While possibly Europe’s biggest “pain trade”, fund managers are under pressure to buy banking stocks despite the deep problems of Deutsche Bank and some other lenders in the region.
A 9 percent slump to record lows on Friday for the German lender was rapidly reversed in afternoon trade, exemplifying the difficulties investors face in staying bearish on a sector which still faces fundamental problems.
As the third quarter draws to a close, the main European banking index has rallied 19 percent from the start of July, with a number of constituent stocks rising sharply in contrast to those of some German and Italian banks.
This presents a dilemma for fund managers who, following a long period of poor overall performance by European banking shares, had taken heavily underweight positions in the sector.
With the index still down around a quarter this year, those who shifted towards other sectors have outperformed benchmark indices against which their funds are measured.
But now they find themselves in a tough spot. If the banking sector keeps rising overall, they risk losing these gains and underperforming for the full year – unless they raise the proportion of bank shares in their portfolio at least to neutral, matching the weightings in the benchmark indices.
According to strategists at Citi, European banks are the worst performing combination of business sector and geographical region among the 285 they have tracked over the past decade.
Acknowledging that buying into them now constitutes “the world’s biggest contrarian trade”, the analysts led by Jonathan Stubbs said in a note to clients: “History says Buy, but our key message is do not Underweight the sector.”
GRAPHIC – Deutsche Bank’s problems tmsnrt.rs/2dcqb49