KBW CEO says bank stocks are a good hedge against inflation, is he right?

By: Motiur Rahman
Motiur Rahman
Md Motiur enjoys researching how companies are solving challenges the world will face over the coming decades. In his… read more.
on Jun 3, 2021
  • US inflation rose in April to the highest level of 4.2% in 12 years.
  • Economists expect inflation to continue rising in the coming months.
  • KBW CEO thinks bank stocks could provide a good hedge against rising inflation.

US investors are getting concerned about the rising inflation rates. In April, inflation rose to hit a new 12-year high of 4.2%, driven by government stimulus packages introduced to boost the economy amid the pandemic. Economists expect inflation to continue rising in the coming months ahead of potential tapering later in the year. 

US stocks have continued to deliver mixed performances amid taper talks, while banks have maintained a consistent run since September last year. Bank stocks are among the few sectors to have recovered from the COVID-19 stock crash of March last year to rally to new highs.

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KBW CEO told CNBC’s ‘Squawk On The Street’ that “bank stocks are a good place to be if inflation concerns continue.”

The KBW Bank Index hits new historical highs

As demonstrated in the KBW Bank Index (INDEXNASDAQ:BKX) chart, bank stocks, in general, are up more than 95% over the last eight months. The index rallied to 135.65, the highest level it has ever traded since its inception in 1991, before pulling back slightly to the current level.

Source – TradingView

Index investors can target profits at around 140.42 or higher at 150.29. Key support levels can be found at 128.40 and 120.40. The index is approaching overbought levels of the 14-day RSI. This could trigger a short-term pullback. But generally, the upward momentum looks set to continue.

Which bank stock to buy in June?

Most banking stocks appear to be on a bull run, but few are expected to do better than others in the coming quarters. UK’s Barclays Plc (NYSE:BCS) is one of the most attractive bank stocks to look at for those looking to hedge against inflation. In the most recent quarter, 

Barclays’ revenue grew by 40.20%, while earnings increased by a whopping 129.90%. Earnings are expected to grow by 77.87% next year. Since September last year, BCS shares are up more than 131%, but the stock still trades at an attractive P/E ratio of just 12.70. 

Source – TradingView

Technical overview of BCS stock

Technically, BCS stock appears to be trading within a rising wedge formation in the daily chart. It has now rallied closer to the overbought levels of the 14-day RSI. However, with the stock trading at such an attractive P/E ratio, the bull run could still continue.

Investors looking to ride the bull run can target profits at around $11.68 and $12.54. Key support levels can be found at $9.55 and $8.50.

Bottom line: BCS stock is a good option to hedge against inflation fears

In summary, bank stocks appear to be a good place to hedge against rising inflation fears. And BCS stock looks like a good option given its attractive P/E ratio and earnings growth expectations.

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