August 18, 2008 / 12:11 PM / 10 years ago

UPDATE 1-JPMorgan sees opportunity in long financials trade

(Recasts; adds details)

Aug 18 (Reuters) - J.P. Morgan Securities’ U.S. equity strategists saw opportunity in going “short” energy and “long” financials, as capital flows and macro developments were likely to be less favorable to energy relative to financials.

Analysts led by Thomas Lee downgraded the U.S. energy sector to “neutral” from “overweight,” and said the next two years will see a shift toward a long financials trade.

The outperformance of “long energy/short financials” may be ending, the analysts wrote in a note to clients.

Equity markets were discounting $400 billion in additional write-downs for U.S. financial institutions, while JP Morgan analysts estimate a far lower figure of $145 billion, they said.

“To the extent home prices stabilize faster, or oil continues to weaken, these provide further upside to the baseline view,” analysts led by Lee said.


The analysts noted that JP Morgan’s Asset-backed Securities Strategist Chris Flanagan recently estimated credit losses to be about $1.5 trillion, of which $390 billion was estimated for U.S. financial institutions.

Losses taken by U.S. institutions total $246 billion so far, implying that financials were about two-thirds of the way through, the analysts said.

They estimate $145 billion in additional write-downs for U.S. banks and investment banks as well as further capital raising amid a weakening economy.

However, the $145 billion estimate was far lesser than the $400 billion which the market was discounting, they added.

In addition, write-downs were likely to ease to the extent the economy and housing recovers, they said. (Reporting by Tenzin Pema in Bangalore; Editing by Jarshad Kakkrakandy)

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