Financials has been one of the hardest hit equity sectors during the corona crisis – in fact, only the energy sector has fared worse. Lower interest rates and financially strapped customers have been a poisonous cocktail, but the sector is approaching a turning point, estimates Danske Bank, who are therefore lifting the sector from neutral to overweight based on an expectation that financials will outperform the general equity market in the time ahead.
There are several reasons for this, according to Danske Bank’s investment strategist, Lars Skovgaard Andersen:
- First, Danske Bank assesses financials to be too cheap given that we continue to expect a gradual reopening and recovery in the global economy in 2020.
- Second, the sector is again beginning to talk about dividends and share buybacks, which have been put on hold during the corona crisis – and dividends and share buybacks have historically been among the most attractive characteristics of the sector.
- And thirdly, the investment strategist expects the yield curve to steepen a little – in other words, we will see a greater difference between long and short yields – as the economy recovers, and this would be positive for the banks’ earning potential.
Other cyclical sector downgraded
Financials is a classic cyclical sector that typically performs best during periods of economic growth and, conversely, tends to get hit hard during times of crisis. Hence, this is one of the riskiest sectors to be invested in.
“However, we do not wish to increase the total level of risk in our investment universe right now, so to maintain an overall balance we have decided to reduce another cyclical sector – namely, consumer cyclicals – from overweight to neutral,” explains Lars Skovgaard Andersen.
One reason for the downgrade, according to the investment strategist, is that some consumer cyclicals have risen a lot in recent months relative to how much growth we have seen in the economy so far.
Still modest overweight in equities
Overall, Danske Bank still has a modest overweight in equities – in other words, a slightly higher share of equities in our portfolios than the bank expects to have in the longer term.
“Our overweight reflects a continuing expectation for a gradual recovery in economic growth in 2020 – and while the rises of recent months have already priced in a lot of positivity, we still see a potential for further increases in equity prices. That we only have a modest overweight in equities is due to our wanting to see further confirmation of growth in the global economy, and that we would also prefer to have confirmation that economies can withstand any second wave of coronavirus,” says the investment strategist.
Corona has triggered new price falls
Fears of new outbreaks of the virus have triggered new price falls in equity markets in the past week following disappointing US data that showed increased rates of infection in several US cities and China seeing a cluster of new infections in Beijing.
“This has reinforced fears of a second wave of infections, but we essentially expect that the authorities and the general public have leaned a lot from the first wave and will have better control of any second wave, so we can avoid a total lockdown again. Likewise, we have presumably moved closer to a vaccine against the coronavirus. However, there is no doubt the financial markets will continue to be very sensitive to developments in the coronavirus, and this of course is a risk you should be fully aware of as an investor,” concludes Lars Skovgaard Andersen.