The US banking industry could see its stock prices plummet within the next 16 months, according to macro guru Hugh Hendry.
In a new interview with Kitco News, the former chief investment officer of hedge fund Eclectica Asset Management says that US banking stocks could witness a deep devaluation if the economy goes through a period of recession.
“Sometimes, I’m a little bit unhinged. Sometimes I get the meter sense of what is about to befall us, but when I’m putting on trades, I’m putting on trades with the certainty that I don’t know when it’s going to happen, and I usually exercise a series of strategies whereby I’ve got two years to be proven correct or wrong.
And this is a two-year operation, which began for me [from] between the beginning of this year until the end of next year. I would say to use your word ‘peril,’ there is great peril and uncertainty, the uncertainty being that the economy could slow down rather dramatically and that the provision for credit and impairment costs within the financial sector could escalate and the valuation of banking stocks and other financial stocks could correct.”
Hendry goes on to say that during tough financial times, top-ranked banking institutions tend to see their market caps dwindle to a figure close to the value of their shareholders’ equity.
“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 well, it has a market capitalization of nearly $450 billion dollars. Its shareholder funds [is] over like $290 [billion], and if we get peril, those two figures will come closer together.
Typically, in a recession, you do see that even the best banking franchises are pulled towards the net asset value [or] their shareholder funds so that I would say my presumption is there is significant price risk in the financial sector and indeed in the overall stock market globally.”