Earnings publications continued to beat analysts’ forecasts, notably the two major systemic French banks (BNP Paribas and Societe Generale). As European banks are core components of the value segment (alongside oils stocks), investment choices have to be made in this sector. The failure of the IPO of the Italian regional bank Banca Popolare di Vicenza, which was seeking to raise EUR 1.5bn, tipped the Italian banking sector and the entire local market back into a negative spiral. The sector has been weighed down in Germany by the difficulties facing the Sparkassen savings banks and destabilised by restructuring at Deutsche Bank and Commerzbank, whereas France has benefitted from a snapback in industrial investment, combined with a rise in new loans and a dynamic savings market. Although the current level of interest rates has certainly not boosted corporate and investment banking (CIB) which has had a challenging first quarter, earnings per share have surely reached a low point over the past few months. Regulatory constraints will also become less demanding if the economic cycle helps streamline banking balance-sheets. Equity markets will probably go into “pause” mode until after the Brexit referendum and the Spanish elections.
The latest opinion polls in the UK have implied a slight lead for the Bremain camp. British electors will therefore find themselves under increasing pressure over the next few weeks, particularly those who are still undecided. The practicalities of a potential exit from the European Union are highly complicated. If the UK votes to leave, the country will firstly have to negotiate its divorce, immediately followed by the arrangement of a type of remarriage, establishing new trade links with the EU, and probably with a change of government in between.
In Spain, the revote will not necessarily yield a very different result, given the current positions. However, in a repeat election, electors will nonetheless wish to nominate political parties which are capable of governing. This factor represents a challenge for protest parties such as Podemos, which have so far failed to demonstrate their ability to compromise, as was previously the case with their Italian counterpart Cinque Stelle under Bepe Grillo.
Igor de Maack, Fund manager and spokesperson at DNCA. This article was finalised in May 6th, 2016.
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