Major Wall Street indexes closed lower on Monday as a falling Turkish lira weighed on the economy. The lira is down over 40% so far this year as concerns over President Tayyip Erdogan’s increasing power and deteriorating relations with President Donald Trump persist. Hence, global markets took a hit as investors are worried the financial distress in the Middle Eastern country could impact the international banking system.
Erdogan’s victory in the recent snap elections led the European Central Bank to question the autonomy of Turkey’s central bank and warned the European Union’s largest lenders to Turkey. Adding to the agony, after Trump announced a hike in tariffs for imports of Turkish steel and aluminum last Friday, the lira plunged. What’s unnerving investors across the globe is Erdogan’s unwillingness to hike interest rates to take control of the situation as he cites a blow to economic growth as a potential outcome of the policy change.
At a time when the Turkish economy is already dealing with declining confidence in the government, high levels of foreign currency debt, rising borrowing costs and a current account deficit, Erdogan does not seem content with setting an accommodative rhetoric to solve the differences with the U.S. Despite clearly not having the bargaining chip, he has threatened to boycott U.S. electronics and has not provided a clear response to the release of a detained American pastor. As a result, this has invited criticism from policymakers and market pundits alike, as a number of representatives, from Germany’s Angela Merkel to top analysts from leading research houses, have warned of an adverse outcome and a contagion effect if Erdogan does not change his ideology.
Owing to this, major U.S. banking stocks witnessed declines in the past two trading days. Given significant exposure to Turkey, banking stocks have come under tremendous pressure and have witnessed a massive selloff. Keeping tabs on the price performance last Friday compared to Monday, Wall Street majors JPMorgan Chase & Co. (JPM, Financial), Bank of America Corp. (BAC, Financial), Wells Fargo & Co. (WFC, Financial), Citigroup Inc. (C, Financial) and Goldman Sachs Group Inc. (GS, Financial) suffered declines of 2.6%, 3.5%, 1.4%, 3.9% and 3% respectively. Although these stocks pared some of their losses on Tuesday trading following the Turkish central bank’s move to ease pressure on the currency, investors are still maintaining a cautious stance given the high level of uncertainty.
From a general perspective, however, bank stocks present a bullish case for investors when the Federal Reserve’s stance on rising interest rates is taken into consideration. As the Fed is clear on its intentions to adopt a tightening monetary policy, investors are optimistic about banks’ net margins. Although the lira’s fall has introduced new concerns for Wall Street’s banking bulls, the strong fundamentals for these stocks present few threats apart from short-term volatility.
Moreover, another possible scenario that might be a bullish factor for these large-cap banking players is rising geopolitical risks might lead to an increase in safe-haven demand. This, in turn, could lead to a surge in bond yields and contribute to the top lines of these banks. Coming to valuation multiples for the top five players, per the GuruFocus website, JPMorgan is currently trading at a forward price-earnings ratio of 12.5, while Bank of America is trading at 11.9, Wells Fargo at 12.95, Citigroup at 10.56 and Goldman at 9.70. These stocks seem to have attractive valuation multiples when compared to the industry median of 13.4. Therefore, although a short-term loss in momentum won’t be shocking, they seem to be attractive enough in the long term.
Disclosure: I do not own any of the stocks mentioned.
