Photographer: Alex Kraus/ Bloomberg

Loving European Banks Equally May Backfire on Stock Traders

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Stock pickers in European banks can stop hitting the snooze button.

While the difference between returns from lender shares has fallen to a record low, a sign that investors aren’t distinguishing between them, that’s set to reverse, according to strategists at HSBC Holdings Plc. An indicator known as dispersion, which measures how far individual equities swing relative to an index, is more than 40 percent below its 10-year average, they say.

Cheap prices and the unwinding of monetary stimulus has encouraged broad-based buying of financial shares in Europe. While bets of rising interest rates has boosted profit expectations for the sector as a whole, the lockstep moves are in jeopardy as distinct risks emerge within the region: Catalonia’s crisis has weighed on Spanish banks in October, soured loans hang over those in Italy and a slowing economy threatens firms lending in the U.K.

“Whilst macro factors may continue to dominate over the near term -- in particular, the evolution of monetary policy -- the danger is that stock-specific factors begin to play a greater role in stock returns,” HSBC equity strategists Robert Parkes and Amit Shrivastava wrote in an Oct. 18 note.

Up a whopping 59 percent since a low 15 months ago through Wednesday, banks have beaten all other industry groups on the Stoxx Europe 600 Index. After shunning the sector for years, investors are buying up the shares amid speculation that a better economy will lift demand for loans, while rising bond yields will ease the squeeze on profitability. Stoxx 600 banks fell 0.8 percent on Thursday, pacing a decline in the broader benchmark amid Catalan tension.

HSBC says the low dispersion is bound to reverse, if history is any indication. Earnings reports from European banks, set to pick up pace next week, may help separate some winners from losers.

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