RLAM's Lilley closes underweight position in European Financial stocks

Having been underweight the Financial sector all year, both in banks and insurers, Kevin Lilley, manager of the Royal London European Growth Trust, moved to a neutral weighting in both areas yesterday.

According to RLAM’s Kevin Lilley: "We have seen signs of capitulation by investors in recent days with stock prices falling aggressively. Long only fund managers are underweight these sectors and hedge funds are short. From here I feel that the marginal trade will be for both parties to cover their positions as a result of recent government actions.

We have seen the disappearance of Bear Stearns and Lehman Bros. Fannie Mae, Freddie Mac and AIG have received government support. Central banks globally have been injecting liquidity into the markets in a co-ordinated way. HBOS has been absorbed into Lloyds TSB and the belief is that both Morgan Stanley and Goldman Sachs could be in trouble.

This has created a level of fear and hysteria that I have never witnessed in the last three decades that I have been following stock markets. The pressure on the US government / Federal Reserve is such that they may consider creating a new version of the Resolution Trust to absorb the assets of failed financial institutions, in order to draw a line in the sand. This could spark a sharp reversal in the share prices of financials.

I still feel that the longer term implications of the credit crunch will lead to far lower returns for banks than analysts are forecasting, but in the shorter term I feel that the market may have moved too far and that the pain trade will be upwards."