Negative on banks as low profitability is “locked” by governments
As result, European banks are down 1% in today’s sessions and are hitting fresh lows not seen since 2009. The STOXX 600 Banks total return index is down 57% since its inception in 2001 and is only up 19% since the lows in 2009. Central banks and private commercial banks are essentially an extension of the government and commercial banks have generally over the past 100 years been a profitable enterprise, but with recent central bank policy and increasing regulation the private commercial banking industry has slipped into “utility state” with very low profitability and limited growth potential. The COVID-19 has caused many governments to issue loan guarantees to ensure banks are continuing to extend credit moving the industry even closer to a quasi-government run credit operation. Overall, it is hard to be optimistic on banks, and even US banks, and our view is to be underweight banks across all regions.
Tech earnings surprised paving the way for more gains
Last week saw earnings from all the major US technology companies and they were all strong relative to the weak backdrop of overall economic activity bolstering confidence among investors in their bets on technology stocks. Especially, Facebook and Google showed robust advertising revenue highlighting the fact that even in a struggling economy the technology giants can increase revenue as activity is still being pushed online. This characteristic will continue to push up market valuation on technology companies and with the US 10-year yield at 0.54% investors will accept the high valuations.