Head of Equity Strategy
Summary: Credit Suisse is the story of a long string of bad decisions but also a structurally weak European banking sector that 14 years after the Great Financial Crisis is still struggling with return on equity being above the cost of equity over an entire economic cycle. While financials in many ways are taking the elevator down, the energy sector is being catapulted back into a proper size of the overall equity market with Exxon Mobil as an example being up 71% this year and now the 11th biggest US publicly listed company on market value.
It is hard to remember when we were positive on European banks except for rare tactical cases. European banks remain structurally weak and yesterday’s profit warning from Credit Suisse indicating a potential loss in Q2 proves the point. Credit Suisse will likely see its investment bank division delivering a third straight quarterly loss driven by market share losses across all business lines. The Swiss bank has been hit over the years from the spectacular blow-up of the hedge fund Archegos and the collapse of its supply chain finance partner Greensill Capital. The bank came out with a long list of excuses for why the bank was doing badly from geopolitical tensions to abrupt changes to monetary policy.
The cold hard facts are that Credit Suisse has relentlessly destroyed shareholder value since the peak in 2007 and has not since late 1992 delivered a positive total return destroying capital a rapid pace when adjusted for inflation. Credit Suisse had some years after the Great Financial Crisis when it was delivering better return on equity (ROE) than the overall European banking sector but since 2011 its performance has continuously deteriorated relative to the industry. The current 12-month forward ROE is now only 3.9% which is well below the cost of equity. Credit Suisse is a symptom on European banks stuck in a prohibitive regulatory environment, low growth economy, and overhang of bad debt. It is difficult to be structurally positive on European banks.
Exxon Mobil, the biggest oil and gas company in the US, is up 71% this year taking the market value to $440bn as of yesterday’s close. This brings the stock to the 11th place in S&P 500 on market capitalization regaining some of the lost terrain for energy stocks in the S&P 500. Despite the recent rally Exxon Mobil is valued at 12-month free cash flow yield of 9% compared to around 6% for the MSCI World Index.
As we recently wrote in a note, energy stocks are the cheapest in 27 years, and they have rallied from just 2.4% of the total market value in the S&P 500 to 5.2% as of May with the long-term average at 7.5%. Under the assumption of an ongoing energy crisis and hangover from low investments over the previous 8 years, energy prices will continue to remain high and deliver high return on invested capital for energy companies. We remain structurally positive on oil and gas stocks.
2024: The wasted year
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
