Global financial stocks are down nearly 3.0% this year, while the broader MSCI World has gained 5.3%. US bank valuations have retreated as the Fed's appetite for interest rate rises evaporated. This has driven a compression in the price to book value to 1.3x, almost half the long-run average. Essentially, the financials appear cheap and the industrials appear expensive. The question to ask yourself, are bank valuations an opportunity or a value trap?
To answer this question, it is important to review our expectations and our long run success in predicting the future. If we cast our mind back to 2007-08, only months preceding the start of the Global Financial Crisis, investors had an expectation about the ability to source cheap money. The widely held consensus view, was that cheap and plentiful finance was a given. The analyst community would scold corporate managers for having a strong balance sheet, which…
