Deutsche Bank [ETR:DBK] has reported one of the best quarterly performances since prior to the financial crisis, thanks in no small part to higher interest rates. Fixed income trading has also played its part. Pre-tax more than doubled to €1.6bn in Q3 for the German bank, which beat analysts’ expectations. The big question is whether this will improve investor sentiment around the stock.
Shares have been rallying since mid-October, but are still down nearly 10% in the last six months. Deutsche Bank stock is also well down – nearly 20% – on a YTD basis. It is looking quite cheap, with a PE ratio of under 8. The share price performance raises the question for many investors as to why Deutsche Bank remains so undervalued? Some of it boils down to the posture of big institutional investors, especially in continental Europe, who have a massive level of influence over where this share goes next.
Here’s a screenshot which demonstrates how artificial intelligence from UK developer Irithmics learns to recognise, classify and anticipate how institutional investors allocate and reallocate portfolio capital. Strictly speaking, it’s showing anticipated supply and demand pressure from institutional portfolios and strategies.
This is possible because of something Irithmics calls ‘strategy isomorphism’ which occurs because similar, but independent institutional investors, with similar portfolios, strategies and mandates, are more likely to make similar choices and decisions when presented with similar constraints and market environments. So, strictly speaking, the screenshot is showing the anticipated supply and demand pressure from institutional portfolios and strategies.
Are Deutsche Bank investors running on autopilot?
What’s of interest is the extent to which Deutsche Bank’s investors appear to be on autopilot with their choices and decisions being (largely) unaffected by the company. You can see the shaded areas of blue (anticipated demand) correspond to subsequently observable rallies in stock price (a consequence of increased demand). Similarly, shaded areas of red (anticipated supply) correspond to subsequently observable drops in stock price (a consequence of increased supply).
“This ‘autopilot’ characteristic would normally concern corporates, their executive management, boards and investor relations teams as it’s often suggestive of peculiarities in market dynamics and shareholder behaviours,” said Grant Fuller, co-founder of Irithmics. “In addition to weakening market capitalisation and shareholder value, this does provide an opportunity for Deutsche Bank’s corporate narrative to be hijacked by activist investors, short sellers and social movement campaigns.”
Importantly, the Irithmics AI is not predicting Deutsche Bank’s stock price, but is anticipating isomorphic behaviour (the allocation and re-allocation of capital) amongst institutional investors based upon voluntary and regulatory disclosures, including those by corporates, asset managers, funds and various government agencies.
This ‘autopilot’ characteristic would normally concern corporates, their executive management, boards and investor relations teams, as it is often suggestive of peculiarities in market dynamics and shareholder behaviour. Usually, corporates would seek to more proactively manage this narrative, systematically enhance shareholder value and executive legitimacy, and lessen their vulnerability to narrative hijacking.
