Antonio Guglielmi was in Italy watching a dull, tied-at-zero soccer game between AC Milan and S.S. Lazio of Rome, his hometown, at the beginning of February when his mind wandered to the subject of Europe’s banks. That’s something he thought about every day as a financial company analyst at Milan-based Mediobanca SpA. (MB)
As the players fruitlessly kicked the ball between goals, Guglielmi, 40, decided that when he returned to his office in London he would look more closely at the capital cushion of euro-zone financial institutions, Bloomberg Markets reports in its December issue.
Bank stocks were at a post-financial crisis high at the time, with the Bloomberg Europe Banks and Financial Services Index up almost 144 percent from a March 2009 trough. Guglielmi and his 11-person team nevertheless saw trouble ahead. In a Feb. 7 note, they downgraded the whole sector, saying the banks didn’t have enough capital to undergird them in the event of a new meltdown.
“Denial is futile,” the note said.
Following that downgrade, European bank stocks fell 34 percent as of Aug. 31, according to the Bloomberg index.
Guglielmi’s prediction that French and Italian bank shares would plummet makes him one of the world’s top 20 financial stock pickers, according to data compiled by Bloomberg Markets for its annual ranking of analysts and their firms. The ranking looks at the stock picks of more than 2,900 analysts at 212 firms worldwide from Jan. 1, 2009, to Aug. 31, 2011.
26 Out of 43
The No. 1 financial stock-picking firm was Citigroup Inc. (C), whose London-based team of capital markets analysts made 26 accurate calls on the 43 financial stocks they follow that met the Bloomberg Markets ranking’s criteria. Citigroup was No. 5 in 2010.
“It is not, and it hasn’t been for a while, a stock picker’s environment,” says Andrew Pitt, Citigroup’s global head of investment research and a former financial company analyst. “So doing well picking financial stocks over the last 12 months has required judgment and probably also a degree of luck.”
Europe’s debt crisis, new global banking regulations and investors fleeing equities have made financial stock picking around the world difficult, Pitt, 45, says. Stock prices today are less influenced by companies’ individual earnings performance and management decisions than by broad political and economic events, he says.
Stocks in Lockstep
In 2011, stocks in the Standard & Poor’s 500 Index have been moving in lockstep with each other to a degree not seen since at least 1980, according to a study by Westport, Connecticut-based Birinyi Associates Inc. Birinyi looked at 50- day rolling averages going back three decades and found that correlations between individual members of the S&P 500 and the index as a whole had risen sharply to 0.85 percent in September, meaning the movement of share prices was more related to the direction of the overall market than to a company’s earnings prospects.
Nick Sargen, chief investment officer at Cincinnati-based Fort Washington Investment Advisors, says analysts will hit their target prices more often when issues like the European debt crisis are resolved and volatility decreases.
“The best analysts will look prescient once the dust settles as people look through the rubble and fundamental factors start to matter again,” says Sargen, whose firm manages $38 billion.
Citigroup’s 60 percent accuracy rate stands in contrast to last year’s No. 1 firm, Goldman Sachs Group Inc. (GS), which got 38 percent of its calls right. This year, Goldman is No. 2, with 25 accurate calls on the 44 financial stocks it follows.
Analysts’ Poor Record
The larger analyst community is wrong much more often than it’s right. On average, the 212 firms that are part of the ranking got 1.3 stock recommendations correct out of every 16 from the beginning of 2009 through Aug. 31, according to Bloomberg data.
Some sell-side analysts are so consistently wrong that Sam Ginzburg of First New York Securities LLC bets against their recommendations. “If an analyst is wrong all the time, I’m going to take the other side of what he’s saying,” says Ginzburg, who’s a partner and head of capital markets at the New York- based proprietary trading firm. “That is just as good to us as if he’s typically right.”
Guglielmi, who’s head of Mediobanca’s research department and European banking team, says the downgrade of European banks was considered very bold at the time.
‘A Crazy Call’
“It was a crazy call, and it’s the one I’m most proud of,” says the former Merrill Lynch & Co. analyst, who’s been at Mediobanca Securities since 2010. “Top management and regulators were telling us that there were no imminent capital problems. We said, ‘Give me capital now or we go to Waterloo together.’”
Guglielmi won his spot among the top 20 analysts with calls on Intesa Sanpaolo SpA (ISP), Italy’s second-biggest bank by market value, and BNP Paribas (BNP) SA and Societe Generale (GLE) SA, France’s biggest banks. He went from a “buy” to a “sell” rating on SocGen and from a “neutral” to a “sell” on BNP on July 5. The stocks plunged 43.2 percent and 32.6 percent by Aug. 31. He had either a “sell” or “hold” on Intesa after Nov. 10, 2010, and its stock dropped 46.5 percent from that date to Aug. 31.
