After the strong performance over the last two weeks we close our Banks position in our ETF portfolio and shift the money back to the EONIA benchmark index. After the strong positive news .…
Banks have posted a very strong performance of 44% over the last two weeks. This rally has followed a strong decline of the European banks sector by 40% from start of the year until 9 March. Reasons for the decline included very poor Q4 reporting and losses related to the financial market sell-off as well as fears of further write downs and increasing credit defaults. The strong exposure of many West European banks to Eastern Europe was a further drag to the performance until 9 March. Our main reason to buy the Banks sector was the expectation of actions by government and central banks, in order to support the banking sector and help to improve the liquidity position for banks (see ETF: Ideas and Flows, 10 February 2009). The performance rally of the European Banks sector over the last two weeks was indeed basically driven by government action and central banks.
A strong positive impact on European banks had the recent announcement of the US government. On 23 Mar 2009 US Treasury presented its public-private investment program (PPIP) that will deal with both legacy loans and legacy securities and remove toxic assets like Mortgage-Backed Security from bank balance sheets.
For this programme the Treasury plans to use between US-$75 billion and $100 billion and aims to generate co-investments from private-sector investors. This stabilises prices of legacy assets and reduces systemic risk of the US banks which is indirectly positive for European banks. (For further details on monetary policy frameworks of the Federal Reserve, the ECB and the Bank of England see DB Fixed Income Special Report “Overview of Global Policy Initiatives”, published on 20 Mar 2009).
In Mid March Finance ministers and central bank governors from the G-20 countries issued a joint statement at their meeting in London that they would take coordinated action to overcome the global recession. One Central bank action which is very positive for the banks is quantitative easing. In the United States, Japan, Britain and Switzerland central banks are using quantitative easing in attempts to revive lending. This means, central banks create new money by buying financial assets such as government bonds, securities or debentures and thereby increase the size of their balance sheets. The European Central Bank has not yet gone down this path.
Going forward, we don’t expect much additional positive news flow for Banks from government and Central bank action beyond the plans which are on the table. So after the strong rally over the last two weeks, we see increasing risk of disappointments for the Banks sector. The negatives which have triggered the decline until 9 March are still in place. The recession feeds through to more and more sectors in the real economy. Rapidly deteriorating conditions throughout most cyclical sectors could well increase number of company defaults and increase the pressure on the financing banks in H2/2009 and 2010. Also major writedowns in relation to the big exposure of West European banks to Eastern Europe are well possible. In addition, the business outlook for many areas in the investment banking business looks mixed at most for 2009. Consequently, we close our position “db x-trackers DJ Stoxx Banks” and put the money back into the EONIA benchmark index.
We keep our position in the ETF “db x-trackers DJ Stoxx Basic Resources” and the position in the Commodity ETF “db x-trackers DBLCI –OY balanced”. Both positions have performed very well since 17 March 2009. The highest weight in this Commodity index is Oil with 47% and Gold with 16% (for details see the ETF: Ideas and Flows from 18 March 2009). Overall, commodity prices and commodity stocks could be among the first assets to benefit over the next months from hopes of some economic recovery in 2010 and from the implementation of stimulus packages. Commodity stocks could also benefit from the improved capital base. Main risk to commodities prices and the performance of the Basic Resources sector is that recession lasts longer than expected and that the Emerging Markets, especially China, slow down stronger than expected.
We also keep the “db x-trackers iTraxx Crossover 5Yr TR Index ETF” in our portfolio. Credit spreads are still cheap in our view and it seems that the credit market has already priced in a deep recession more than appropriately and we continue to expect a normalisation of credit spreads in the longer term. Risks to the performance of iTraxx Crossover 5Yr TR Index include a longer than expected recession and a higher than expected number of major company defaults, especially of companies included in the Crossover index portfolio.
Source: Trading Ideas ETF: Ideas and Flows – Deutsche Bank AG
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