Interest rates and global financials

We are overweight financials and have been for some time.  We have also began to purchase more European financials to get the same future growth we have experienced in our North American financials.  The European financials are very cheap compared to North American financials.

North American banks typically have half the earnings related to interest income from banking operations.  As interest rates bottomed last June at Brexit, we see the low in interest income ($10.3B).  Since that point we have had a strong rally in bond yields – in other words, interest income increases globally.  As we look forward on the chart below, the next several quarters will be compared against the lows for interest rates, so we expect a strong upward trend to continue. 

Net Interest income bottomed at Brexit and is moving higher with global yields, this is a backdrop of growing earnings for financials. The following slide is from the Bank of America earnings release, April 18, 2016.

Source: Bank of America

This chart shows the 10-year US bond yield move higher and the stock price of Bank of America moves lock step higher with yields, we expect this to continue going forward.

Source: Bloomberg, Stuchberry Group

This chart shows the German 10-year yield, over the last year it was negative several times, we think as it rallies European financials will have the same or a larger move higher than US financials.

Source: Bloomberg, Stuchberry Group

These upward moves in interest rates are not a consistent move higher but instead they jolt higher on big news – Trump was one such jolt. We will happily own these financials collecting dividends awaiting these next major moves.

Happy to answer any questions you may have.





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