Foreign financial stocks have outperformed their U.S. counterparts by a wide margin over the past four years.
The sector has been aided by positive industry consolidation trends, booming overseas property markets, and domestic monetary policies that have, on balance, been more accommodating than in the U.S.
And because of the shares' heavy weighting in many equity benchmarks around the world, they have naturally attracted a disproportionate share of the sizable U.S. investment flows pouring into foreign markets since 2003.
Up until very recently, overseas banks and other such firms have also benefited from the perception that problems in the U.S. credit markets stemming from a bursting housing bubble and the subprime lending debacle are a localized concern.
As it happens, developments over the past few months indicate that some of the factors that have favored non-U.S. financials, in comparative terms at least, are beginning to fall by the wayside.
For one thing, there is evidence in countries like the United Kingdom and Spain, among others, that local property markets are beginning to experience a bit of vertigo. Prices have not only stopped rising, but are beginning to soften. The reversal will almost certainly have a negative impact on financial services providers in those countries.
Recent upheavals in global credit, equity, and currency markets have also spurred a reappraisal of risk by investors in many countries around the world. In the U.S., there are signs that some of those who have long maintained an overweight exposure to foreign markets are less than sanguine about sticking with that stance.
Interestingly, rising volatility and worries over which shoe -- or shoes -- might be the next to drop have awakened a long dormant, knee-jerk response among some that the U.S. is the safe haven of choice during times of trouble, despite worries over structural imbalances and the longer-term outlook for the dollar.
Last but not least, reports make it clear that the subprime disaster is spreading well beyond U.S. shores, affecting financial firms in Germany, China, and the U.K, for example. This suggests the "disease" is anything but contained. Indeed, recent developments have probably convinced no small number of investors that the most vulnerable firms are located outside the U.S.
So far this year, the shares of American banks, brokers, and the like have borne the brunt of the selling in the financial sector. Amid signs of a turnabout in some fundamentals, however, it wouldn't take much for the pressure to be felt elsewhere. Foreign financial shares could quickly play catch-up -- on the downside.
With the accompanying chart picture indicating as much, it seems we may already be seeing the end of a long period of outperformance by foreign financials.
Michael Panzner is a 25-year veteran of the global stock, bond, and currency markets and the author of Financial Armageddon: Protecting Your Future from Four Impending Catastrophes and The New Laws of the Stock Market Jungle.
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