20180129-高盛-_Bank_-ing_on_EM_domestic_growth_25页_1mb

EM Strategy Views Summary

Core Content

The document provides an analysis of Emerging Markets (EM) bank stocks and their performance in relation to interest rates, macroeconomic conditions, and valuation trends. It highlights the differences in how EM and Developed Markets (DM) banks respond to interest rate changes and identifies specific EM markets where banks are expected to outperform in 2018.

Main Points

• Interest Rate Divergence: EM and DM have shown different responses to rising interest rates. While DM banks typically follow the yield curve, EM banks tend to perform inversely with interest rate levels, especially in high-yield economies.
• Bank Performance and Rates: In EM, bank stock performance is more closely linked to loan growth than net interest margins. This dynamic is influenced by the overall economic growth and the central banks' ability to cut rates.
• Valuation and Earnings: EM bank stocks appear relatively inexpensive compared to broader EM indices, with notable exceptions such as the Philippines. The document suggests that EM banks may offer attractive opportunities due to their alignment with improving domestic growth cycles.
• Sector Rotation: There is a recommendation to rotate from Information Technology (IT) to banks, as IT has outperformed significantly and the bar for outperformance has been high. Banks may offer better value as the growth cycle continues.
• Country-Specific Views: The document favors banks in Brazil, Russia, South Africa, India, and Mexico, while remaining cautious about Turkey due to persistent inflationary pressures.

Key Information

(1) Interest Rate Divergence and Bank Performance

• DM Banks: Move closely with the yield curve, with a strong correlation between interest rate changes and bank stock performance.
• EM Banks: Inversely correlate with interest rate levels, particularly in high-yield economies. This is attributed to:
  • Lower Risk Premia: Improved fundamentals and reduced risk premiums in EM.
  • Loan Growth Focus: EM banks are more influenced by loan volume than margin changes.

(2) Valuation and Earnings Trends

• Valuation: EM banks are relatively inexpensive in 12 of the 18 major EM equity markets, with the exception of the Philippines.
• Earnings Growth: EM banks are expected to benefit from rising credit growth and consumer activity. Earnings growth estimates for 2017 and 2018 indicate positive trends across several EMs.

(3) Country-Specific Analysis

• Brazil: Banks have historically outperformed during rate-cutting cycles. Expected rate cuts may continue to support bank performance.
• Russia: Banks have shown strong performance during the recent rate-cutting cycle. Continued rate cuts are expected.
• South Africa: Banks have outperformed following the December African National Congress vote. Further outperformance is anticipated as domestic growth improves.
• India: Banks have outperformed, with the expectation that the central bank will begin raising rates later in 2018, but near-term outlook remains strong.
• Mexico: Banks have outperformed in recent years but lost alpha in late 2017 due to rate hikes. Political risks may affect the relationship between banks and local rates.
• Turkey: Banks are viewed with caution due to inflationary pressures and the deterioration of the central bank's inflation-targeting credibility.

(4) Macroeconomic Forecasts and Policy Trends

• GDP Growth: Expected to rise in several EMs, with Brazil, India, and South Africa showing the most potential.
• Inflation: Projected to decrease in most EMs, with Turkey being an exception due to high inflation rates.
• Policy Rates: Expected to remain stable or decrease in several EMs, particularly Brazil, Russia, and South Africa, while increasing in others like Mexico and Turkey.
• FX Forecast: Several EMs are expected to see currency appreciation, which could benefit bank stocks in South Africa and others.

(5) Valuation Metrics

• P/E and P/B: EM banks are generally valued at lower P/E and P/B ratios compared to broader EM indices, with some exceptions.
• D/Y (Dividend Yield): Indicates potential for dividend income, which is attractive in a low-growth environment.
• Z-Score: Reflects the relative valuation and risk of different asset classes, with EM banks generally showing higher Z-scores than other asset classes.

Conclusion

The document concludes that EM bank stocks present an attractive investment opportunity, especially in the context of improving domestic growth and the potential for rate cuts. It emphasizes the importance of valuation and the unique dynamics of EM bank performance, which are driven more by loan growth than by interest margins. Investors are advised to consider a rotation from IT to banks, with a focus on specific countries where the macroeconomic environment is favorable.