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Citigroup Global Equity research is forecasting a 41% drop in the future earnings for financial companies, and isn’t ruling out a possibility that earnings could be completely wiped out. Even though banks have already been smacked hard, they haven’t been hit hard enough says Citi.
Wealth Bulletin: Citigroup equity strategists have argued that financial stocks still look the most expensive in the market, mainly because the anticipated trough in earnings has not been fully factored into valuations. The financial and consumer discretionary sectors are both trading on about 25 times trough earnings.
The Citigroup report also set out a worst cast scenario in which the trough in global equity returns is worse than in previous cycles by the same amount that it overshot previous peaks. Under these bleak circumstances, global equity returns could slump to a low of 6% and equity returns in the financial sector would be wiped out completely.
As the global financial sector currently account for 75% of global earnings, the analysts forecast that overal earnings will fall a further 40% by mid-2010 or 55% under the worst case scenario.