed markets, particularly Japan and Europe, look quite expensive, while banks in Greece, Colombia and Qatar seem undervalued.
Finally, Goldmann explores credit growth trends as a means of evaluating investment opportunities in bank stocks. The credit-to-GDP ratio (defined as domestic credit to the private sector provided by banks) has generally increased across all emerging markets over the past two decades. Two notable declines include the period 2002-2005, due to deleveraging in parts of Asia and during the Covid-19 pandemic. By contrast, credit/GDP has been steadily declining in developed markets since the global financial crisis, mainly due to deleveraging in Europe. Banks in the CEEMEA (Central and Eastern Europe, Middle East and Africa) region look attractive in terms of the “credit gap,” he says.
Thus, Goldman identifies the most attractive bank stocks internationally, using these three criteria but also comparing them to the consumer staples sector, as it is the sector least sensitive to the credit environment.
Therefore, bank stocks in the MSCI indices of Qatar, Saudi Arabia, Chile, Colombia, Thailand and Greece look the most attractive. and Goldman recommends that investors remain long against MSCI’s broader emerging markets consumer goods sector. This trade has covered the underperformance in March, but looks attractive in the medium term given the valuations and credit gaps described above. More broadly, these banks typically do better during periods of stability or appreciation in currency markets, a theme that Goldman believes will continue through the summer.