Financials a trailing sector in 2016, here's why
Financial stocks have significantly decreased in 2016 because other broader markets have restored and the central banks cut interest margins.
Shares of banks also have miserable year due to policies of central banks damaging the financial market.
The economic stimulus attempts on lenders will improve the situation because huge U.S. banks have just started reporting their incomes for Q1.
The U.S. stock market has experienced a dramatic decline in January and February and is currently recovering. However, banks and financial companies are in a severe crisis.
This difference represents the problem of central banks' policies. Policies supporting 'easy money' have encouraged a rally in assets with higher risk.
According to FactSet, incomes of financial companies from S&P 500 list are predicted to be 8.5% lower in the first quarter of 2016 than in 2015. Market analysts have decreased their forecasts for the next three-quarters for the financial sector companies.
Bank stocks currently have some challenges. Low and sometimes even negative interest rate have hurt banks' incomes. At the same time in Europe, the situation has worsened by troubled loans, especially in Southern Europe which provides a low of opportunities for forex trading.
Financial companies are the least successful in the S&P 500, decreasing by 7.6% this year while the index itself has gained 0.2%.
Few huge banks have been performing even worse. Bank of America's stocks dropped 25% in 2016, Morgan Stanley declined by 25% after three years of growth in a row, while Citigroup Inc.'s shares lost 22%.
Everything is even more critical in Japan and Europe where investor suggest that negative rates act like the tax on banks as lenders are ready to pay to place the deposits at the central banks.
If we compare the MSCI World Index and the MSCI World Banks Index the situation is clear - the first slightly decreased by only 2%, while the last one dropped 15%. In Japan, banks in Topix have reduced by 34%.
Banks' shares had a rally following Fed's decision to increase interest rates last December for the first time in almost ten years. However, the investors aren't very happy after the ECB has switched to negative interest rates and Japan's central bank supported this move.
Considering the U.S. economic figures which are better than was expected, the possibility of a recession is very low, and the Federal Reserve has cut its plans regarding future interest rates change.
Increased rates are beneficial for banks as it raises a spread between bank's charge for loans and the expenses on deposits. These interest margins dropped from 3.69% in 2010 to 3.13%. Financial shares in the U.S. are currently lower than their historical average level.
Michael Mattioli from John Hancock Asset Management noted that he has added to his bank holdings with the concentration on U.S. biggest banks. He added that banks had never been in a better situation from the position of liquidity or capital.
Phil Poole, a researcher in Deutsche Asset Management, who has €777 billion in management, stated he is currently buying some bank credit, but he's more cautious about buying bank stocks due to concerns around bank legislation in Europe.
Investors think that the problems of financial stocks increase worries regarding the stability of the rally in the broader market since minimum levels in February.
