Financials have proven a hugely divisive topic over the past few years. With Deutsche Bank in the doldrums and Italy on the edge, Abante’s Marta Campello gives one fund selector’s view on how to find potential outperformers despite all the market problems.
In the last 18 months the banking sector has been the worst performer in Europe by far, losing nearly 60% of its market value. The Brexit vote was a new hurdle in the way of banks' performance and the expected stress tests have not dispelled fears of a deeper crisis for their business models.
Among fund managers we can see that banks are equally loved and hated. For some it is their favourite sector, while for others it is the main area one to avoid. So what can you do?
Among our selected fixed income managers, the preference for financials is quite common. Given the zero rates scenario and the spread compression in corporate debt. The banking sector, with a wide range of alternatives in the debt space, is one of the strongholds that still offers value to our managers.
Fixed income focus
In the short duration bucket, Carmignac Securité, managed by Keith Ney, and Natixis Euro Short Term Credit, managed by Christine Barbier, have decent exposure to financials. Both of them include short duration senior and subordinated debt to increase the yield of their portfolios.
Meanwhile, the Invesco Global Total Return Bond fund is one of our favourites within the flexible fixed income funds. Managed by Paul Causer, Paul Read and Jack Parker, the financial sector is the focus of their corporate bond exposure, with 20% allocated to banks. An important part of this is to subordinated financials.
Elsewhere, the Jupiter Dynamic Bond, run by Ariel Bezalel, has 17% in financial bonds, as he believes banks are now quite healthy in terms of capital. Therefore being a bond holder is very attractive.
In the few weeks after the Brexit vote, we saw an opportunity to invest in contingent convertibles of well-capitalised European banks, so we decided to include Mutuafondo Bonos Subordinados, a fund investing more than 50% of its portfolio in CoCos.
While in the fixed income space finding some exposure to financial debt is not rare, in the equity space, backing a bet on banks is really controversial. Many managers have been avoiding banks for a while. However, others see current valuations as a once in a lifetime opportunity.
Among those taking this stance, we can find one of the veteran funds in our equity portfolios. The Invesco Pan European Equity fund, managed by John Surplice and Martin Walker, has a financials overweight, which makes up a quarter of the fund.
He thinks European banks have undertaken an important effort to become well capitalised in the past few years, thus they are prepared to face negative economic scenarios with no need of macro capital increases.
The big banks in the eurozone are trading at 0.3 to 0.7x price-to-book value, a level not seen even in 2008. This neither reflects a profitability problem nor a solvency problem, it is just an escape from which all the uncertainties the market is contending with.
José Ramón Iturriaga, manager of Okavango Delta and Spanish Opportunities fund, views Spanish banks as a historic investment opportunity. Banks have been, especially in Spain, ‘super hated’ stocks as a consequence of political uncertainty reflecting a higher risk perception.
Macroeconomic figures being supportive, the quick formation of a new government and the end of the consolidation process among the Spanish banks should be a powerful catalyst to see banks' prices rising much higher.
As you can see for some managers the bet on financials in Europe is a strong conviction, but so far the market is denying this fact. Probably being patient will be rewarding in the long term.
An extract of these comments appeared in the October edition of Citywire Selector magazine.