Concerns about asset quality, flattening yield curves, and tightening liquidity have meant a weak start to the year for financials - including banks and insurers. However, we believe the concerns are generally overdone given low valuations, manageable exposure to the energy sector, adequate capital positions and continued central bank liquidity provision in case of emergency. In this context, we think investors should maintain a preference for stocks in the European financial sector. On U.S. financials, we remain neutral.
The sudden concerns about global financials that erupted in February have caught markets by surprise. The MSCI Europe Financials equity index is down by 20.2 percent year-to-date, and U.S. financials have fallen 12.8 percent in 2016.