Short US & European Banks


If you've accumulated bank stocks last year, you would have watched, with a sinking heart, the freefall of this sector's share prices from its once lofty perch. The result -- a decimated and tattered portfolio, testament to the crisis of confidence that has swept through the investment community.

Take Citigroup. The third-largest U.S. bank’s share price fell to an 18-year low of $2 last week. At its height in 2007, one share cost $55. Now, shareholders have to grapple with the prospect that their stock might be diluted.

Talk of possibly nationalizing some big U.S. banks has kept equity markets on edge in recent weeks, until Federal Reserve Chairman Ben Bernanke spoke on Tuesday to deflect those worries. But with the U.S. government reportedly in discussions with Citi that could lead to Washington taking up to a 40 percent stake in the bank, what are investors to make of these developments?

Short Western Banks

James Falkiner, Director & CEO of Falkiner Global Investors, says there's a lot of risk for both ordinary and preferential shareholders as banks need to be recapitalized.

“These banks need very significant amounts of new capitalization that is going to take some time to work its way through the system.” Says Falkiner on CNBC Asia Pacific’s “Protect Your Wealth”. “You can’t really offer much in way of comfort at this stage because the enormity of the losses yet to be taken is very significant.”

Falkiner cited the example of Japan to illustrate his point. "In 2002 or 2003, the five largest Japanese banks had a market capitalization that was about the same size as the five largest banks in Australia. Given the differences in the size of the economies, that tells you how low these things could be valued before they start to rise from the ashes."

Falkiner prefers to hold a market neutral strategy when at this point in time. He says there are opportunities to take short positions in U.S. and European banks, as well as industrials. He says he is inclined to reinvest that money in companies in the fertilizer and agricultural markets, and resource firms that have conservative balance sheets.

Comments? Questions? Send them in here.

Catch "Protect Your Wealth" on CNBC's Asia Pacific network every Tuesday on "CNBC's Cash Flow," Wednesday on "Asia Squawk Box" and Thursday on "Capital Connection."