Bloodied bank stocks 2016 is shaping up to be a difficult year for investors in bank stocks.
Credit Suisse shares plunged to a 24-year low last week after announcing its first annual loss since 2008. Standard Chartered shares have more than halved in 2016, last week hitting 18-year lows. Deutsche Bank recently announced full-year losses of €6.8 billion; its shares have fallen by almost 40 per cent this year, taking them below levels seen during the 2009 financial crash.
These are extreme cases, but banking stocks everywhere are bleeding. The financial sector, hit by fears over a global slowdown, exposure to the energy sector and continued low or negative interest rates, has been the worst performer in the MSCI World Index this year. Among 22 major bank stocks tracked by Barclays, eight are now trading below their tangible book value (the total value of their assets in the event of liquidation). Such valuations, as JPMorgan noted last week, are typically seen during recessions.
That raises the question as to whether banking woes are now baked into market prices. Prices can always go lower, but those with strong stomachs might be tempted to bite. According to Barclays, current bank valuations have only been seen on three occasions in recent decades – in summer 1990, early 2009 and August 2011 – all of which turned out to be major buying opportunities. Google, Apple and an old curse Google parent Alphabet became the most valuable public company in the world last Tuesday, only for Apple to wrest back its crown a day later, but history indicates the most-valuable title may be something of a poisoned chalice. More than three-quarters of the time, the top dog underperforms over the following decade, according to Rob Arnott of Research Affiliates, and not by a small amount – on average, by 5 per cent annually. The so-called winner's curse can be found in all stock market sectors, Arnott found; future underperformance is the norm. In fact, underperformance is not confined to the biggest beast.
Looking at the 10 biggest companies, Arnott found 68 per cent lagged behind indices over the following decade.
Technology stocks currently dominate the top-10 list, with Alphabet, Apple, Microsoft and Facebook occupying the top-four places.
All too often, however, today's winners are tomorrow's losers. Ray's 'radical transparency' Bridgewater's Ray Dalio, who has made more money for investors than any other hedge fund manager in history, is famous for his insistence on "radical transparency", whereby employees openly air their criticisms and grievances.
A new book, Adam Grant’s Originals: How Non-Conformists Move the World, provides a revealing example of Bridgewater’s open culture.
“Ray – you deserve a ‘D-’ for your performance today”, a Bridgewater employee wrote to Dalio in an email following a meeting with a potential client. “You rambled for 50 minutes . . . It was obvious to all of us that you did not prepare at all because there is no way you could have and been that disorganised at the outset if you had prepared. We told you this prospect has been identified as a ‘must-win’ . . . today was really bad . . . we can’t let this happen again”.
Dalio responded by asking others at the meeting to grade him honestly, on a scale from A to F.
The initial email was then copied to every Bridgewater employee so that they could learn from the exchange.
Bridgewater's approach is an unusual one, but kudos to Dalio for practising what he preaches. Strategists are full of bull UBS equity strategists last week followed the lead of JPMorgan, Credit Suisse and Canaccord Genuity by lowering their year-end S&P 500 price target. They hadn't much choice; strategist price targets made just six weeks ago already look hopelessly outdated. Strategists should not be pilloried for getting it wrong – after all, year-end price targets are inherently unpredictable.
They should be pilloried, however, for the predictable way they play the prediction game. Statistical Ideas blogger Salil Mehta recently examined 186 forecasts made over the last 18 years, and found strategists predicted market gains over 95 per cent of the time. Forecast gains averaged 9 per cent; actual returns were just half that. Markets suffered three disastrous years during that period, in 2001, 2002 and 2008.
Among the 13 firms that covered those years, not one ever envisaged a down market.
There’s no sin in being wrong; however, being “full of bull”, as Mehta puts it, is a different matter.
