The sector has been out of favour since its headline role in the 2008 financial crisis, having had to live life under the watchful glare of both the authorities and the public.
However, Anness, lead manager of Invesco’s Global Opportunities Fund, believes that after coming through intense regulatory scrutiny and corporate restructuring since then, the sector has reached pivotal moment.
“Financials, despite having built up capital quite significantly post-financial crisis and gone through various stress tests, are at relative low valuations,” he said.
“Banks are significantly under-paying in terms of shareholder returns. There has rightly been a huge shift towards building capital and reducing leverage in the financial system, and we think we are approaching the point where banks are in a position to start improving their loan growth and shareholder returns.
“There is an argument that the fully-intended consequence of increased regulation is that some banks will become less volatile. We think earning streams will become less prone to swings because they are removing the riskiest parts of their businesses, which will hopefully lead to better dividend paying capacity. Also, capital buffers and leverage ratios are better than they have been for some time – particularly in the US.”
Taking a bite of financial pie
Anness carries a 25.13% weighting to the sector (as of 27 February), while 40.89% of his portfolio is dedicated to the US. But while he is positive on financials as a whole, it is in the US market that he is most faithful.
“There is a significant differential in the portfolio [between US and European banks],” he explained. “We have a substantial weighting in US financials, such as Citigroup, JP Morgan and First Republic.
“The US is further through the issues we have seen on both a macro and industry level, so they sit in a much stronger capital position.
“Also – while it is not the base of our investment case and the market is clearly very bearish – there is a free auction on US interest rates. Any increase will allow banks to improve margins and be set on valuations that are significant, such as book value, single-digit price/earnings and potential to return capital.”
Another area in which Anness is confident is oil-consuming companies within the energy sector, where he has recently increased his portfolio weighting to 4.88%.
“We think it is a very interesting sector, despite price-to-book being at a low point for the last 50 years,” he said.
“We have been building up our position in the energy sector with a number of companies that are very low cost – even accounting for the low oil price – and can still generate cash and dividends and fund future growth. There are some areas, such as oil services, that we want to investigate further.”
However, there is a caveat.
“We are nervous that the scene is being set for a significant oil price rise,” said Anness. “Capital expenditure decline rates in the industry are around 7-8% globally. The world needs to continue finding more and more oil to generate a flat supply outlook, which is something that concerns us. Oil companies are cutting back on capital expenditure, so it will be interesting to see how this plays out over the next 18 months.”
“There is definitely scope for [oil] supply and demand to tighten quite quickly. Storage facilities are getting quite full, so there could be a glut, which would hamper the oil price further.
“But the reduction in oil exploration and development will inevitably lead to a higher oil price, albeit further down the track. So in the medium to long-term the oil price could rise significantly, but the short-term is much harder to call. However, there is a time to buy, and there are some business that could provide great opportunities.”
