Shares in Barclays(LSE: BARC) and HSBC(LSE: HSBA) have been on a tremendous run over the past 12 months. From the lows at the beginning of 2016 to today, Barclays shares have gained 43.8% and HSBC has racked up gains of 54.7%, excluding dividends. For comparison over the same period, the FTSE 100 has produced a return of 18%, excluding dividends, so both of these banks have vastly outperformed the index.
However, over the past four weeks, some of these gains have started to evaporate. It's not exactly clear why investors are now taking money off the table, but it could be a mix of both profit-taking and a more cautious approach among investors. Over the past month shares in HSBC are down 2.4% and Barclays has lost 5.5%.
Unfortunately, there could be further losses on the cards for both.
Falling back to earth
Since Donald Trump was elected US president at the beginning of November last year, financial stocks around the world have rallied on the belief that his proposed $1trn economic stimulus plan would unleash a wave of inflation. Higher inflation rates would push central banks to raise interest rates, which would be good news for banks such as Barclays and HSBC. But so far, Trump has been all talk and little action. Promises to reform the healthcare system and US tax system have been ensnared by the realities of US politics.
Meanwhile, continued economic uncertainty here in the UK has poured cold water on hopes of any interest rate rise from the Bank of England.
Barclays and HSBC are also facing another headwind in the form of Brexit-related uncertainty. Now that Article 50 has been triggered, the realities of what a divorce from the European Union could mean for the UK financial sector are starting to set in.
Put simply, it's not looking good longer-term for Barclays or HSBC. Even though City analysts currently expect HSBC's pre-tax profit to double this year, profits will actually be down by 6% from the 2015 figure, which wasn't skewed significantly by a one-off charge in 2016.
Barclays' outlook is much brighter but there are still questions around it. Analysts are expecting earnings per share growth of 57% for this year and the shares currently trade at a relatively attractive forward P/E of 10.9. Shares in HSBC trade at a forward P/E of 12.9 and support a dividend yield of 6.3%.
While these fundamentals may seem appealing, Barclays and HSBC remain at the mercy of global economics and politics. Their fortunes are linked to the outcome of Brexit talks and with so much uncertainty surrounding the final outcome, it's difficult to put together a fundamental analysis of the businesses.
As markets generally tend to err on the side of caution, this may mean there is further downside to come for the shares as investors avoid HSBC and Barclays.
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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has recommended Barclays and HSBC Holdings. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.