Gavekal Capital: Can European Banks Continue to Outperform?

Wednesday, June 11, 2014

Can European Banks Continue to Outperform?

In the wake of the ECB's announced intention to boost lending to SMEs and ahead of stress tests to be conducted later this year, banks in MSCI Europe are the only group in the Financial sector with positive performance so far this week. For the year so far, the Diversified Banks have gained over 14%-- placing them in the top three performers of the European Financial sector:

As we noted here, Financials (along with Industrials) lead the MSCI World Index in new highs. And, while performance year-to-date is positive in all regions, MSCI Europe Financials have gained the most (8.56% versus 1.47% in MSCI Asia Pacific and 4.19% in MSCI North America):

While we can not say for certain whether or not these positive developments will continue, we would note that nearly ALL of the constituents of the MSCI Europe Diversified Banks sub-industry have relative strength point-and-figure charts that closely resemble this formation:

The good news is that multi-year downtrends have given way to more constructive base formations. The bad news is that if the more recent uptrends fail to overcome previous support (that now acts as resistance), many of the European banks may start to underperform again. Looking at the average daily percent change of each individual stock over various time periods reveals that gains are already becoming more scarce in this sub-industry:

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