Healthy global financial opportunities despite market correction

The New Star Global Financials Fund, managed by Guy de Blonay, has risen 213.22% since inception compared to a 12.81% gain by the FTSE Global Financials Total Return Index and a 44.7% gain by the MSCI World Financials Total Return Index over the same period.

The diversity of the financials sector means Guy can invest in companies to suit a rising or falling market. During an equity bear market the fund can focus on defensive companies with earnings that respond to market volumes rather than rising asset values, or in a bull market it can invest in companies that are more sensitive to the economic and market environment. Following the recent market correction, Guy identifies the sub-sectors and stocks he currently favours.

Globally, the positive trends of the beginning of 2007 look likely to continue despite February’s correction. Global equities have been buoyed by declines in oil prices, inflationary pressures and bond yields, as well as economic indicators that suggest the deceleration in global economic growth will be modest. Equities are near their cyclical highs, a natural precursor to the recent stock market falls, but still appear attractively priced by historical standards and even more attractive when measured against inflation-adjusted bond yields.

The growing pool of global savings makes companies with exposure to wealth management particularly attractive. These include fund management groups and investment banks with strong private banking arms such as Switzerland’s UBS and Credit Suisse. This pool of savings and relatively low financing costs has also created the perfect conditions for private equity. Private equity groups led by managers with track records of long-term delivery, such as Eurazeo and WENDEL Investissement in France and Partners Group in Switzerland, are well-placed to benefit further.

In geographical terms, companies in Continental Europe are typically trading on valuations at a significant discount to those in Japan and the US. This imbalance is likely to be corrected in time, with takeover activity and high levels of liquidity supporting positive re-ratings and rises in share prices. National barriers, which previously prevented the takeover of domestic financial champions by foreign institutions, are steadily being removed and the economic region is beginning to take on the appearance of a ‘United States of Europe’. This has led to the creation of mega-European banks, such as Unicredito Italiano, which has exposure across the euro zone as a whole in addition to a strong share of its domestic market.

The Italian banking sector has undergone a sustained period of consolidation. This shake-up has increased competition, forcing banks to focus on improving their efficiency of management. Rich pickings are to be had by those that succeed, with the relatively under-borrowed Italian consumer providing opportunities in the credit card and mortgage markets at margins significantly higher than the European average.

FAVOURED SECTORS AND STOCKS

European banks with emerging market exposure

Société Générale has identified its international operations as its main growth engine for the coming years. Its option to take control of Russia’s Rosbank in 2008 offers further exposure to a market in which loans and deposits are growing strongly. Germany’s Deutsche Bank also expects emerging markets to play a greater role in its business, with China and India’s demand for increasingly complex products boosting its sales and trading growth.

Mediterranean banks

Mediterranean banks are benefiting from growth in credit markets and consolidation – SanPaulo-IMI and Intesa have merged in Italy, Unicredito Italiano is going from strength to strength and Greek bank Marfin Popular remains on the acquisition trail. Greek banks have strong potential, with share prices and efficiency being driven upwards by growth in credit markets and consolidation.