Wherever you fall on this debate, it is clear financials are now a higher beta part of the market, often leading gains or falls at any particular point in time.
To give an example of volatility now seemingly inherent in the sector, around £10bn was wiped off the value of the UK’s five largest banks in a single day during August’s market madness.
With so much volatility and uncertainty around, few are willing to call now an attractive entry point for financials, despite cheap valuations – the sector is highly geared, so will tend to perform very badly in deteriorating economic conditions and very well against an improving backdrop.
Even those with a positive view on banks will see returns not as attractive as before the credit crunch and there is probably better value in specialist financials.
To illustrate this, most generalist equity managers are underweight Western banks, preferring financial opportunities in areas such as insurance, real estate and asset management. For example, Newton Global Higher Income’s manager James Harries has never held a UK, US or Australian bank since launch in 2005. Instead, he holds Reits in Singapore and financial services companies such as Aberdeen Asset Management in the UK.
Specialist financial portfolio managers are also cautious with, for example, Susan Sternglass Noble – who runs the Axa Framlington Financials fund – moving more defensive in the face of growing sovereign debt concerns.
One consensus is that returns from banks will not be what they were over the past decade but as long as managers can accept that, then so much the better. Financials managers will also look to other assets than banks for returns, and to banks outside the UK.
If investors can gain more confidence from banks’ book value, and can convince themselves they are well positioned should there be another recession then they could be attractive.
But we are probably a few years away from that, 2019 if the Independent Commission on Banking report is upheld to the letter.
For our complete commentary on this topic, please see the Equities article in December’s issue of Portfolio Adviser.
