- Instruments
Your capital is at risk if you invest. You could lose all your investment. Please see the full risk warning here.
In a recent article that discussed the components of the S&P 500, we had stated that ETFs based on Oil & Gas as well as Financials had been showing a subtle increase in volumes. While the value proposition and outlook for the energy sector was outlined in an earlier article, the outlook for financials merits a more detailed analysis.
The Year So far
The outlook for the banking industry in 2022 had largely been upbeat, given how sector performance is strongly correlated with events such as the reserve releases and improving loan growth, better investment manager performance, rising premiums and insurance, property price indexes in real estate in recent times. However, U.S. inflation rates hitting 40-year highs present a scenario that historically witnesses gold prices rising if efforts to contain inflation don’t have significant effect. Over the months since the new year, there has been little sign of abatement in price increases for household goods, food and energy even before Russia’s “special military operation” in Ukraine.
Meanwhile, crypto investments, while increasing in volume, hasn’t seen nearly the same immunity to “fiat” market events that some popular crypto proponents had long asserted in the past. For example, while Bitcoin ushered in the new year with a 62.3% increase in value on a year-on-year basis, it rapidly shed 19% over the course of January. While prices did improve over the next month, March began with the benchmark cryptocurrency down nearly 7% relative to the new year and April began with it being 3% down.
Gold, financial stocks and cryptocurrencies can broadly be considered as the equivalent “money” instruments: in some way or form, they either “represent” wealth or “process” wealth. For gold, lets consider the VanEck Vectors Gold Miners ETF (GDX) while the financial sector is represented by the the Financial Select Sector SPDR ETF (XLF). To zero in on the banking sector specifically, lets also consider the stocks for HSBC, Barclays, JPMorgan, Citigroup and Goldman Sachs.
ETF Comparison
Just as with the ETF analysis executed in the article on energy instruments, ratios are calculated in the constituent average as well as weighted average format over a series of one-year windows – plus two additional points in the current year – in order to evaluate the two ETFs.
Going on analysis on the basis of weighted-average trends, the following can be observed:
As a whole, XLF is relatively less overvalued than GDX.
GDX has high Price to Earnings (PE) Ratios in mid-2019 which had pared down to 3-year lows of around 20 before rising up to nearly 29 in the present. In contrast, XLF’s PE Ratio – after a modest high in mid-2021 – are inching downwards in the present.
GDX’s Price to Sales (PS) Ratio – barring that seen in January 2022 – has been in a “steady state” for at least 3 years. This is the case with XLF as well.
An interesting observation can be seen in the data in January 2022: GDX’s average Price to Sales Ratio is extremely high. This is due to ETF constituent Capricorn Metals Ltd, which had a PS Ratio of over 11,210 and a Price to Book (PB) Ratio of over 8.9. The weighted average method made the ETF’s PS Ratio a relatively reasonable value of 40.57. While, in general, gold miners’ forward-looking outlook over their business lends a slightly greater edge in its valuation, it can be seen in general that both ETFs are mostly comprised of stable and reasonably valued companies.
Now, lets consider the banks.
Global Banks: A Little More to The Picture
Now, lets consider global banks’ performance with the very same ratios and timeframes.
The following patterns are observed:
All the banks have seen a drop-off in PE Ratios, with Barclays being the most affected.
Only Goldman Sachs shows a net increase in PS Ratio while Citigroup shows the biggest decrease.
Only JPMorgan and Goldman Sachs show a net increase in PB Ratio while Barclays shows the biggest decrease.
Also, in terms of short interest recorded in U.S.-based instruments (i.e. the ADRs of Barclays and HSBC in this case), Barclays and HSBC have had a substantial increase in short interest, along with Citigroup. However, it is evident that short interest in JPMorgan and Goldman Sachs have also registered a significant uptick in the year till date.
It’s not immediately evident how much the current economic outlook affects the banks’ investment banking and trading divisions. While SPACs face increasing regulatory pressure and IPOs are estimated to witness a slowdown, virtually every major U.S. bank (and likely other global banks) anticipates an increase in trading revenue. On the other hand, debt-related activities forms a major part of most banks’ revenue streams. While this data is not available on a daily basis, trends seen until the end of last year highlight a few key developments.
