By the early months of 2017, many people were reflecting on the nine years since the economic crisis of 2008 and wondering about the fate of bank shares. Would it ever be worth investing in them again or had their time passed? The answers to these questions are not simple and involve the consideration of many factors, and though this is often the case it is especially so when we come consider banks and bank shares. To give an example of the complex nature of the question, let us consider for the moment the performance of banking shares in 2016.
2016 was a year of rally, with the global banking sector returning 13.7% with dividends. American and British banks performed especially strongly, but European and Asian banks were not too far behind. On the face of it, bank shares are definitely worth your consideration, at least if we take this short term performance into account. The problem occurs, however, when we look at the long rather than the short term. The gains made by bank shares in 2016 came after years of continuous underperformance. Even by 2017, the world banking index stood 14.1% lower than it had been ten years earlier. We can then see that while recovery is a good sign, it is recovery from a deep financial trough, and the recovery is by no means complete. The short term investor in bank shares could have profited from the performance in 2016; the long term investor may still be licking his or her wounds after the disastrous events of 2008. We should also remember the way that banks and banking have changed since 2008 before we answer the question posed in the title of this piece. The crisis had many consequences; one was the increased regulatory role taken by governments all over the world. While this has led to increased stability it has undoubtedly also affected the speed of the recovery of bank shares. So too have the changed policies now being followed by the leading banks, which have tended to ‘de-risk’ their businesses. The big four UK banks, RBS, HSBC, Barclays and Lloyds have all taken steps to ensure that they hold far greater amounts of equity relative to their incurred liabilities. Some analysts noted that the markets did not seem to be taking these actions into account, which might be unfortunate for the markets and yet fortunate for those who happen to hold shares in those banks.
However, the question remained complex and other factors influenced the performance of bank shares in 2016 and 2017. For instance, some considered that a part of the 2016 rally was caused by the rhetoric of Donald Trump, both before and after he was elected. Mr Trump proposed pro-spending steps, including massive infrastructure investment, which would have led to higher interest rates. However, by June 2017 Congress was passing a deal which slashed government spending and seemed to go against the spirit of Mr Trump’s suggestions. How bank shares fared in light of this news was at that time unclear.
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