WEBVTT - Bill Fitzpatrick: Central Banks May Be Coming To Their Senses

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<v Speaker 1>Global business news twenty four hours a day at Bloomberg

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<v Speaker 1>This is a Bloomberg Business Flash from Bloomberg World Headquarters.

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<v Speaker 1>I'm Charlie Pallid. SMP five hundred index trading at a

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<v Speaker 1>record The SMP also heading for its fifth monthly gain

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<v Speaker 1>after data showing the US economy grew slower than forecast

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<v Speaker 1>last quarter. That gave the Federal Reserve no reason to

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<v Speaker 1>accelerate its timetable for higher interest rates. Earnings from Alphabet

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<v Speaker 1>also boosting technology shares that's the parent of Google, up

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<v Speaker 1>now by three and a half percent. Mixed picture for

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<v Speaker 1>equities SMP up six to seventy six. Again, there are

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<v Speaker 1>three tenths of one percent the down lower little change down.

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<v Speaker 1>Industrials down three points now, NaNs stack up twelve, a

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<v Speaker 1>gain of two tenths of one percent. Gold up one

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<v Speaker 1>and a half percent, rallying nineteen fifty ounce to thirteen

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<v Speaker 1>fifty one. Crude Oil West Texas Intermediate up thirty five

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<v Speaker 1>cents of Arrete gained narrow of nine tenths of one percent.

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<v Speaker 1>I'm Charlie Pellett, and that's a bloom Bread Business flash

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<v Speaker 1>thank you very much, Charlie Pellett. It's time now for

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<v Speaker 1>the e t F Report. It's brought to by Sector

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<v Speaker 1>eight six six Sector e t F. Let's go to

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<v Speaker 1>Katherine Cowdery for the Exchange Traded Funds Report. Millennials are

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<v Speaker 1>doubling down on e t s. That's the word from

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<v Speaker 1>Heather Fisher, vice president of e t F Platform at

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<v Speaker 1>Charles Schwab. She outlined some of the findings about millennials

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<v Speaker 1>from the Schwab e t F Investors study. They are

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<v Speaker 1>twice as likely to increase their investments in ets in

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<v Speaker 1>the next year as other demographics, white is likely to

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<v Speaker 1>consider e t s instead of stocks, and twice as

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<v Speaker 1>likely to consider replacing bonds in their portfolios with e

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<v Speaker 1>t s. And I'd say that versus thirty percent of

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<v Speaker 1>the rest of investors view e t s as the

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<v Speaker 1>core dostment type in their future portfolio. Fisher says millennials

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<v Speaker 1>may be comfortable with using e t s is their

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<v Speaker 1>core portfolio holdings in part because they've grown up knowing

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<v Speaker 1>about them ets were launched over twenty years ago. Among

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<v Speaker 1>the top reasons that millennials site for using A t S,

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<v Speaker 1>according to the survey, because they provide access to several

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<v Speaker 1>asset classes, broadening investing horizons. They also sided the ease

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<v Speaker 1>of the interday trading and e T S tax efficiency.

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<v Speaker 1>That's your Bloomberg at F report. I'm Katherine Cowdery. This

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<v Speaker 1>is taking Stock with PIM Box and Kathleen Hayes on

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<v Speaker 1>Bloomberg Radio. All right, I'm actually filling in for Kathleen Hayes.

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<v Speaker 1>Matt Miller here with PIM Fox, and we're gonna bring

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<v Speaker 1>in Bill Fitzpatrick right now global equity analysts and Manu

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<v Speaker 1>Life Asset Management UH to talk about the Bank of

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<v Speaker 1>Japan and international equities. And Bill, let me start with

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<v Speaker 1>the b o J because it's I think such an

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<v Speaker 1>exciting story. Um, but they kind of disappointed markets today.

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<v Speaker 1>They didn't lower interest rates though into further negative territory.

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<v Speaker 1>Does that mean that they get negative rates are bad

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<v Speaker 1>for banks? Yes, I think they finally figured that out.

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<v Speaker 1>And the good news is that other policy makers around

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<v Speaker 1>the globe I think around the same page. Oh, absolutely,

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<v Speaker 1>dragging has sent a very clear message that bank equity

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<v Speaker 1>prices matter. I think you're unlikely to see them go

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<v Speaker 1>further negative in Europe, and in fact, whatever policymaker moves

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<v Speaker 1>you see, I think there's going to be a notion

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<v Speaker 1>to protect the bank stocks. And I think that's that

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<v Speaker 1>has to happen in Europe only because the whole economy

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<v Speaker 1>is financed by the banks. They don't have a very

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<v Speaker 1>deep capital markets. So I think that message is is uh,

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<v Speaker 1>it's finally coming through. I think that's very encouraging. Bill.

