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Canadian banks have made an appearance on a U.S. strategy note from Bank of America – but if you're hoping that they'll be singled out as pillars of strength in a shaky financial landscape, read no more.
Michael Hartnett, chief investment strategist, is sticking to his forecast that equities are in the early stages of a so-called Great Rotation, as investors move out of bonds and into stocks. It could take years, and he believes it will support the U.S. dollar and U.S. banks.
But if investors really want to take advantage of this trend, he recommends going "long" U.S. banks while short-selling (or betting against) Canadian banks. In fact, he calls this one of his favourite trades.
Mr. Hartnett is, unfortunately, short on details here. However, he does provide a chart comparing the MSCI U.S. financials relative to Canadian banks, which implies that U.S. financials are a steal right now.
Here's our own breakdown: The KBW Bank index, which consists of U.S. banks, has fallen 26.3 per cent over the past five years, after factoring in dividends. Canadian banks have risen nearly 60 per cent over this period, for an amazing – though hardly surprising – difference of 86.3 percentage points.
However, things have been shifting this year. U.S. banks have risen 10.1 per cent in 2013, after dividends, which is more than double the 4.7 per cent gain by Canadian banks.
U.S. banks do seem to have a lot of upside if their financial health returns and the U.S. housing market continues to improve. Canadian banks, though, are facing a potentially tough environment, with a creaking housing market and signs of a deteriorating economy.
Add in the relative strength of the U.S. dollar over the Canadian dollar – it's up more than 6 per cent since September – and you can see where Mr. Hartnett's trade is coming from.
David Berman