The UK financials sector is seen as a buy for those investors that believe that the FTSE All-Sh...
The UK financials sector is seen as a buy for those investors that believe that the FTSE All-Share is going to start moving up.
This is leading a number of fund managers to prefer the UK banking sector, where a number of highly profitable stocks are now verging on attractive valuations.
Giants in the life sector, including Prudential and Norwich Union, have cut dividends recently amid falling equity markets and concerns over their liabilities and solvency ratios. Some fund managers believe value now may be emerging on a stock specific basis.
Richard Peirson, manager of the Framlington Financials fund, says domestic insurers typically look more stable than their continental counterparts, having been more pro-active in rebalancing their asset exposure.
'Worries over capital have meant some general insurers are now looking very cheap relative to their growth prospects.' He adds that European insurers, with their comparatively low exposure to equities will look less attractive should markets move ahead.
Investment in the sector relies on conviction that the equity markets are set to rise, given that insurance stocks are heavily geared into the market and investor sentiment.
David McCraw, manager of the Edinburgh Financial fund, agrees value is now emerging in the sector but warns it remains a high-risk investment as the companies are heavily punished for any bad news.
'For example, when the management of the Prudential in the UK was unwilling to commit to the current dividend policy, the shares were marked lower by nearly 20%,' McCraw notes.
He says the banking sector, except Lloyds TSB, generally grew its dividends after share prices went up on the back of better than expected corporate results.
David Ridland, investment manager at Britannic Asset Management, notes while there are concerns Lloyds TSB will cut its dividend, Royal Bank of Scotland (RBS), Northern Rock and HBOS have all performed well.
'We are quite positive on the banking sector and are overweight, but on a very stock specific basis. The sector sold off ahead of the results, because of concerns over the credit cycle, but the bad debts did not really rise as expected,' Ridland says.
Ridland is overweight RBS, liking its bolt-on acquisition strategy in the US and diverse income stream, which has to an extent shielded it from the downturn in the equity markets. Moreover RBS has produced 15% annual dividend growth for the last decade.
According to Britannic, mortgage bank Northern Rock is cushioned from the markets to a far greater extent than, for example, Barclays, which has investment banking exposure.
'The mortgage market has enjoyed a long period of exceptional growth and going forward we see a slowdown but not collapse in the housing market. Northern Rock can still deliver strong results. It has a very strong business model that drives its earnings growth and has just announced it has secured a lot of funding through securitisation deals, which is another positive,' Ridland says.
Peirson believes domestic banks look mildly cheap but European banks look better value compared to their net asset values.
UK banks on attractive valuations.
Strong dividend growth in banking sector.
Life assurers on low valuations.
Putting the tech into protection
Square Mile’s series of informal interviews
Fallout from Haywood suspension
Launching later in 2019
£80bn funds under calculation