Global financials 2008 outlook

Global financials 2008 outlook by Guy de Blonay, manager of the New Star Global Financials Fund: “It is easy to believe that financials did badly in 2007 and anyone invested in investment banks or mortgage banks in the more developed parts of the world may be nursing losses.

“However, there was plenty of opportunity for profit during 2007 provided an investor had favoured strong-performing areas such as southern European banks, stock exchanges or Asian property companies.

“The question for investors is whether the same strategy will work in 2008 or do they need to try to do things differently. The strong fundamental arguments for favouring financial companies in developing countries certainly remain intact. Under-penetration of financial services in countries like Russia and Brazil provides considerable opportunity for investors to make money as loan growth, credit card growth and mortgage advances outpace more developed markets.

“Nevertheless, steep falls in share prices because of the sub-prime fallout have opened up some attractive valuations among western banks. High dividend yields and low price to book ratios among western banks suggest we are approaching the bottom but I believe there are still questions about earnings visibility. I am inclined to wait until earnings reports are released in the new year. This may be at the expense of a little upside but a clearer picture will have emerged about the true impact of write-downs and a slowing housing market. In the meantime, companies that actively benefit from volatility such as stock exchanges and hedge fund or derivative providers should continue to do well.

“Information is likely to be a watchword for 2008. Central banks will be scrutinising economic data to guide them in their decision-making as there is currently a fine line between combatting inflation and preventing a recession. Falling interest rates are, historically, a precursor to strong performance from financial stocks. Recent downward moves in the US and the UK could, therefore, herald stronger performance from financials in these countries during 2008.”