Morgan Stanley downgrades the European banking sector with its report today, as it believes that the stagnant inflation environment, the intensifying pressures on consumers and the increased geopolitical risk worsen the risk / reward profile of banks.
The American investment house held overweight positions in the financial sector in the post-pandemic period, but now it downgrades the banks to neutral and upgrades the pharmaceuticals to overweight, in a move that is part of its general cautious attitude towards the stock markets.
Analysts explain that the Russian invasion of Ukraine has overturned the macroeconomic environment in Europe, with previous conditions of good growth and moderate inflation giving way to an environment of much weaker growth and high inflation.
“This shift to a more volatile environment, with increasing consumer pressure, is not conducive to the performance of banks, which are highly correlated with consumer confidence,” said Morgan Stanley. In fact, he adds that the revisions of the forecasts for the corporate results of the banks became negative, for the first time since 2020.
In addition to the reversal of the macroeconomic environment, the house notes that banks are more exposed to the possible further deterioration of the geopolitical situation and more sensitive than other sectors to the Fed’s desire to tighten monetary conditions, as it tries to curb inflation.
While the banking sector’s valuations are low, they are not yet at levels where they could say that the negative news has been valued, analysts note.
Money Review
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