U.S. bank stocks are poised for gains because they have only begun to catch up with a surge in corporate bonds, according to Ian Scott, a global strategist at Nomura International Plc.
The CHART OF THE DAY compares the industry’s stock performance relative to the Standard & Poor’s 500 Index with a Moody’s Investors Service index of yields on Baa-rated corporate debt, the lowest investment-grade category. The latter is shown in reverse because falling yields translate into rising prices.
“Bank stocks have hardly responded” to the rally in bonds, Scott wrote in an April 16 report, even though the S&P 500 Banks Index has more than tripled since March 2009. This is the industry gauge used in the chart, which is similar to one published in his report.
The group fared much better in the early 1990s, when the stocks kept pace with corporate bonds as banks rebounded from real-estate losses, in his view.
Rebounds in mortgage-backed securities and leveraged loans, made to debt-laden companies, also signal that the rally in U.S. banks’ share prices “has further to run,” the report said.
“U.S. credit measures have improved across the board,” Scott wrote. “None of these improvements has yet to be reflected in either the absolute or relative performance of bank stocks.” He recommends that investors have more money in global banks than their weighting in benchmark indexes would suggest.
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