Investment banks, which have struggled through almost three years of a bear market, are showing sign...
Investment banks, which have struggled through almost three years of a bear market, are showing signs of recovery.
Jeremy Sigee, an analyst at SchroderSalomonSmithBarney (SSSB), said European investment bank confidence indicators, equity market transaction volumes and revenues are all beginning to turn up.
For this reason SSSB is recommending an overweight position in the European investment bank sector.
Sigee said: 'However, they have also seen recovery in share prices and a re-rating to 13-22 times P/E multiples on our 2003 estimates. This gives investors a dilemma.
'These stocks are clearly vulnerable to any relapse in the recent market recovery and reversal of the flight to beta.'
However, he argued, on the positive side it could be argued that there are higher P/Es on these trough earnings and upside risk to earnings estimates from revenue recovery coupled with further delivery of cost savings.
Turning to specific recommendations, SSSB recommends UBS for investors seeking downside resilience, but its most bullish recommendation is Credit Suisse which offers a good value play.
He said: 'Confidence indicators have picked up from their recent low point. Equity markets have rallied 10%-15% from their early-October trough but remain hesitant, slipping back over the past week.
'Against this backdrop, the investment banking industry has seen steady equity trading volumes and modest stirrings in equity and bond issuance and M&A announcements.
'Recent interest rate cuts in the US and Europe and the return of steeper yield curves offer some stimulus to fixed-income markets. However, while revenues may be improving from third-quarter levels, year-on-year comparisons in 2003 should be challenging given the decline since the first half of 2002.'
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