Bank stocks often act as proxies for political risk, as well as economic barometers. When a government starts shaking or a recession looms, financial shares may be the first to suffer. If you trust bank analysts, that paradigm is about to change.
Financial institutions in countries with high political risk have seen some of the steepest positive earnings revisions so far this year. In Egypt, for example, the median bank is now expected to make 20.7 percent more in the next 12 months than was the case when 2017 started. In Brazil, with the second-steepest increase in optimism, the median earnings-per-share forecast is up 12.4 percent.
A closer look at the six biggest gainers in the chart above suggests something may be askew. The Egyptian pound has weakened 22 percent since the central bank floated the currency freely on Nov. 3 to fight a deepening economic crisis and pave the way for a bailout from the International Monetary Fund. This week, the government rolled back a cut in bread subsidies to avert further unrest. The country does look better than it did six months ago, but have things improved that much?
Brazil's GDP contracted for a third straight year in 2016, shrinking 2.5 percent. The corruption probe that culminated in the ouster of former President Dilma Rousseff threatens to derail the current administration too.
A look at broad regions is even more intriguing. Despite bullish expectations for U.S. banks from a potential review of Dodd-Frank legislation, analysts have turned a lot more sanguine on institutions in the Old World. On average, earnings estimates for banks in Eastern Europe were revised up by 8.1 percent since the start of 2017, and their peers in the West got a 6.2 percent boost.
In other words, the risk that a French election could trigger a rift in the euro region doesn't seem to worry analysts, nor do potential diplomatic hurdles faced by Russia and its neighbors. Based on revisions of earnings estimates, Italian banks are the best bet right now, despite the burden of nonperforming loans.
Part of the change in sentiment may be a reflection of the market catching up. Last year, U.S. bank stocks rose almost 50 percent, while their European, Middle Eastern and Asian counterparts generally ended in the red. Earnings estimates tend to lag economic and political events, too, so the recent bullishness could yet unravel.
Or one could dare to hope that the world really has changed, and these bank stocks no longer suffer from political and economic malaise.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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