Dear David, I read an article yesterday that gave some alarming statistics on the performance of banking stocks globally, in particular Japanese, Eurozone and US banks have markedly underperformed their respective indexes of late. Being a veteran subscriber I am aware of the importance you give to the banking sector as an indicator of general wellbeing and the likelihood of an equity market to rally is greatly enhanced if this sector performs! Therefore my question is where are the banks in the current cycle? Further losses or cheap enough for a rebound?

David Fuller's view

Many thanks for your long interest in this service and these very interesting questions of general interest.

The performance of bank shares in most markets has been poor, in real terms and also relative to their national indices, as you can see from the Stoxx Europe 600 Banks and the Euro Stoxx 50 Index of leading diversified shares.  There are two ways to interpret this: 1) the underperformance of a country’s bank shares is a bearish indicator for the economy and also the broader indices of shares in that market; 2) today there are mitigating circumstances following the Volcker Rules which: a) reduced the size of some ‘too big to fail’ banks; b) required them to significantly reduce their use of leverage.  Consequently, banks in developed countries may be somewhat more finally sound in this cycle, but the tradeoff is that their scope for earnings has been reduced.  Additionally, banks’ ability to profit from normal loans has been reduced by record low interest rates for many countries since 2009.   

Regarding your second question, some banks may be cheap enough for a partial rebound.  However, there are reasons why it may take a long time before this sector is able to capture public imagination in the manner of inform tech or fashionable retailers.