It can be noticed that while Goldman Sachs has registered a net increase in “loans relative to deposits” as well as “loans relative to assets”, it has also witnessed an increase in non-performing loans that is second to HSBC in terms of rate of increase. Outside of Goldman Sachs, all other banks here have had decreasing loans relative to deposits as well as loans relative to assets. These statistics seem to be indicative of a larger issue: it’s quite likely that rising inflation is affecting the debt-repayment abilities of many businesses and wage-earners tin the U.S.
Price Trends and Trajectories
Across the time horizon considered, the trends in instrument performance – in comparison to gold futures and Bitcoin – show some distinctive characteristics.
In effect;
Both gold miners and gold futures have seen a substantial increase in the year till date (YTD). However, the gold miners show a little more volatility relative to gold. This is likely a function of these stocks being relatively overvalued; overvaluation typically imparts more a reactionary characteristic to market events and news.
Bitcoin’s performance – as indeed that of every major cryptocurrency – shown a strong correlation with “fiat” market events during the downturn seen over the past several months. This effectively implies that, at least in the present paradigm, cryptocurrencies cannot become an effective replacement for the “storehouse of value” status that a classical element like gold has.
While virtually every bank has shown a downturn in the YTD, HSBC is an outlier in that it hasn’t. This is suggestive of the idea that investors don’t think of any possible recessionary behaviour being a significant impediment in the Eastern Hemisphere – an important area of focus for HSBC.
With regard to XLF’s constituents outside of banks, it bears noting that companies with significant connections to market trading such as MSCI, CME Group, MarketAxess, Moody’s and S&P Global have both high PS and PE Ratios relative to those seen in banks. While their relative weights are quite low, it represents a welcome source of diversification. Whether this pans out over the year to come or whether there will be a “ratio cool-off” remains to be seen.
However, given the trajectories, practically any investor with an exposure to the “business of money” but without an exposure in gold-related assets would be remiss. The trajectories seen in light of the current economic scenario highlights precisely how gold-related assets play a crucial role in stabilizing portfolio value.
Your capital is at risk if you invest. You could lose all your investment. Please see the full risk warning here.
Share this:
By subscribing here, you agree with our Privacy Policy and you will receive our newsletters. You can unsubscribe at any time by following the link at the bottom of each newsletter.
The ETP securities are intended for sophisticated investors who (i) are able to monitor their investment in the ETP securities on a frequent basis in line with the recommended holding period; (ii) understand the risk of compounded returns and the increased risk of investment in leveraged products; (iii) can afford to risk losing their investment; and (iv) and have a very short investment horizon in line with the recommended holding period. Please ensure that you fully understand the risks involved. If in any doubt, please seek independent financial advice. Investors should refer to the section entitled “Risk Factors” in the relevant prospectus for further details of these and other risks associated with an investment in the securities offered by the Issuer. This material is not intended to be relied upon as a forecast, research or investment advice and is not a recommendation, offer or solicitation to buy or sell any financial instrument or product or to adopt any investment strategy. Any decision to invest should be based on the information contained in the relevant base prospectus after seeking independent investment, tax and legal advice.
Never miss out on important announcements. Get premium content ahead of the crowd. Enjoy exclusive insights via the newsletter only.
Terms and Conditions
Notice
If you are not classified as an institutional investor, you will be categorised as a private/retail investor. At this time, we cannot send communications directly to private/retail investors. You are welcome to view the contents of this website.
If you are an ‘Institutional investor’, you affirm either that you are a Per Se Professional Client, or that you wish to be treated as an Eligible Counterparty Client, both as defined under the Markets in Financial Instruments Directive, or an equivalent in a jurisdiction outside the European Economic Area.
