31 March 2022
RAGING BULL AWARDS
The investment case for European Banks should ultimately reach positive territory in time. Implied real rates from years five to ten are at zero – too low for a normalised economy. Transitory elements of inflation, including commodity prices and supply-chain-induced price increases, should ease over the next year. However, more sticky elements like wages and shelter (rental), costs may remain elevated. Shelter costs are one-third of the more hawkishCPI basket and the single largest contributor – so any leaning Fed enduring rental inflation would be significant. has led to a A buoyant economy benefiting from accommodative rapid rise in nominal monetary policy will likely prolong a tight labour market and real bond yields; and should keep wage pressures elevated, potentially 10-year fixed rate yields increased by 27 basis points, pushing inflation above expectations. This will further and 10-year real yields increased by 39 basis points maintain the Fed’s hawkish stance and hence the path for over January. However, inflation expectations implied bond yields to rise further. Growth estimates remain above by the bond market remained stable, indicating that the trend, and monetary conditions are still favourable, given market remains confident in the Fed’s ability to contain that real rates are negative. This should support the ‘value’ inflation at around 2%. The bond sell-off spilled over into portion of the market, provided any inflation surprises and global markets, with European long bonds finally offering consequent Fed remedial actions are not overly aggressive. positive yields. Rising inflationary pressures and rates are impacting Unsurprisingly, ‘growth’ underperformed ‘value’ in most regions but to varying degrees. Europe, which has global stock markets as long duration shares suffer struggled with below-target inflation for many years, is disproportionately from higher discount rates. The more experiencing higher inflation. Current expectations are for speculative growth companies with limited or no profit have the ECB to bring rate hikes forward and end their bondbeen in decline for most of last year, with some of the larger purchasing program sooner. As a result, European bond cap tech companies now also starting to underperform. yields have finally exited negative territory. 2022.pdfwe 1believe 2022/02/10 14:30 Aside from offering compelling value relative to the While realTruffle_MM_Mar rates remain negative, they SOPHIÉ-MARIÉ VAN GARDEREN Portfolio Manager at Truffle Asset Management
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overall market, banks typically benefit from rising interest rates. Banks earn a spread on the rate they charge creditors less the rate at which they borrow. When rates fall close to or below zero, they cannot reduce their borrowing rates below zero. Depositors who provide funding to banks don’t take kindly to being charged interest on their deposits! As a result, bank margins get squeezed. Furthermore, banks earn interest on their equity, which also suffers when rates are low. Hence, rising rates are positive for bank earnings. Globally, European banks, especially Spanish and Italian, are most sensitive to rising interest rates. These banks have a more significant proportion of floating-rate loan books, which they can quickly reprice as rates rise. Some of these banks have been generating low levels of profitability and are operationally geared. Hence, they will benefit significantly from rising rates. Given our expectations of positive revisions to earnings, combined with relatively cheap valuations and attractive dividend yields, we remain positive on European banks.
“Europe, which has struggled with belowtarget inflation for many years, is experiencing higher inflation”
When it comes to long-term investment success, a portfolio’s composition is crucial.
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MY
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CMY
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PROPERTY
CASH
BONDS
GLOBAL
EQUITIES
Enjoy the fruits of a well-diversified portfolio.
The value of experience. www.truffle.co.za
WINNER 2021
Truffle Asset Management (Pty) Ltd is an authorised Category I, II and IIA financial services provider (FSP No. 36584) (Date of Authorisation: 11/03/2009). Truffle operates independently from the Raging Bull Awards and is neither an associate or product supplier to Raging Bull. Full details and basis of the award are available from the Manager.
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