Global Financials: Upgrade From Neutral To Overweight

Charging Bull - New York City. By Arch_Sam on Foter.com / CC BY

Patrik Lang (Head Equities & Global Equity Strategy, Julius Baer) | Global financials typically outperform when purchasing managers’ indices and bond yields rise. Growing scepticism with regard to the negative interest rates and increasing chances for the beginning of tangible fiscal easing are also potential positives.

Global financials typically outperform when purchasing managers’ indices and bond yields rise. Growing scepticism with regard to the negative interest rates and increasing chances for the beginning of tangible fiscal easing are also potential positives. No other sector in our developed market universe benefits more from rising bond yields than global financials. Global financials have underperformed since 2018 against the backdrop of slowing macroeconomic momentum and declining bond yields. Leading macroeconomic indicators around the globe had started to recover prior to the coronavirus outbreak.

In our view, the negative macroeconomic impact of the virus represents a postponement but not a cancellation of a global recovery. This means that purchasing managers’ indices should continue to recover in Q2 and bond yields are strongly correlated with such indices. Financials is the most sensitive sector to yields and macroeconomic momentum and typically strongly outperforms during periods of rising yields and accelerating macroeconomic momentum.

In addition, earnings revisions have already turned positive and should support the performance of the sector. Shareholder returns are also supportive for the sector, with a dividend yield of 3.2% and extensive share repurchase programmes, especially in the US banking sector.