Risk Warnings
The value of an investment in ETPs may go down as well as up and past performance is not a reliable indicator of future performance. Trading in ETPs may not be suitable for all types of investor as they carry a high degree of risk. You may lose all of your initial investment. Only speculate with money you can afford to lose. Changes in exchange rates may also cause your investment to go up or down in value. Tax laws may be subject to change. Please ensure that you fully understand the risks involved. If in any doubt, please seek independent financial advice. Investors should refer to the section entitled “Risk Factors” in the relevant prospectus for further details of these and other risks associated with an investment in the securities offered by the Issuer.
This website is provided for your general information only and does not constitute investment advice or an offer to sell or the solicitation of an offer to buy any investment.
Nothing on this website is advice on the merits of any product or investment, nothing constitutes investment, legal, tax or any other advice nor is it to be relied on in making an investment decision. Prospective investors should obtain independent investment advice and inform themselves as to applicable legal requirements, exchange control regulations and taxes in their jurisdiction.
This website complies with the regulatory requirements of the United Kingdom. There may be laws in your country of nationality or residence or in the country from which you access this website which restrict the extent to which the website may be made available to you.
United States Visitors
The information provided on this site is not directed to any United States person or any person in the United States, any state thereof, or any of its territories or possessions.
Persons accessing this website in the European Economic Area
Access to this site is restricted to Non-U.S. Persons outside the United States within the meaning of Regulation S under the U.S. Securities Act of 1933, as amended (the “Securities Act”). Each person accessing this site, by so doing, acknowledges that: (1) it is not a U.S. person (within the meaning of Regulation S under the Securities Act) and is located outside the U.S. (within the meaning of Regulation S under the Securities Act); and (2) any securities described herein (A) have not been and will not be registered under the Securities Act or with any securities regulatory authority of any state or other jurisdiction and (B) may not be offered, sold, pledged or otherwise transferred except to persons outside the U.S. in accordance with Regulation S under the Securities Act pursuant to the terms of such securities. None of the funds on this website are registered under the United States Investment Advisers Act of 1940, as amended (the “Advisers Act”).
Exclusion of Liability
Certain documents made available on the website have been prepared and issued by persons other than Leverage Shares Management Company. This includes any Prospectus document. Leverage Shares Management Company is not responsible in any way for the content of any such document. Except in those cases, the information on the website has been given in good faith and every effort has been made to ensure its accuracy. Nevertheless, Leverage Shares Management Company shall not be responsible for loss occasioned as a result of reliance placed on any part of the website and it makes no guarantee as to the accuracy of any information or content on the website. The description of any ETP Security referred to in this website is a general one. The terms and conditions applicable to investors will be set out in the Prospectus, available on the website and should be read prior to making any investment.
Leverage Investment
Leverage Shares exchange-traded products (ETPs) provide leveraged exposure and are only suitable for experienced investors with knowledge of the risks and potential benefits of leveraged investment strategies.
Cookies
Leverage Shares Management Company may collect data about your computer, including, where available, your IP address, operating system and browser type, for system administration and other similar purposes (click here for more information). These are statistical data about users’ browsing actions and patterns, and they do not identify any individual user of the website. This is achieved by the use of cookies. A cookie is a small file of letters and numbers that is put on your computer if you agree to accept it. By clicking ‘I agree’ below, you are consenting to the use of cookies as described here. These cookies allow you to be distinguished from other users of the website, which helps Leverage Shares Company provide you with a better experience when you browse the website and also allows the website to be improved from time to time. Please note that you can adjust your browser settings to delete or block cookies, but you may not be able to access parts of our website without them.
This website is maintained by Leverage Shares Management Company, which is a limited liability company and is incorporated in Ireland with registered offices at 2 Grand Canal Square, Grand Canal Harbour, Dublin 2.
By clicking you agree to the Terms and Conditions displayed.
Terms and Conditions
Notice
If you are not classified as an institutional investor, you will be categorised as a private/retail investor. At this time, we cannot send communications directly to private/retail investors. You are welcome to view the contents of this website.
