Financials remain reliant on a stock market recovery in order to outperform but are still attractive...
Financials remain reliant on a stock market recovery in order to outperform but are still attractive in terms of longer-term demographics.
Matthew Czepliewicz, an analyst at Credit Suisse First Boston, says the sector's hopes of a bounce back is too reliant on stock market performance for his liking in the near term. His concerns about deteriorating corporate credit quality and margin pressures have led to Credit Suisse First Boston lowering its general exposure to the sector.
Besides recent high-profile casualties of the economic slowdown, such as Enron and Marconi, Czepliewicz says a string of lower profile mid-caps failing could have an even worse impact on the sector. He harks back to the aftermath of the early 1990s recession, which saw a period of underperformance from the sector.
'We believe the earnings pattern will be broadly similar in the current recession, implying subdued earnings growth not only in the first half of 2002 but also, in absolute terms, in the second half of 2002,' he says.
In terms of sub-sectors, asset management companies remain attractive on a long-term view. Although US savings rates remain negative, a return to the high single-digit rates of saving that on average characterised the 1990s, would help bolster the sub-sector in the short-term.
Diamond Lee, fund manager at Britannic, prefers the more cyclical sub-sectors, such as investment banks and asset managers.
Although asset managers remain expensive and are facing new pressures in terms of pricing, the sector remains a growth area and a proxy of sorts for the stock market, he says.
'There is less risk in the market now, so we are much more willing to play the investment banks,' he adds.
The insurance sector should enjoy something of a recovery in 2002, according to Czepliewicz. Companies in the sector have seen a number of forecast adjustments in light of last year's terrorist attack on the US, but the larger players in both insurance and reinsurance should enjoy a lift, he says.
'After bearing the brunt of the World Trade Center liabilities,' he adds, 'they should subsequently benefit from improved pricing, flight to quality and so forth. Implied long-term growth rates are a couple of points higher for global insurance than for global banking, which we consider fair.'
Lee is bullish about reinsurance and prefers the larger European players on the back of their unrivalled balance sheet strength. He says there will be a flight to quality and insurance companies will go to the companies with the thickest balance sheets, such as Swiss Re and Munich Re, which have pricing power.
Czepliewicz says the earnings multiples of banks have actually risen from their level before the events of 11 September. The house remains heavily underweight Japanese and Latin American banks on the back of continuing fears of their credit exposure.
Lee says his largest underweight is retail banks, which he believes will be further hit by bad debts over the coming year. He feels it can be difficult to establish banks' exposure to such assets, exemplified by the surprise caused when news of Abbey National's hefty exposure to Enron was revealed.
Insurers and reinsurers to bounce back.
European banks to outperform peers.
L-T demographics still favour sector.
Japanese and LatAm banks to underperform.
Further job cuts in the sector likely.
US savings rate negative.
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