Guglielmi still recommends selling the French banks because of their sovereign debt exposure and their leveraged business model. BNP and SocGen were damaged by their exposure to Greek debt and by SocGen’s 88 percent stake in Athens-based Geniki Bank (TGEN) SA.
Italian bank stocks, including Intesa, were downgraded by S&P on Sept. 21, one day after the rating company downgraded Italy’s credit rating on concern about its “weakening economic growth.” On Oct. 4, Moody’s Investors Service also downgraded Italy, saying that weak European growth would make it difficult to reduce the country’s 1.9 trillion euros ($2.6 trillion) in debt.
Europe’s financial leaders are trying to repair Greece’s economy while shoring up euro-zone banks that the International Monetary Fund says face as much as 300 billion euros in credit risk. Stocks rallied last month as the European rescue fund was boosted to 1 trillion euros ($1.4 trillion) and bondholders agreed to a voluntary writedown of 50 percent on Greek debt.
Spain, like Italy, was whipsawed by the worry over contagion. Carlos Berastain, an analyst at Deutsche Bank AG (DBK) in Madrid, made the ranks of best analysts with his calls on Banco Santander SA (SAN), Spain’s biggest bank, and Banco Bilbao Vizcaya Argentaria SA. (BBVA)
Against the Bulls
He put “buy” ratings on the banks in June 2009, and by February of this year, they were up 27 percent and 17 percent. He then rated them “hold,” and they dropped 25 percent and 28 percent through Aug. 31.
“I found that the early 2011 rally and bullishness would be difficult to sustain,” Berastain, 36, says. “Downgrading these names was not the most consensual or obvious thing to do, but in perspective it was the right thing to do.”
In the U.S., the 2011 performance of financial company stocks was tightly linked to the crisis in Europe, with prices rising and falling with each new wave of optimism or fear, says Donald Selkin, New York-based chief market strategist at National Securities Corp., which manages about $3 billion. That’s because of U.S. banks’ Europe-linked risks and the 2008 financial crisis, which showed how the collapse of a big bank such as Lehman Brothers Holdings Inc. can reverberate around the globe, Selkin says.
In addition, all big banks will be affected by the deliberations of the Basel Committee on Banking Supervision, which is finalizing new, more-stringent capital requirements, known as Basel III, for financial institutions deemed “systemically important.”
“It’s a very challenging environment because a lot of the financial names tend to trade together in this environment,” says David Konrad, an analyst at New York-based KBW Inc. (KBW) “So you look for near-term catalysts like quarterly earnings to use in your stock picking, which will allow the stock to deviate from the macro pressures.”
Konrad, 46, is a repeat winner in Bloomberg’s analyst ranking. His best calls included a “buy” on JPMorgan Chase & Co. (JPM) in March 2009. The stock was up 83 percent as of Aug. 31, including a 7 percentage point drop in August. Konrad also put a “hold” on U.S. Bancorp in October 2008 at $31.46 and then reinstated a “buy” when it fell to $21.23 on Oct. 2, 2009. The stock rose 12 percent from that date to Aug. 31.
Konrad recommends Goldman Sachs, the fifth-biggest U.S. bank by assets, because of its strong market share and low valuation.
Buckingham Research Group’s David Hochstim, a 20-year financial services analyst veteran, says regulatory uncertainty, the economic slowdown and the volatile environment have been “very unpleasant and painful” for the analyst community. His calls on American Express Co. (AXP), Capital One Financial Corp. (COF), MasterCard Inc. (MA) and Visa Inc. (V) made him the best analyst of consumer finance stocks in the U.S.
“The European crisis is running on its third year,” New York-based Hochstim says. “The credit card stocks I follow have held up a lot better than a lot of bank stocks, in part because they don’t have significant exposure to other financial institutions. But they are vulnerable to the economic environment and high unemployment.”
Hochstim recommends investors buy Visa and MasterCard shares because he says the world’s largest consumer-payment networks will benefit from the long-term global growth in electronic payments.
Big Macro Calls
Citigroup’s Pitt says he and his team are eager to get back to bottom-up analysis of single financial institutions. “It’s been a tough market for everybody,” he says. “Analysts have been asked to make big macro calls rather than really looking at the performance of individual banks.”
Pitt doesn’t see the turbulence subsiding any time soon.
“What concerns me is that there are deep structural issues that have to be dealt with in the global economy,” he says. “And they are not going to be solved by a bailout in Greece.”
To contact the reporter on this story: Nikolaj Gammeltoft in New York at firstname.lastname@example.org.