Warning Over Bank Stocks After Downgrade

Banking stocks should be avoided following the downgrade to US debt by Standard & Poor’s, according to a new report from Bank of America Merrill Lynch (BofAML).

The report, which offers BofAML’s house view in the wake of last Friday’s downgrade, says the bank wants to steer clear of ‘assets tied to government and consumer balance sheets, such as sovereign debt and banks’, over the medium term.

By contrast, the bank favours assets ‘tied to healthy corporate balance sheets, such as best of breed equities and corporate bonds’.

The warning comes after Standard & Poor’s lowered the rating on US debt from AAA to AA+ and warned that further downgrades could be forthcoming.

The news affected shares badly, with stock markets seeing sharp falls on Monday as investors fled to perceived safe havens including US treasuries.

In the short term, BofAML is cautious on global equities, saying a sustained equity rally needs ‘a substantive and credible policy response to recent weakness’.

The first part of this response came yesterday as the Federal Reserve put out an announcement saying it would keep interest rates at low levels for two years.

Following the Fed’s statement, the US market ended up, recovering some of its losses from the previous day.

Click here to read the full report.

[Article by Tim Human, Inside Investor Relations]

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