While 2000 was a poor period for equity markets in general, the UK financial sector had a good year ...
While 2000 was a poor period for equity markets in general, the UK financial sector had a good year with banks up 33.63% compared to a fall in the FTSE All-Share of 6.7% over the 12 months to 17 January.
UK insurance companies also posted positive results, rising 30.9%, while the FTSE Speciality and Other Finance index, which lists asset management houses such as Schroders and Amvescap, rose by 25.5%.
But Royal & SunAlliance pan-European bank analyst Mike Stubbs believes 2000 was very much a year of two halves for financials, even though overall stock performance was good.
He says: "In the first half of the year, the sector felt the effects of the tech, media and telecoms panic and competition from new entrants such as internet banks. But the key attraction of financials has been their relative defensiveness, and stocks recouped any losses by outperforming in the second half of 2000."
Many analysts believe financials are well placed to benefit from a low interest rate environment and a move towards easing fiscal conditions.
Although positive about macro influences on the sector over the coming months, Stubbs believes financials are looking relatively fully valued and sees little in the way of upside, especially in the UK. With this in mind, RSA is broadly neutral in the sector.
Looking at banking, Stubbs says he is positive about the prospects for clearing banks such as Royal Bank of Scotland. He is slightly less so about Asian banks, which, he says, have closer links to the US and therefore would be worse affected by a hard landing.
He is also cautious about UK insurance stocks, which he once again sees as fully valued. He believes Europe may offer better value in this sector over the next six months and predicts a shift towards longer-term growth investing in stocks such as Skandia and CGNU.
Stubbs also believes that the stronger franchised Swiss and German banks are better equipped to withstand a hard landing in the US and forecasts they will outperform over the next few months at the expense of Nordic banking areas.
Britannic investment manager Kevin Fenelon says the company is overweight banks and insurance, and believes the financial sector is currently in a strong position because of its particular sensitivity to short interest rates.
He says: "The past year was a good year for the sector, especially the fourth quarter when many financial stocks gained 'safe haven' status in the midst of widespread profit warnings. In addition to interest rates coming down, wider demographic trends, such as diminishing state benefit provision, suggest a bright future for financials."
With general insurance, Fenelon believes premium increases in 2000 will take time to come through in figures, which should mean further share price increases this year.
On the negative side, he says the margin pressures that come out of the introduction of stakeholder pensions could affect many of the savings industry's products. He also calls attention to the strong correlation between the performance of the life insurance industry and bond yields.
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