Investors are making a record bet on global bank shares following the US election, according to a new survey of institutional money managers that also highlights the risks to the sector if Donald Trump fails to deliver faster economic growth.
The allocation that investors made to bank stocks this month climbed to a weighting of 31 per cent above their benchmarks, up from 25 per cent in November, as portfolio managers anticipate that higher interest rates will bolster banks’ bottom lines, a survey from Bank of America Merrill Lynch showed on Tuesday.
Bank shares have been the biggest beneficiary from the near euphoria that has swept stock markets since Mr Trump’s surprise victory early in November.
The sharp rise in US government bond yields has raised hopes that banks will become more profitable as they can command higher interest rates for the loans they make.
“Our preference for financials relates to expectations for more bond yield upside (possibly as high as 3 per cent next year),” equity strategists at Citigroup said, echoing the preference of investors in the survey.
On Wall Street, banks have led the post-Trump rally with the S&P 500 Financials Index surging 17 per cent.
Those gains, though, have been eclipsed in Japan where investors’ appetite for bank shares had been sapped earlier in the year by the negative interest rate policy pursued by the Bank of Japan.
The Topix Banks Index is up 29 per cent since Americans went to the polls. In the eurozone, where the European Central Bank is also pursuing a policy of negative rates, the Stoxx Europe 600 Banks index has advanced 14 per cent in the same period.
While money managers have invested their greatest hopes in banks, the BofA survey also showed that expectations about corporate profits are now at their rosiest for almost seven years.
Mr Trump has vowed to cut the US corporate tax rate from 35 per cent to 15 per cent.
If investors are showing no let-up in the enthusiasm for financials, the survey revealed anxiety over the dollar that has risen about 4 per cent on a trade-weighted basis since the election.
About 35 per cent believe that buying the dollar is the most crowded trade while the share of investors who believe it is overvalued is at its third-highest level of the past 10 years.
The question mark over the dollar was one of the few sour notes in a survey that, overall, reflected investors’ optimism that the election of Mr Trump will spur faster global growth and, at least in the US, a move away from the low level of interest rates that have dominated since the financial crisis.
Projections for global economic growth, for example, jumped to a 19-month high this month, while inflation expectations are at their loftiest since 2004, the survey found.
With investors currently still focused almost exclusively on the potential gains — and ignoring the dangers — for markets that a Trump presidency might deliver, they singled out the risk of European Union disintegration as the largest tail risk.
Almost 30 per cent reckoned that was the chief, albeit low probability, risk. Just 20 per cent pointed to a devaluation of the renminbi by Chinese authorities and the country’s property bubble as a concern.
European equities have taken in their stride the resignation of Matteo Renzi as Italian prime minister in the wake of the Italian referendum on constitutional reform last week. Europe’s benchmark stocks index has risen almost 7 per cent since the US election.
The next big European political risk will come with the French presidential election in the spring in which Marine Le Pen, the leader of the far-right National Front, is expected to reach the final round.
The survey questioned more than 200 investors in the first week of December. Collectively they manage almost $600bn.