Longer days have brought stronger rallies. This week we discuss fresh 34-year highs in Japan equities and three ways to revive European banks.
The Nikkei 225, Japan’s benchmark equity index, closed at new highs this week for the first time since 1989.
Japan Equity Strategist Masashi Akutsu thinks higher real wages and a manufacturing recovery will continue to bolster fundamentals. Management teams are also expected to disclose plans to improve capital efficiency when full-year earnings are released in May. Shareholder-friendly policies are in vogue as the total value of buybacks and the number of companies repurchasing shares were at their highest levels since FY (Fiscal Year) 09. Dividend forecast revisions are also well above the 10-year average. Index returns are expected to be modest for the rest of 2024 with a year-end price target of 41,000 (+5% from Friday’s close). The team highlights 61 quality cyclical stocks with high ROE (return on equity), low leverage, and resilient earnings expectations. Consistent with expectations for volatility and somewhat less upside ahead, Chief Investment Strategist Michael Hartnett notes that the Nikkei is discounting a big jump in the ISM manufacturing index. He recommends going “long producer” cyclical assets like South Korea, Sweden, Germany, and EM ex-China as the ISM inflects higher.
European banks are in need of AI-like dynamism.
Banks offer shareholders 12% cash yield on highly capitalized and liquid balance sheets, but Head of European Banks Equity Research Alastair Ryan argues that they don’t do much anymore. European banks have added little to no loan growth in the past 15 years, creating the “stability of a graveyard” that authorities didn’t seek. Non-bank lending has increased and record-high 16-18% Cost-of-Equity makes required returns on new lending too high for politicians to bear. In Alastair’s view, three post-crisis reforms should be reconsidered for banks to re-rate and support Europe’s recovery: 1) Global Systemically Important Bank (G-SIB) thresholds should be indexed. Buffers were set a decade ago, before 40-60% economic growth, and tipping into more highly scrutinized buckets can cost banks 8% of market cap; 2) Liquidity Coverage Ratios (LCR) should reset from the current 158% toward the required 100% to restore balance and potentially mobilize €1.8 trillion of trapped liquidity in the euro area alone; and 3) more balanced stress tests would free more capital to lend.