Forget oil stocks. Banks are killing your portfolio
by Ivana Kottasova @ivanakottasova
February 5, 2016: 8:39 AM ET
Forget oil. It's time to worry about banks.
Shares in some of the world's biggest banks are plunging. Financial stocks in the S&P 500 are down more than 11% so far this year. That's worse than oil, energy stocks, and even the emerging markets index. European banks have fallen even further.
Deutsche Bank (DB) has lost 31% so far this year, Unicredit (UNCFF) is down 35%, and Credit Suisse (CSGKF) is 30% down. Barclays (BCLYF), BNP Paribas (BNPQF), Societe General (SCGLF), and UBS (UBS) have all lost about 20% since the beginning of 2016.
Bank earnings have generally been disappointing. Credit Suisse shares hit a 24-year low after it posted its first loss since 2008, and BNP Paribas suffered a 50% drop in net income in the fourth quarter.
Even JPMorgan Chase (JPMPRA), which had a bumper quarter, warned of a "challenging" start to 2016 because of volatile markets.
There is growing fear about the state of the world's economy. China is slowing down, and the American economy is losing momentum. Emerging markets are struggling to keep growing -- and some have slumped into recession.
Banks are being hit particularly badly. Here are three reasons why:
1. Low interest rates
Low interest rates in most major economies are cutting into banks' profit margins, and investors are losing hope for a change any time soon.
The Federal Reserve raised interest rates for the first time in nearly a decade last December, and has indicated that rates could rise four times this year.
But investors don't believe it, and the financial markets are now pricing in zero hikes in 2016.
The Bank of England signaled Thursday that rates are likely to stay at record lows for another year. The Bank of Japan has just introduced negative interest rates, and the European Central Bank is widely expected to take action soon to drive eurozone rates even lower.
"Risk of a Fed backtrack and negative rates across the board from major central banks (are) not good for (the) sector," said Mike van Dulken, head of research at Accendo Markets.
2. Oil pressures
Collapsing crude oil prices are also weighing on the financial sector. Many banks have invested heavily in big oil projects, only to see the companies behind them go bust as prices collapsed. At least 42 North American oil companies filed for bankruptcy since the beginning of 2015.
"The decline in oil prices to largely unforecasted levels makes for a large question mark over all the lending done to support the industry during boom times," said Nicholas Colas, chief market strategist at brokerage Convergex.
Wells Fargo (WFC), JPMorgan Chase, and Citigroup (C) are all sitting on billions in loans to the energy sector. They're setting funds aside to cover expected losses.
3. Regulations and fines
Many banks are also still struggling with the fallout of bad behavior. Fines and settlements are piling up.
Banks are now also facing tougher regulations, which are forcing them to scale back their investment banking businesses.
They are required to set aside more capital for rainy days, and are banned from trading with their own money -- so-called proprietary trading.
The new rules were designed to make banks safer and prevent future crises, but the banks say they are also making them less profitable.
BNP Paribas, Credit Suisse, Deutsche Bank and Barclays all recently announced a shift away from investment banking, in an attempt to cut costs.
CNNMoney (London)
First published February 5, 2016: 8:39 AM ET
money.cnn.com/2016/02/05/investing/bank-stocks-worse-than-oil/index.html?section=money_topstoriesRelax. We are not heading for a global meltdown
by Ivana Kottasova @ivanakottasova
January 23, 2016: 8:59 AM ET
Yes, the global economy is facing a dangerous thingytail of risks. But there is room for optimism too.
Slowing China, rising U.S. interest rates, crashing commodity prices, and jittery emerging markets could all tip the world into a painful economic chaos.
But leaders at the World Economic Forum in Davos say that if handled properly, these scary events could actually bring the world back to normality.
The global economy is in much better shape than it was before the last recession. Many emerging markets, which are still driving the global growth, have cut down on their foreign debts, so they are better insulated against the rising interest rates in the U.S.
The financial system is also stronger. "We used to have huge balance sheets, we were highly leveraged, there was excessive animal spirit, now we can go through stress," Tidjane Thiam, the chief executive of Credit Suisse (CSGKF), said in Davos.
While disastrous for some, tumbling prices of oil and other commodities support growth in India, China, and Europe. Consumers cheer the low prices too, which boosts consumer demand. That means the global middle class is growing, which is also a good sign for the economy.
A slower China, up high on the list of risks, also means a more sustainable China. "China is slowing down in a controlled fashion, and that's a positive thing," Christine Lagarde, the head of International Monetary Fund, said at the forum.
Still, markets are freaking out about China -- the first three weeks of 2016 have been the Wall Street's worst start of the year ever. But Lagarde thinks that a little more clarity from China could solve the problem -- investors are worried mainly because they don't know what China is up to, fearing they can't trust the official numbers.
China should learn a lesson or two from the Fed. Its decision to raise interest rates in December, the first hike in over a decade, surprised no one and left the markets calm.
The Fed started raising interest rates just as the European Central Bank hinted at more stimulus. They are pulling in opposite directions, but that too could be a good thing for the global economy.
"If the Fed, Bank of England, the ECB, and Japan...all started to exit from monetary easing at the same time, the impact could be worse than the current staggered approach," said Haruhiko Kuroda, the Governor of the Bank of Japan.
The geopolitics will remain the most worrisome part. Tensions in the Middle East are growing and the conflict in Ukraine seems to have stalled. The terror threat is once again on everyone's mind, following deadly attacks in Paris, Lebanon, Egypt and elsewhere.
The message from this year's Davos meeting is to be optimistic, but stay cautious. The risks are still huge and there is very little room for mistakes.
Europe is at a breaking point, grappling with the world's worst refugee crisis in 70 years and the prospect of Britain deciding to break away. Politicians are fast running out of time to save the European project.
With low or even negative interest rates in most developed countries, the world is still hooked on cheap money and politicians need to up their game in terms of structural reforms.
CNNMoney (Davos, Switzerland)
First published January 23, 2016: 8:59 AM ET
money.cnn.com/2016/01/23/news/economy/davos-economy-risks-optimism/index.html?iid=EL