The lingering bearish stock market climate has hit global banks and insurance companies badly over t...
The lingering bearish stock market climate has hit global banks and insurance companies badly over the past year.
Slumping markets have impacted on the solvency levels of life companies, many of which were already struggling with the aftermath of summer floods in Europe and the 11 September attacks. Some, like Swiss Life, Aegon and L&G, have sought to raise money by selling off holdings and rights issues.
The US investment bank sector has also been adversely hit by the turmoil in global markets and the almost complete stop in IPO activity, as well as the growing likelihood of increased regulation.
Andrew Killean, investment manager at Britannic, says the group is heavily underweight US investment banks because of the lack of transparency in the market.
'There have been concerns recently over some investment banks misleading investors on IPOs,' he says, 'US regulators are currently looking at tighter regulation for investment banks'.
Despite the negative outlook for the market, opportunities can be found now valuations have fallen, according to David Jane, manager of the Global Financials fund at M&G.
Although the long-term prospects for many global financials are good, short-term prospects remain cloudy. He says: 'In the long term, financials is a sector that will do well. There are attractive valuations in the market at present in good, mainstream banks. However, the question is how it will perform in the near term.'
Both Killean and Jane are avoiding the insurance market. They say insurance companies are high beta companies and overexposed to the equity sector. Yet, because of their market sensitivity, when markets change, the insurance sector should do well, they believe.
'Because of their growth element, insurance companies have long-term potential and the sector is highly undervalued,' Jane says.
The fund managers are favouring banks over insurance companies in Europe. Jane is holding good retail and commercial banks in the region. However, Killean says many investors are expecting too much from European banks.
'The expectation of 20% growth for European banks does not look likely,' he says. 'This is causing them to lose value. There are good European banks, such as ABN Amro, which, although it has a Brazilian exposure, has delivered a 7% yield.
'We also favour French retail banks but are avoiding their German counterparts because of the amount of non-performing loans.'
Killean is positive on the UK and is focusing on the mortgage market. He notes: 'The UK economy is in better shape than Europe's. The Royal Bank of Scotland is a good buy because of the Natwest integration.'
Meanwhile, Jane has recently reduced his exposure to UK banks because of valuation concerns. Both the ECB and the Bank of England have recently given signs that there could be further rate cuts.
Financial sector has good fundamentals.
The bear cycle is turning.
Opportunities in Asian markets.
Brexit uncertainty a major factor
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