Short-sellers who bet against European banks are set to lose a substantial amount of money in April after the sector bounced back from the shock downfall of Credit Suisse (CSGN.S) in anticipation of strong quarterly earnings.
Investors who set up bearish trades believing the sector’s stock prices would fall further have lost an estimated $1 billion so far this month, according to analytics firm Ortex, after making $2.7 billion in March, their largest profit on European bank short positions in more than a year.
“Rate hikes have significantly boosted interest income and that’s not going to fall right now. It is not time yet to leave the financials out of your portfolio,” said Carlo Franchini, head of institutional clients at Banca Ifigest in Milan.
Only a few weeks ago, at the peak of the banking turmoil, markets were bracing for a deep downturn and even for central banks to reverse course and start cutting interest rates.
“Banks fail to reflect the positive impact of interest rates so far, they have much stronger capital bases than they’ve had in other times of economic weakness and therefore the European Central Bank has continued to approve (share) buybacks,” said James Rutland, fund manager at Invesco in London, which has its biggest overweight position within financials.
According to Refinitiv IBES, European financials should report first quarter earnings growth of 31% – the bulk of corporate earnings growth in Europe – with full-year growth forecast at 19.5%.
But a Bank of America survey showed fund managers cut bank exposure in April to the lowest since May 2020, as they piled into more recession-proof defensive sectors.
One area of concern is exposure to commercial real estate and investors will be alert to any sign of emerging stress as European lenders report earnings next week.
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