Regular dividends driven by steady income streams have kept US financial stocks on the buy-list for ...
Regular dividends driven by steady income streams have kept US financial stocks on the buy-list for managers of North American funds during the market downturn.
M&G fund manager and financial sector specialist David Jane notes that valuations in the sector are 'exceptionally attractive' in many cases, in both absolute and relative terms.
'The critical point is that management quality is quite high, there are not huge credit quality concerns, the companies earn good cashflows which pay real dividends and, as long as that's the case, you can make a good argument for the sector in absolute terms.'
Jane says banks and insurers have managed to avoid exposure to most of the corporate strife that has emerged during the downturn, with most of the failed corporates financed by bond issuance and private equity.
'I don't think credit quality is as big an issue as people have made it out to be ' so far, the banks have sidestepped most of the risks,' adds Jane.
Official interest rate cuts totalling 425 basis points in 2001 have been key to the outperformance of the banking sector, with banks typically borrowing on shorter terms than the fixed-term housing loans they grant, so reducing the cost of financing mortgages.
The Fed's remarked this month that growth in aggregate demand is being undermined by weakness in financial markets and corporate governance concerns, along with its familiar statement that 'risks are weighted mainly toward conditions that may generate economic weakness' is being seen by some analysts as a shift towards an easing bias. Further easing in monetary policy would allow US consumers to continue their credit-funded shopping binge, reducing one key risk to banking revenues.
Mortgage refinancing, to take advantage of lower interest rates, has also driven stronger revenues for some of the larger regional banks, such as mortgage giant Wells Fargo.
Alex Ingham, a fund manager at Aberdeen, says: 'The regional banks look great and they're benefiting from the steep yield curve.
'Investment banks are also starting to look better and it seems we may be past the worst of the Enron-type disclosures within the sector, which is encouraging for them.'
Investment banks have also been the subject of recent investor interest on expectation of a pick-up in equity issuance and other corporate activity requiring their steerage in the second half of 2002.
'It's questionable whether that is sustainable, but in the near term it has been good for the share prices,' says Jane.
US insurers have also outperformed their European counterparts, primarily because differences in regulation and investment style has prevented them from becoming over-leveraged to equities during the bull market, hence reducing their losses once conditions soured.
Still, it is not all good news in the sector. In common with most other markets, value is highly stock-specific, and some stocks, such as those with large exposure to South America, have suffered badly.
The dependence of the US economy on consumer spending also leaves the sector vulnerable to any sharp downturn in employment, says Jane.
Regular cash dividends.
Credit quality mainly high.
Low interest rates buoying revenue.
Value is stock-specific.
Some stocks exposed to South America.
Vulnerable to fall in employment.
The increase in minimum AE contributions has had little impact on opt-out rates - with cessations after April increasing by less than two percentage points, data from The Pensions Regulator (TPR) shows.
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