Sector rotation: from metals/energy to banks

From metals/energy to banks, a risky tactical sector rotation, but which makes technical sense. We are in an extreme technical situation between the overbought metals/energy sectors and the oversold banks, in particular European ones.

In the short term, we have taken our profits on metals and energy and are buying the banking sector. A very tactical move, because in the medium to long term, we are maintaining our bet on the Commodities Supercycle – energy, metals and agriculture – which we have been arguing for two years already. The Russian invasion of Ukraine, and the massive sanctions against Russia that followed, heavily affected European stock markets and banks in particular. If there were to be value adjustments on Russian assets, banks would be penalized by regulatory capital requirements. Refer to the Great Financial Crisis of 2008. The probable economic slowdown, in Europe in any case, is not favorable to the banks, nor the rise in interest rates (inflation) which could affect the real estate sector. But as a fund manager, I’ve often advocated contrarian positioning, especially in extreme situations like today.

Despite the harshness of the war, discussions on a peace agreement continue, difficult, but with glimmers of hope. The trigger for the validation of our sector rotation will obviously be a rapid easing of the conflict.

Switch Commodities to European banks

In the short term, we do not believe in a lasting slide in the prices of metals, oil and gas. Regarding oil and gas, the potential supply is sufficient in the medium term. Producer countries have no interest in seeing prices rise sharply because of a significant risk of demand destruction; what they want is price stability. Moreover, China cannot afford high energy and metal prices, while its economic growth and real estate sector suffer.

We bought Societe Generale and Unicredit, two banks exposed to Russia. Unicredit announced that in an extreme scenario the loss could amount to €7 billion. Societe Generale is exposed with its subsidiary Rosbank, the first foreign bank in Russia; before the invasion, its Russian assets amounted to €18.6 billion, but, at the end of 2021, Rosbank was valued on the balance sheet at €2.7 billion. The losses for the banking sector could therefore be less of a problem than estimated. In terms of income, Russia has a significantly lower weight, but again, the important thing is the value adjustments compared to equity. The rally will continue, even for Raiffeisen International which is very exposed to Ukraine and Russia.

Heravest SA is an independent boutique top-down to bottom-up investment advisory and investment solutions provider.

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