It’s time to buy the banks

It is time for the “true contrarian to be rubbing their hands in glee”. Why? Because the latest Merrill Lynch Global Fund Manager survey is giving an unusually strong steer on what they should be buying, says Jonathan Allum of SMBC Nikko.

The “classic contrarian” signal here is how much cash the respondents report as having in their portfolios: the more they have the more likely markets are to rise as they pile back in. History tells us that anything over 4.5% is generally positive for markets. That makes the current reading of 5.6% “an unambiguous buy signal”. You’ll be wondering for what exactly.

For the answer, it’s worth looking at the most overcrowded trades out there (the more people in a trade already, the higher the odds of it reversing at speed). Right now, that means the things you don’t want to do are to be long the US dollar, short emerging markets, or short oil. You don’t want to because everyone else is.

That makes sense to us. We are generally loath to forecast currency movements, but if the Fed’s next move is to cut rather than raise rates, anyone holding dollars is going to feel a bit silly. As for oil, we have been discussing the capital cycle here for a while now and it seems unlikely that there is much more downside. If pushed we’d be more likely to be buyers of oil (and mining) stocks than sellers. But there is one more contrarian trade we reckon you should look at this month: banks.

For years now we have been telling you to avoid holding banks in your portfolio. They are too complicated; too caught up in credit crunch politics; and too vulnerable to monetary policy mistakes. However, look at out cover story this week and you will find a different view.

James Ferguson acknowledges that the failure of Europe’s banks to deal with their post-crisis bad debt problems has been at the root of much of the market carnage this year, but he also goes on to make an excellent case for buying some of the better US banks. Jonathan Compton also chimes in. He hasn’t bought a bank share for a decade. But come April he will, he says, be a shareholder in five of them.

It might seem ridiculous even to consider putting miners, oil companies and banks into your portfolio. Frightening even. But Compton and Ferguson are both very effective contrarian thinkers and it is of course those who invest when no one else will who often end up doing the best. Read the story. See what you think.

Finally a word on Brexit. There are endless arguments and counter arguments to come. We’d like to have a go at cutting through the bluster and the guff. With that in mind, this issue of MoneyWeek comes with the first of a series of briefings on the things we all need to think about before we vote. We start with trade.


Leave a Reply

Your email address will not be published. Required fields are marked *