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<v Speaker 1>And what if you could describe for people in your

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<v Speaker 1>in your in your mind, what are the problems in

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<v Speaker 1>European Union banks? While there are there are several h

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<v Speaker 1>The first problem is that you're just in a low

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<v Speaker 1>growth economy. UH, so you're not seeing a lot of

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<v Speaker 1>loan growth. It's very difficult for them to grow the

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<v Speaker 1>loan book. Uh. The second component, which I think is

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<v Speaker 1>probably most pressing today, is that we never really got

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<v Speaker 1>the bad assets off the balance sheets. So if you

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<v Speaker 1>think back to the tarp here in the US that

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<v Speaker 1>was done all the way back in two thousand and eight,

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<v Speaker 1>two thousand nine with cleans the balance sheets and we're

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<v Speaker 1>able to get the banking environment operating smoothly right away.

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<v Speaker 1>We never really did that here. Now a few countries did.

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<v Speaker 1>They did in Spain, they've done in Ireland. Uh, not

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<v Speaker 1>to say that they're growing dramatically, but they did a

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<v Speaker 1>nice job there to clean up the balance sheets. But

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<v Speaker 1>we still haven't done that in Italy. Uh. That's the

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<v Speaker 1>biggest overhang today. And until we can address that problem,

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<v Speaker 1>I think you're going to see the bank stocks are

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<v Speaker 1>probably going to be stagnant. Does this mean that you'd

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<v Speaker 1>be willing to take on more risks outside of bank stocks? Well,

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<v Speaker 1>I think generally speaking, Uh, there's a lot of value.

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<v Speaker 1>There's certainly a lot of value in the banking system

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<v Speaker 1>in Europe and Japan. And I think once we get

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<v Speaker 1>this uh this issue addressed in Italy, which will likely

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<v Speaker 1>be in the next couple of days, only because we

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<v Speaker 1>get the stress tests out today. But the only speaking,

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<v Speaker 1>there's this plain better value in Europe and Japan than

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<v Speaker 1>there is in the United States. Uh. There's a few

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<v Speaker 1>of the more stable areas of healthcare and consumer stables

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<v Speaker 1>where you're seeing relatively lofty valuations, but any of the

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<v Speaker 1>more cyclical areas have sold off dramatically, and I think

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<v Speaker 1>there are a lot of good opportunities there. I just

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<v Speaker 1>wanted to bring our listeners the headline just crossing the

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<v Speaker 1>Bloomberg terminal, the Italian Treasury is saying that no public

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<v Speaker 1>backstop is needed for Montepachi, and we know that of course, uh,

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<v Speaker 1>Montapachi is going to try and raise money here an

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<v Speaker 1>additional five billion dollars and get rid of its bad loans,

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<v Speaker 1>as we've been talking about for the past couple of hours.

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<v Speaker 1>Past hour, I should say, um, I wonder who would

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<v Speaker 1>want to buy stock in an Italian bank? I mean,

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<v Speaker 1>isn't it just a losing investment. Well, it's certainly for

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<v Speaker 1>the deeper value and deeper value oriented investor UH somewhere

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<v Speaker 1>who just seems to navigate in the distressed areas in

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<v Speaker 1>the marketplace. But I have to say, just see look

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<v Speaker 1>at the headline. Now, this is very encouraging that there

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<v Speaker 1>is private capital available. So you have to assume that

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<v Speaker 1>this money is coming from folks who have who have

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<v Speaker 1>really fowered the balance sheets of these different banks. Uh,

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<v Speaker 1>they're getting very favorable terms. I'm sure I haven't seen

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<v Speaker 1>exactly what kind of a discount of getting it's going

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<v Speaker 1>to be massively dilutive to existing shareholders. So UH, this

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<v Speaker 1>outside money is going to committed very favorable terms. But

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<v Speaker 1>I think there's an effort to say, hey, you know,

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<v Speaker 1>we think the balance she's collectively in Italy are going

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<v Speaker 1>to be cleansed. And if if that's the case, now

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<v Speaker 1>there's about a thirty or forty billion eurosword fall collectively

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<v Speaker 1>in Italy. But if there are efforts to address those

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<v Speaker 1>in unison, then there may be some value in this

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<v Speaker 1>particular Italian bank. We are seeing UM in the news

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<v Speaker 1>that JP, Morgan, Goldman, Sachs, UH, City Bank America they're

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<v Speaker 1>all going to get together with a bunch of European

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<v Speaker 1>banks as well to UH to underwrite this share sale.

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<v Speaker 1>So it looks like those banks at least believe that

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<v Speaker 1>they can do it. Bank, UH Bank, Amounted, Depasta d Sienna.

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<v Speaker 1>I want to remind listeners was bailed out twice already

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<v Speaker 1>since UM, since two thousand nine. But if we get

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<v Speaker 1>past this issue, does that make the EU stronger and

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<v Speaker 1>a better place to invest? Oh? I think so if

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<v Speaker 1>this goes a long way, Like I said, there are

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<v Speaker 1>other areas that have already removed some of the bad assets. Uh.

