Lower quality, high risk banks, that struggled for performance last year, are now performing better ...
Lower quality, high risk banks, that struggled for performance last year, are now performing better than the higher quality, stronger managed and less economically sensitive banks, according to Ian Brady, head of North American Investment at Schroders.
Brady says financials are a very cyclical area and the more interest rate sensitive banks, which have done poorly in the past, are now benefiting from the Federal Reserve's aggressive round of interest rate cuts.
Brady says the Bank of America was perceived as having major problems because it was one of the largest lenders in corporate America. However, it has returned 19.35%, in dollar terms, for the 12 months to the end of April 2001, compared to returns of -12.97% of the S&P 500.
Over the year to 22 May returns in the S&P major regional bank sector fell by 1.79% in dollar terms while the S&P money lender banks index, where Bank of American is listed, rose by 19.08%.
Rupert Della-Porta, head of US equities at Aberdeen, says that falling interest rates is a good environment for financial stocks, with the Federal fund rate now at 4%, the lowest since May 1994. However, he says it is likely the US is nearing the end of the rate cut cycle, with the bulk of the cuts probably over.
Simon Moss, senior investment manager at Gartmore, says it still sees the Fed cutting rates by around another 100 basis points to 3%.
David Jane, fund manager of M&G's Global Financials fund, which was launched in March 2001, says the fund has been looking at US investment banks that have performed well and are dependant on market direction and sentiment.
Jane says that commercial wholesale banking is also an attractive area because of current low valuations. He says: 'Commercial banking has performed badly with the worry about loans and credit cycles. However, we do not believe credit losses are going to be as bad as the market thinks and are taking advantage of areas where people think the discounts are worse than they really are.'
Jane says consumer finance, an area that is sensitive to unemployment, has performed well recently as people think the economy is getting better.
Jane says the fund is 40% invested in the US compared to the FT World Financials benchmark of 45%. The reason for this slight underweight position he says, is because he is underweight insurance companies, a traditionally defensive area that is more sensitive to long-term interest rates going up.
Jane says: 'The fund is more biased to short-term interest rates, an area where the economy is looking more positive and it is in the areas of investment banking, commercial banking and consumer finance that the fund is overweight.'
Della-Porta says the trends that have been more positive than expected are consumer credit card quality and companies associated with mortgage business. For companies associated with mortgage business, he says the volume of mortgages has been very strong and there has been a lot of mortgage re-financing.
Financials benefiting from low interest rates.
Consumer sentiment improving.
l Financials still attractively valued.
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