Britannic Asset Management is overweight financials in the UK, Japan and the Far East but significan...
Britannic Asset Management is overweight financials in the UK, Japan and the Far East but significantly underweight the sector in the US, Diamond Lee, joint manager of the Britannic Global Financial Services Fund, says.
'Earnings streams of banks are less volatile in the UK and are less dependent on investment banking and brokerage, which means the UK will see less downgrades in this environment.'
Lee is overweight Japan purely as a restructuring exercise. 'We buy financials when they have done terribly and sell when people begin to get excited about them,' he says. 'This can mean we pick them up in time for a 20% trade. Sentiment is quite bearish at the moment so it is time to be contrarian and buy.'
He moved overweight the Far East very recently having been underweight just two months ago. 'The Far East comes off attractively because the credit cycle is different,' he adds. 'In the crisis of 1998 bad credit was flushed out and banks have been strengthening balance sheets while Western banks have been stretching theirs.'
However, Andrew Hobson, investment manager at Exeter, does not like Asian banks at the moment, as he feels the economic situation in the Far East is deteriorating rapidly. 'In Singapore there was a significant economic detraction of 10% year on year last quarter, which has been affected by the slowdown in export trades,' he says.
Britannic is underexposed to US banks as Lee believes the earnings numbers are too optimistic and the sector has not yet factored in bad debt. 'Some banks are committed to lending for another year and this is not shown on the balance sheets,' he says.
The investment banks that were more directly involved in the terrorist attacks will have trouble managing costs, according to Lee. 'They will have to make a lot of cost cuts while struggling with rebuilding and will not be wanting to cut people off the payroll,' he says.
As for commercial banks, Hobson is underweight the sector pending the slowdown in revenues.
He says: 'There is a rise in debt provision and the quality of loans will deteriorate. We are more weighted to mortgage banks as mortgage lending is pretty safe. Even in a recession write-offs are very small.'
Lee is positive on insurance companies, particularly the reinsurance sector. 'There are strong balance sheets and the survivors will become strong as the weaker companies exit the market,' he says. 'Reinsurance rates were already rising and this has been reinforced. The largest reinsurance company is Munich Re.'
But Hobson is concerned about insurers' exposure to the attacks on the World Trade Center, however. He says: 'They have been qualifying their losses and will have to raise loss expectation.' Still he adds the event has been discounted in the share price and premium rates will be higher in the future.
Hobson says: 'Companies are going to have to go to financiers to underwrite against the hardening market and rates will go up so this is a net positive. Especially for insurance companies that have not had much exposure to WTC and have not seen the downside but will benefit from the upside.'
He cites Lloyds companies as attractive and says they should see an increase in profits in a market where premiums were already rising before recent events.
Banks restructuring in Japan.
Less dependent on investment banking.
Outlook positive for reinsurance companies.
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