Global Markets Strategy19 February 2024J P M O R G A Nwww.jpmorganmarkets.comEquity StrategyMislav Matejka, CFA AC(44-20) 7134-9741mislav.matejka@jpmorgan.comJ.P. Morgan Securities plcPrabhav Bhadani, CFA(44-20) 7742-4404prabhav.bhadani@jpmorgan.comJ.P. Morgan Securities plcNitya Saldanha, CFA(44 20) 7742 9986nitya.saldanha@jpmchase.comJ.P. Morgan Securities plcKarishma Manpuria, CFA(91-22) 6157-4115karishma.manpuria@jpmchase.comJ.P. Morgan India Private LimitedWe have last quarter advised to open a short in Banks…959799101103105107109111113115Jan 23Mar 23May 23Jul 23Sep 23Nov 23Jan 24MSCI Eurozone Banks relativeTurned UW…this follows 3 years of strong Banks run, driven by rising bond yields and improving EPS momentum809010011012013014015016017085100115130145Jul 20Nov 20Mar 21Jul 21Nov 21Mar 22Jul 22Nov 22Mar 23Jul 23Nov 23Mar 24MSCI Europe Banks price relativeMSCI Europe Banks 12m fwd EPS relative (rhs)63%Regionally, we continue our preference for Japanese over both the US and European Banks90100110120130140150Jan-23Mar-23May-23Jul-23Sep-23Nov-23Jan-24Open Long in Japan vs Global BanksMSCI Japan Banks vs World Banks (LC)Source: Datastream, IBES, J.P. Morgan.•One of the sector calls where we face the most pushback from investors is our UW on Banks, entered in Q4 - see top chart. Until Q4, Banks have outperformed for 3 years in a row, driven by better EPS momentum and ultimately by rising bond yields. We have downgraded the sector as we think this phase is over. However, many we speak to see Banks as cheap, with likely sustainably higher profitability, returning large amounts of cash and this time even as a defensive play, so want to keep their positive stance on the sector. From our side:•1. Bond yields direction is one of the key drivers of Banks� fortunes, as the sector is generally a barometer between deflation and reflation. After years of malaise, Banks performed well over the past 3 years as interest rates rose, with US 10-year moving from 0.5% in 2020 to 5% last October. Bond yields have likely peaked, in our view, see our report from last October, even as near term there is a consolidation in process. Central banks will be cutting rates this year, which will directly reduce the earnings power of the sector. Since November, the forward curve has shifted down 50bp, which is a hit to earnings. If yields are turning, Banks should be peaking, as well.•2. The pressures could arise from the peaking out in relative EPS growth of the sector - middle chart. Even if Banks stay more profitable than before Covid, the stalling in their relative EPS momentum could be enough for the sector to stop working. We note that the EPS revisions of European Banks have just recently entered negative territory. In addition, the net interest income for Banks could weaken, from elevated levels, and deposit betas could increase - see the work from our analysts on ...