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<v Speaker 1>That's not to say there aren't a few more of

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<v Speaker 1>bad apples out there that will need to be addressed.

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<v Speaker 1>But what we'd really like to see is move from

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<v Speaker 1>a balance sheet concern to an income statement. And if

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<v Speaker 1>we can get beyond the balance sheet saying, Okay, the

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<v Speaker 1>income statement is still weak. We know that interest rates

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<v Speaker 1>are so low, the margins are down, that's going to

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<v Speaker 1>be a weight. But if there's a comfort in the

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<v Speaker 1>balance sheets, then there's really no reason for these bank

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<v Speaker 1>stocks to trade at half their book value. So I

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<v Speaker 1>think there are real good opportunities for value investors there. Well,

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<v Speaker 1>let me just challenge a little bit here, because I

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<v Speaker 1>note that you're describing the European Banking Authority is due

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<v Speaker 1>to give its a stress test results for sixteen that

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<v Speaker 1>will take place at ten pm Central European time. That's

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<v Speaker 1>just in about the six minutes from now. And there's

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<v Speaker 1>another study that has done from the New York University

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<v Speaker 1>that says that the European banks such as HSBC, Deutsche Bank,

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<v Speaker 1>UNI Credit that they're gonna need to raise two hundred

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<v Speaker 1>and eighty billion dollars in capital in order to meet

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<v Speaker 1>the same standards that have been specified by the US

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<v Speaker 1>Federal Reserve. Uh. Do you concur that they're gonna need

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<v Speaker 1>that much money? Well, I don't know exactly the terms

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<v Speaker 1>of the scenario that would require a capital raise of

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<v Speaker 1>that magnitude, but I suspect that's an armageddon end of

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<v Speaker 1>the world scenario that would trigger such a capital needs

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<v Speaker 1>UH to that degree. Uh. So you again, I haven't

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<v Speaker 1>seen the survey in great details, So Uh, technically that

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<v Speaker 1>may be true, you know, but I think we'd have

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<v Speaker 1>to see just a very massive recession. It's a trigger

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<v Speaker 1>of conditions like that, and I just think that's that's

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<v Speaker 1>unlikely today. So Europe's largest banks, they've gotten rid of

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<v Speaker 1>about thirty of their market value that's declined since UH

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<v Speaker 1>as of June, and UM their average ratio of market

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<v Speaker 1>value to book value was like se that's got to

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<v Speaker 1>be concerning for for the bank's managements. Well, that's certain.

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<v Speaker 1>That's a message that the marketplace isn't very comfortable with

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<v Speaker 1>with what resides on the balance sheet. And it's also

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<v Speaker 1>a reflection of the returns. So the book you really

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<v Speaker 1>can't talk about the book value without talking about the

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<v Speaker 1>return on equity. UH. And for most of these banks,

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<v Speaker 1>you're still seeing high single digit leaves, but from evaluation perspective,

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<v Speaker 1>and get that up to ten, which is uh, certainly

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<v Speaker 1>nothing spectacular. It's just a head of your cost of equity. Uh.

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<v Speaker 1>And then I think you're probably look for valuations should

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<v Speaker 1>push closer to book value. So if you go from

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<v Speaker 1>seven tents of book value, as you say, uh, towards

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<v Speaker 1>book value or maybe just a slight premium, you're talking

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<v Speaker 1>about a gain that is available. So and we think

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<v Speaker 1>if the balance you took good uh. And we are

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<v Speaker 1>seeing from the earnings releases that have come out thus far,

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<v Speaker 1>credit quality has improved. Uh. You know, then there's no

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<v Speaker 1>reason why why we can't get closer to that temper

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<v Speaker 1>cent r OE. And you also have nice downside protection

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<v Speaker 1>if you think the balance sheets are good, so reasonable

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<v Speaker 1>downside protection and very good upside. I think that's uh,

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<v Speaker 1>that's an area where investors should look to find some games.

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<v Speaker 1>Thank you very much, sure for joining us. A. Bill

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<v Speaker 1>Fitzpatrick is a global equity analyst at Manual Life Asset Management,

0:10:43.360 --> 0:10:47.920
<v Speaker 1>looking for some value and some bargains, perhaps in European

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<v Speaker 1>banking shares. I'm pim Fox. My co host today Matt

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<v Speaker 1>Miller filling in for Kathleen Hayes. We're gonna take you

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<v Speaker 1>through to the close and also get you details about

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<v Speaker 1>the European Banking Authority and its stress tests. They will

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<v Speaker 1>be released at the market close, four pm Wall Street time.

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<v Speaker 1>This is Bloomberg h