If you are an ‘Institutional investor’, you affirm either that you are a Per Se Professional Client, or that you wish to be treated as an Eligible Counterparty Client, both as defined under the Markets in Financial Instruments Directive, or an equivalent in a jurisdiction outside the European Economic Area.
Risk Warnings
The value of an investment in ETPs may go down as well as up and past performance is not a reliable indicator of future performance. Trading in ETPs may not be suitable for all types of investor as they carry a high degree of risk. You may lose all of your initial investment. Only speculate with money you can afford to lose. Changes in exchange rates may also cause your investment to go up or down in value. Tax laws may be subject to change. Please ensure that you fully understand the risks involved. If in any doubt, please seek independent financial advice. Investors should refer to the section entitled “Risk Factors” in the relevant prospectus for further details of these and other risks associated with an investment in the securities offered by the Issuer.
This website is provided for your general information only and does not constitute investment advice or an offer to sell or the solicitation of an offer to buy any investment.
Nothing on this website is advice on the merits of any product or investment, nothing constitutes investment, legal, tax or any other advice nor is it to be relied on in making an investment decision. Prospective investors should obtain independent investment advice and inform themselves as to applicable legal requirements, exchange control regulations and taxes in their jurisdiction.
This website complies with the regulatory requirements of the United Kingdom. There may be laws in your country of nationality or residence or in the country from which you access this website which restrict the extent to which the website may be made available to you.
United States Visitors
The information provided on this site is not directed to any United States person or any person in the United States, any state thereof, or any of its territories or possessions.
Persons accessing this website in the European Economic Area
Access to this site is restricted to Non-U.S. Persons outside the United States within the meaning of Regulation S under the U.S. Securities Act of 1933, as amended (the “Securities Act”). Each person accessing this site, by so doing, acknowledges that: (1) it is not a U.S. person (within the meaning of Regulation S under the Securities Act) and is located outside the U.S. (within the meaning of Regulation S under the Securities Act); and (2) any securities described herein (A) have not been and will not be registered under the Securities Act or with any securities regulatory authority of any state or other jurisdiction and (B) may not be offered, sold, pledged or otherwise transferred except to persons outside the U.S. in accordance with Regulation S under the Securities Act pursuant to the terms of such securities. None of the funds on this website are registered under the United States Investment Advisers Act of 1940, as amended (the “Advisers Act”).
Exclusion of Liability
Certain documents made available on the website have been prepared and issued by persons other than Leverage Shares Management Company. This includes any Prospectus document. Leverage Shares Management Company is not responsible in any way for the content of any such document. Except in those cases, the information on the website has been given in good faith and every effort has been made to ensure its accuracy. Nevertheless, Leverage Shares Management Company shall not be responsible for loss occasioned as a result of reliance placed on any part of the website and it makes no guarantee as to the accuracy of any information or content on the website. The description of any ETP Security referred to in this website is a general one. The terms and conditions applicable to investors will be set out in the Prospectus, available on the website and should be read prior to making any investment.
Leverage Investment
Leverage Shares exchange-traded products (ETPs) provide leveraged exposure and are only suitable for experienced investors with knowledge of the risks and potential benefits of leveraged investment strategies.
Cookies
Leverage Shares Management Company may collect data about your computer, including, where available, your IP address, operating system and browser type, for system administration and other similar purposes (click here for more information). These are statistical data about users’ browsing actions and patterns, and they do not identify any individual user of the website. This is achieved by the use of cookies. A cookie is a small file of letters and numbers that is put on your computer if you agree to accept it. By clicking ‘I agree’ below, you are consenting to the use of cookies as described here. These cookies allow you to be distinguished from other users of the website, which helps Leverage Shares Company provide you with a better experience when you browse the website and also allows the website to be improved from time to time. Please note that you can adjust your browser settings to delete or block cookies, but you may not be able to access parts of our website without them.
This website is maintained by Leverage Shares Management Company, which is a limited liability company and is incorporated in Ireland with registered offices at 2 Grand Canal Square, Grand Canal Harbour, Dublin 2.
By clicking you agree to the Terms and Conditions displayed.
