The shares of UBS and Credit Suisse only outperform during selected periods, Vontobel financial analyst Andreas Brun tells finews.com in an interview. He reveals what disappointed him most this year.
Mr. Brun, are the shares of the big Swiss banks still a valid investment if you look at the loss in value over the past twenty years?
In the case of big bank stocks, we are not in favor of a blind buy-and-hold strategy over decades. Only during selected periods can outperformance be achieved with big bank stocks. A good example is the positive price performance of UBS in the current year - despite negative equity and bond markets.
Can you explain that in more detail?
The investment case for UBS is characterized by a rare convergence of attractive capital repatriation and positive growth momentum across all core divisions. In particular, the high level of share buybacks shows that management is also confident about the outstanding legal risks.
«In the first quarter, we started to expand our position in Zurich Insurance»
In the current year, we have been able to slightly raise our buyback assumptions four times. We expect a nearly double-digit increase in interest income in 2023, clearly a stabilizing factor against lower revenues on the lower base of customer assets under management.
Finally, we were also pleasantly surprised by the fact that UBS Wealth Management managed to attract a high level of new client assets despite adverse markets.
What were your personal favorites?
In the first quarter, we started to build up Zurich Insurance more strongly, which we never regretted during the year, even though the stock has now become a consensus buy. The latter is because most of the key benchmarks are outstanding, such as profitability, dividend, and cost trends.
«We were disappointed by the slump in Partners Group shares at the beginning of the year»
We value Zurich's securities in particular because in uncertain times because strong corporate results are achieved with high visibility and a reduced risk profile. The key price driver for us was above all the price trend, which should still outweigh inflation in the important commercial business until mid-2023. By then, the new catalysts should be able to unfold, including growth in the mid-market segment as well as in the European retail business.
What were your biggest disappointments last year?
The outbreak of the Ukraine war, rising global inflation rates, and higher interest rates have led to a high level of market volatility, the extent of which surprised us. The directionless pattern during the year made it very difficult to stay properly positioned.
We were disappointed by the slump in Partners Group shares at the beginning of the year. We are more cautious about the investment case, which will only pick up again when the refinancing market improves, making exits and new investments possible. Both drivers are also crucial for the future development of new money.
Has Credit Suisse been a disappointment?
We were not invested in Credit Suisse at any point, and we exited Leonteq early on. We realized that volume and margin development would collapse not only in the structured products business but also in all other segments heavily dependent on client trading activity. The expected record trading profit and strong dividend increase in the full year 2022 cannot compensate for the weakness in the core business and the too-high expectations in the next year.
As interest rates rise, will insurance stocks become more attractive than bank stocks?
As is so often the case, both sides of a coin need to be considered. While insurers stand to benefit in the medium term from rising interest rates in both life and non-life business, it is important not to ignore the fact that high inflation is the enemy of the insurance industry.
«The crucial point is the assessment of the inflation trend»
In addition, the catalyst of rising interest rates is relativized for us in that we consider this price driver to be priced into the vast majority of financial stocks, as the interest rate turnaround has already been the dominant theme in the sector since the beginning of the year.
In our portfolios, we do not map sector positions but define our allocation on bottom-up equity analysis, which will include both banking and insurance stocks in 2023.
Are there any arguments that speak against exposure to insurance stocks?
The crucial point is the assessment of inflation trends. On the one hand, there is a risk that higher claims costs cannot be compensated by the rising prices of insurance contracts, especially in the case of natural catastrophes and social inflation. On the other hand, negative inflation surprises may force insurance companies to undertake reserve strengthening.
While in 2023 the development of dividends and share buyback potential are unlikely to lose their high importance in the sector, for certain insurers the weighty exposure to the real estate market could become more of a focus, especially if net asset value (NAV) development turns negative.
What are the macroeconomic factors to watch out for in bank stocks in the coming year?
Right now, confidence for 2023 rises or falls with inflation and interest rate expectations in Europe and the US. Almost weekly, the market vacillates between the euphoria of an emerging slowdown in inflation and a stubbornly strong rise in prices that can only be broken by a forced recession.
«We always considered bank stocks as strong economic proxies»
Inflation is currently expected to peak in the EU and the US. We expect further interest rate hikes at a more moderate pace, which makes us more confident for 2023, especially for high-quality growth stocks.
We consider the development of the economy to be another key macroeconomic factor, as we always regard bank stocks as strong economic proxies. Only when the economy improves and confidence picks up can more new money flow and more client transactions and deals take place in investment banking.
To what extent will the interest rate turnaround have an impact on the further development of Swiss bank shares in the medium term?
The interest rate turnaround will not have a significant impact on banks' and insurance companies operating earnings statements until next year, because the majority of interest rate hikes, particularly in Switzerland and Europe, occurred in the second half of 2022.
«Any financial institution that is not in restructuring can consider itself lucky»
It is important to remember that for most asset managers, the negative effect of the decline in assets under management outweighs the positive contribution to earnings from interest rates. The turnaround in interest rates is unlikely to have an impact on share prices until not only interest income, which is priced in, but also commission income begins to rise.
According to which criteria are bank stocks attractive in the coming year?
Due to low visibility and strong market fluctuations, the focus in 2022 was strongly on dividend yields and share buybacks and less on growth and innovation.
Due to high financing costs and the resulting low deal activity, any institution that is not currently in a restructuring process is lucky. An important driver in 2023 would be if customer activity were to increase due to rising confidence.
Andreas Brun has been an equity analyst at Swiss investment house Vontobel for a year. Previously, he held similar positions at Credit Suisse, Mirabaud, and Zuercher Kantonalbank. He studied finance at the University of Basel and subsequently trained as an investment analyst (AZEK, CAIA Charter).
