According to macro guru Hugh Hendry, the US banking sector could see its stock prices fall over the next 16 months.
Into a new one interview with Kitco News, the former chief investment officer of hedge fund Eclectica Asset Management says U.S. bank stocks could witness a deep devaluation if the economy goes through a recession.
“Sometimes I’m a bit unhinged. Sometimes I get a foreboding of what’s going to happen to us, but when I trade, I trade with the certainty that I don’t know when it’s going to happen, and I usually practice a series of strategies where I have two years to prove me right or wrong.
And this is a two-year operation, which began for me [from] between the beginning of this year and the end of next year. I would say, to use your word ‘danger’ there is great danger and uncertainty, the uncertainty is that the economy could slow down quite dramatically and the provisioning for credit and impairments within the financial sector could escalate and the valuation of banking stocks and other financial stocks.”
Hendry continues that in difficult financial times, top banking institutions tend to see their market capitalization fall to a number close to their equity value.
“JPMorgan today, clearly a best-in-class entity, as everyone tells me, the people who wear suits, they tell me, ‘It’s a great bank!’ Okay, it has a market cap of almost $450 billion dollars Its shareholder funds [is] over $290 [billion]and if we get danger, those two figures will move closer together.
Usually during a recession you see even the best bank franchises being pulled towards the net asset value [or] their shareholder funds, so I would say my suspicion is that there is significant price risk in the financial sector and even the overall stock market globally.
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Image generated: Midway through the journey