The market's optimistic earnings forecasts for the US investment banking sector are too high, accord...
The market's optimistic earnings forecasts for the US investment banking sector are too high, according to David Jane, fund manager for M&G's Global Financial Fund.
'Many analysts are expecting quite a strong rebound in the second half of the year after a slow start, but this isn't realistic,' he says. 'This is traditionally a much slower time of year and this year is unlikely to be any different.'
Although the long-term fundamentals look strong in this sector, valuations remain too high in the short term, says Jane.
'The market doesn't seem to be recognising that a downturn can last seven or eight quarters, such as we experienced in the early 1990s,' he adds. 'I think people could be perceiving the current bear market in the same way as one off events, in the mould of the Asian and Russian crises, rather than general economic weakness.'
As such Jane believes that the European investment banks, led by Deutsche Bank and UBS Warburg, currently offer better value than their bigger US rivals.
'The big US players such as Goldman Sachs and Morgan Stanley have greater exposure in the areas of equity issuance and merger and acquisitions (M&A), which has seen a sharp downturn in business compared to the same period last year, although debt financing has performed quite well. The European's on the other hand have a greater market share in trading and bonds which are doing quite well at the moment,' he says.
Although Jane would typically be overweight in this area, he is currently underweight, in the expectation that share prices will fall.
Investment manager at Britannic Asset Management, Alison Sinclair, believes it could be a long time before the US investment houses return to the profit margins of the bumper years of 1999 and 2000, if at all.
'The past two years were good for the US investment banks because of the internet boom,' he says. 'Companies were coming to the market and the banks made a lot of money from underwriting. Because they are also such big brokers they were involved with most of the big M&A business during that period, but this has now dropped off.'
Although profits for investment banks are notoriously difficult to predict, Sinclair is expecting a 20% drop in year on year profits, but remains confident that US investment banks represent reasonable value as short-term trading stocks.
'There is quite a lot of fluctuation in the share price at the moment,' she says.
In the longer term she sees the need for some of the smaller players, such as Merrill Lynch, to make acquisitions in Europe and Asia in order to continue their growth.
On the positive side, US investment banks have a very strong business base and rule the roost in the US domestic market.
The big European players are finding it very hard to break into this lucrative market, and Sinclair thinks that as a result, US players will be best positioned to benefit from an upturn in the US economy.
American companies making acquisitions also tend to turn to US banks for their underwriting, giving them a major competitive advantage, she adds.
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