Despite these risks, the global economy and equity market fundamentals remain strong, and we remain confident in the market’s ultimate ability to climb the wall of worry.
Best Ideas
An environment of stronger relative earnings growth and attractive valuations in developed non-U.S. markets, particularly in Europe, could be a catalyst for outperformance by select stocks in cyclically oriented sectors. We remain broadly bullish on emerging markets, but are guarded with respect to Chinese equities. Near term in the U.S., we see opportunities in defensive sectors and structural growth stocks during this period of soft economic data, but continue to favor a long-term approach that balances these exposures with cyclicals and value.
In Focus: Financials: Solid Opportunities, But Selectivity Is Key
Bank stocks are up nearly 30% year to date, outperforming the broad S&P 500 Index by more than 10%. This strong relative performance can be attributed to an improving U.S. economy, higher interest rates, increased capital return, strong (and better-than-expected) credit quality and an inexpensive starting point for valuations.
Banks are now trading well off their 2021 peaks, however, as the 10-year U.S. Treasury yield has retreated from its March highs and reflation expectations have cooled. Current valuations appear fair, and fundamentals are mixed, with the 10-year yield hovering around 1.3% and soft loan growth making it more challenging to reach net interest income expectations.
We believe loan growth is being held back by supply-side disruptions, the roll-off of small-business Paycheck Protection Program (PPP) lending, economic uncertainty and diminished demand for credit due to flush corporate and consumer balance sheets. We don’t expect these factors to be obstacles as we head into 2022.
Today’s market environment for banks and other financial services industries should create opportunities for bottom-up stock pickers. Among the ideas we favor are regional banks with strong expense controls leading to better operating leverage, select credit card names that are less dependent on interest rates and financial companies returning above-average levels of capital to investors via dividends and share buybacks.
Saira Malik is head of global equities at Nuveen.