One of the mysteries of the first two months of the year was the fact that the US economy seemed to weather a spate of US Federal Reserve rate hikes without hiccups.
After the events of the last two weeks, this idea can be shelved. “Every rate hike cycle over the last 70 years has ended in recession (about 80% of the time) and/or financial crisis (1984 and 1994),” says Graham Secker, Chief European Equity Strategist at Morgan Stanley in London.
“A week ago you could argue that this observation was theoretical, now we know it will be no different this time,” he added.
His comments came after three US banks collapsed as federal authorities organized big banks to deposit $30 billion in First Republic Bank FRC.
to fend off a fourth. Credit Suisse shares CSGN,
They are now down 22% this week on concerns about their survival.
Secker noted that financial crises do not always lead to economic recessions, as shown in 1984, 1987, 1994, and 1998. the prospect of a material tightening in credit availability and bank lending standards following recent events; 2) the deep inverted yield curve going into recent events,” he said.
The strong year-to-date performance in European equities prior to last week was fueled by financials and cyclicals. But now, he says, “we are confident that the economic outlook has deteriorated and that the window for continued good/better macro data is starting to close.” to deal with quality and other long-term ideas”.
banks SX7E,
will be volatile, but the company recommended selling in rallies while maintaining an overweight position in the sector. “It’s impossible to determine how much of European banks’ underperformance is due to concerns about changes in the net interest margin outlook versus contagion risks versus lower bond yields and interest rate expectations,” Secker said. “We believe the latter factor was a significant contributor and as such any recovery here could result in some upside volatility for banks.”
A popular European exchange traded fund, the Vanguard FTSE Europe ETF VGK,
is up 5% this year, slightly outpacing the 3% gain in the S&P 500 SPX,
However, Secker says bank worries are undermining the case for European stocks versus US stocks.
“While we still see advantages in European equities over global peers from a valuation and earnings perspective, a rotation away from ‘cyclical value’ and back to ‘defensive/quality growth’ would be inconsistent with sustained European outperformance,” he said.
Source : www.marketwatch.com