The global financial sector looks in good shape on the back of consumer borrowing, diversification a...
The global financial sector looks in good shape on the back of consumer borrowing, diversification and restructuring measures to cut costs.
Overall the MSCI World Financials index rose 28.32% last year compared to 8.95% for the previous, while both Psolve Alternative Investments and New Star look to global mortgage markets.
Although Jabir Sardharwalla, chief investment officer at Psolve Alternative Investments, does not comment on individual portfolios, he feels rising interest rates will benefit the lending and banking sector in Japan, as the Bank of Japan is expected to lift its zero interest rate policy from March/April this year.
Banks, he believes, will benefit from this include Mizuho, as the company not only has a lending facility, but is beginning to diversify its business by selling funds as well.
Guy de Blonay, manager of the New Star Global Financials fund, has also placed Japan in its top 10 countries list.
He says: "The fund has increased its exposure to Japan to capitalise on its recovering financial sector and the return of domestic investors. In Japan, banks are moving to the second phase of their recovery, during which core earnings growth should drive profits. Such gains are more valuable than the mere absence of write-off and, where recurring, can produce valuation expansion."
Another region expected to benefit from mortgage lending is Europe. Sardharwalla says: "The European financial sector has been dominant in Germany. Generally banks have rationalised and streamlined to become a lot more efficient. One such company is Deutsche Bank, who has widened its income base by focusing on both the consumer and commercial end."
De Blonay believes the harmonisation of continental European mortgage markets could lead to an extended boom in mortgage lending.
Studies suggest that when consumers are faced with a greater range of lending products, they tend to increase their borrowing levels. Some economists expect mortgage loan growth in Germany, Italy, France and Spain to reach 9% to 10% per annum for the next decade.
The New Star Global Financials fund includes Unicredito Italiano in its top 10. Unicredito Italiano has grown to become one of Europe's largest mortgage lenders, following its acquisition by German Bank HVB.
However, in the US, mortgage lenders are suffering on the the back of the Federal Reserve's decison to rate interest rates for the thirteenth consecutive month to 4.25%. Sarharwalla warns it has been pretty rough for banks with consumers starting to feel the pinch from the rate rises.
However, he says, if the Fed reduces rates later in the year, it could prove beneficial, as consumers begin to restructure their mortgages. He believes companies such as Fannie Mae, the financial services provider for low income earners, and mortgage lender Freddie Mac will benefit the most from this.
Financial stocks also look attractive in the emerging markets as consumers look to lenders to borrow as the economies start to pick up, according to Sardharwalla.
For example, the State Information Centre in China has forecast GDP growth to be 8.8% in 2006, with retail sales are expected to rise by about 13%. UK banks such as HBOS have also begun diversifying, setting up establishments in China.
Sardharwalla says this is a strategic move by the UK banks to boost profits while moving away from the already saturated UK market.
Financials expected to do well on the back of consumer borrowing
Japanese banks to benefit from interest rate rises
Emerging economies doing well due to strong consumer
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