8th March 2013
Bumper losses, fines, the libor scandal, and downgrades – financial stocks have endured a torrid time in recent years, while public confidence in the system has taken a battering, but could there be a reversal in fortune on the cards? Harriet Meyer reports.
The storm has far from blown out, with news of bailed-out RBS and Lloyds posting facing fresh losses this week, while Royal Sun Alliance slashed its dividend by more than 30 per cent, and Aviva saw 12.5 per cent share price falls following a huge write down on its US business losses around £3bn and a dividend cut of a quarter..
Yet despite the battering banks and some insurers have endured, and the negative perception, financials have posted impressive gains over the past year, even though they have remained widely shunned by investors.
The MSCI World Financials Index rose more than 19 per cent over the past 12 months, against an improving economic backdrop, compared with a rise of just over 10 per cent for the MSCI World Index.
So it is time to take the plunge, and could share prices have further to rise?
Gavin Haynes, investment director at Whitechurch Securities, believes developments in the sector could see further out performance. He says: “While many investors remain cautious of investing in financial companies following the global financial crisis, the sector cannot be ignored.”
Of course, there is the issue of transparency given the scandal surrounding the sector. However, Haynes stresses that regulatory pressure is seeing financial companies restructure their business models, moving from more complex, high-risk areas to an increasingly conservative culture.
He adds: “Financials remain easily the largest sector across the UK and global stockmarkets – making up around 23 per cent of the FTSE All Share index and over 20 per cent of the MSCI World Index. As a result the majority of UK and global funds will contain some exposure to financials companies.”
However, the majority of experts are keen to stamp a word of warning on the sector.
Juliet Schooling-Latter, of Chelsea Financial Services, says: “We have seen a strong rise over the last 12 months but that is mainly due to the fact that the long-term refinancing operation (LTRO) announced by the European Central Bank – and further subsequent funding – meaning that banks can get such cheap loans so that it will be almost impossible for them to go bust in the next three years or so.
“However, there are still many question marks over the sector, as government debt issues still remain, and most managers seem to still be largely avoiding it.”
Neil Woodford at Invesco Perpetual has steered clear from banks for some time and has not shown signs of wanting to buy back in. This is despite Woodford owning bank shares in the past – in the 1990s had about 30 per cent of the Invesco Perpetual Income fund invested in the sector – with Lloyds as a large holding.
The unstable situation in major economies is another reason to tread carefully. Brian Dennehy, from Dennehy Weller & Co, says:“ The world’s financial system remains at the centre of a unique and huge financial experiment, and this is unlikely to be unwound without significant pain – be wary.”
The UK bank index is still more than 30 per cent lower while the World Financials index is 7 per cent lower than at the start of the financial crisis, stresses Schooling-Latter.
She says: “Arguably you could say that banks are very cheap and there is less downside now, but they are still very difficult to value, and I think it’s going to be a choppy ride and a risky one for anyone wanting to cash in their investment in the next few years.”
However, for investors one way to spread the risk over the long-term one option is a collective investment fund. Adrian Lowcock, senior investment manager at Hargreaves Lansdown, says: “Banks remain a traders stock, as they frequently appear in the top most trade stock lists, and as such they can be highly volatile and sensitive to changes in sentiment.”
So to spread risk and benefit from an expert take, the favourite specialist fund in the sector Jupiter Financial Opportunities. While the fund has not participated in some of the rallies of recent years, it managing to avoid the hefty falls following the takeover of Bear Stearns in 2008 and the collapse of Lehmans.
Guy de Blonay, manager of the fund, continues to see upside potential in the sector, and focuses on structural themes such as the growth in emerging markets financial services and the move to a ‘cashless society’.
He says: “The sector has a wide range of stocks and regions, and investors tend to forget that, including asset managers and credit card providers – so it’s not just about banks.”
Unlike the developed world, the financial sector in many emerging markets is in rude health, and has a strong structural growth story for investors to take advantage of. De Blonay says: “Also, nowhere in the globe is at the same point in the cycle for this sector – the UK is in a different position to the US and India, for instance.”
The fund is split between ‘growth’ and ‘restructuring’ stocks. Visa and Mastercard are in the former group of stocks, to benefit from the growth of online shopping.
The widespread changes in the sector could also be a catalyst for a turnaround. “In the second bracket we have stocks such as Barclays and Citigroup that are starting to reallocate resources to reap the benefits of this,” says de Blonay.
However, with the sector making up over 20 per cent of UK and Global indices, many investors using a broad-based actively managed fund will already hold significant exposure. Lowcock favours Fidelity Special Situations as a fund offering a wide range of sectors so profits can be taken on financials and other areas shifted to at suitable times.
Toby Gibb, investment director for Fidelity’s UK equity team, stresses that stock such as Lloyds and HSBC are in the top five holdings for this fund, with potential for growth. “There is room for improvement as deleveraging occurs and when interest rates eventually start to rise – although banks might not get back to the high returns seen during the debt bubble.”
But remember that if the global economy takes a turn for the worse financials could be further hit – along with other sectors – so caution and spreading your bets is wise.