$UNITED OVERSEAS BANK LIMITED(U11.SI)$
3Q22 reporting for global financials is underway with companies increasingly cautious on the growth outlook for 2023. Banks have also started to increase their loan loss provisions in anticipation of a more challenging macroeconomic outlook next year. While we have started to see some downward revisions in sector earnings estimates, current consensus forecasts still remain bullish (largely driven by higher rate expectations) with +13% growth forecast for MSCI World Financials Index expected in 2023, versus +5% for MSCI World Equities Index.
The Fed has hiked the fed funds rate by 75 basis points (bps), lifting the target range to 3.75-4%, its highest level since the global financial crisis as core inflation pressures remain a concern. While higher interest rates should continue to support near-term banking sector earnings, the rate hike story is likely to be at a mature phase.
Downgrade financials to underweight: With ongoing rate hikes expected until a “sufficiently restrictive” level is reached, we see sector headwinds looming ahead, as highlighted by the recent shift towards a base case of a US recession in 2023 (Macroeconomics – US: 2022 Inflation, 2023 Recession). With Europe already expected to enter a recession by end of this year (Europe & United Kingdom Banks – Deteriorating macro outlook warrants a continued cautious stance), i downgrade the global financials sector rating further, from Neutral to Underweight due to a worsening risk-reward outlook for the sector.
Be watchful for recession implications in 2023, lighten sector positions into the recent market bounce to manage overall risk exposures: With the federal (fed) funds rate expected to peak at 4.75-5% in early 2023 and a likely pause in the rate hike cycle thereafter,i believe the rates story for financials is at a mature stage. I advise reducing financials positions as we assess the depth and impact of an economic downturn next year, given its negative implications on the asset quality of banks’ loan books and amount of loan loss provisions that may be required. Regions wise, we remain most cautious on Europe within developed markets (EU energy crisis – Focusing on utilities and financials). Furthermore, i highlight my cautious stance on Hong Kong (HK) banks with sizeable exposure to the United Kingdom (UK) and Europe, and China financials within Asia ex-Japan.
I will cash out on bank stocks while I can fornow.
DYODD @TigerStars
Disclaimer: Investing carries risk. This is not financial advice. The above content should not be regarded as an offer, recommendation, or solicitation on acquiring or disposing of any financial products, any associated discussions, comments, or posts by author or other users should not be considered as such either. It is solely for general information purpose only, which does not consider your own investment objectives, financial situations or needs. TTM assumes no responsibility or warranty for the accuracy and completeness of the information, investors should do their own research and may seek professional advice before investing.
so I got but their shares
Hi