INSUBCONTINENT EXCLUSIVE:
NEW YORK: US-based mutual fund managers worried about the outlook for bank earnings have been trimming financial stocks from their
portfolios, although some value-oriented portfolio managers and analysts said they still see attractive opportunities in the sector.
The
average US based mutual fund reduced its stake in financial companies by nearly 1.1 percentage points in the second quarter to approximately
14 percent, the largest one-quarter decline since at least 2013, according to Goldman Sachs
The move away from banks, insurance companies, and mortgage lenders came as the financial sector has underperformed the broad SP 500
benchmark index by more than 5 percent since April.
Many fund managers believe banks have already hit peak earnings
One red flag is that the US Treasury yield curve has been flattening as short-term yields rise in anticipation of US interest rate hikes
from the Federal Reserve while long-term yields fall on worries about economic growth and trade tensions
This situation generally squeezes bank profits.
Some investors worry long-term yields might eventually dip below short-term yields
Such a yield curve inversion that can signal a looming recession.
"The flatter the yield curve the harder it is to make money," said Ian
McDonald, co-leader of the financials research team at Janus Henderson Investors, which oversees $370.1 billion in assets under management,
adding that "funds are looking around and saying that if we're going to see weaker growth then we need to get out of financials."
The spread
between the yield of two- and 10-year US Treasuries is trading around its flattest in 11 years
Rising short-term rates raise a bank's borrowing costs, while falling long-term rates limit how much they can charge for loans.
Yet
McDonald said large-cap banks like JPMorgan Chase and Co, Bank of America Corp, and Citigroup Inc remain attractive even if the sector
The major banks have been investing in online platforms and mobile apps, making them more appealing to millennials and less dependent on
costly branches, he noted
"The US retail banking industry is moving from the post-crisis phase of risk management to the fintech phase of managing customer
Ben Kirby, portfolio manager of the $15.4 billion Thornburg Investment Income Builder fund, said his fund has been moving more into
European banks such as ING Groep NV, prompted in part by a recent sell-off in shares following the steep decline of the Turkish lira
The Turkish currency has plunged more than 40 percent this year due to increasing tensions with the United States and concerns that the
country's central bank is losing its independence under President Tayyip Erdogan
"The US has been the market darling for the last 10 years, and that's led to valuations that are a bit more stretched and an economic
cycle that is a bit more mature," Kirby said
"Whereas in Europe it's earlier in the cycle and growth is accelerating more."
Overall, companies in the SP 500 financial sector trade at
a trailing price to earnings ratio of 14.5 and are up 2.2 percent for the year to date, according to Thomson Reuters data
The broad SP 500, by comparison, trades at a trailing P/E of 22.06 and is up nearly 9 percent over the same time
Investors have retreated from financials as well, with the Financial Sector Select SPDR, an ETF that tracks financial stocks in the SP 500,
losing $1.7 billion in outflows over the last 4 weeks, according to Lipper data
Though banks have stronger balance sheets than at the start of the financial crisis 10 years ago, "we're having a hard time finding
anything to get excited about in financials," said Tom Plumb, manager of the $29.7 million Plumb Equity Fund
Instead of banks, Plumb has his largest positions in credit-card and payment companies Visa Inc and Mastercard Inc, continue to grow as
more retail purchases are made online rather than in physical stores, he said
"It's a mistake to get off a big macro secular trend too early," he said
Kyle Martin, an analyst at Westwood Holdings Group, a Dallas firm with $21.6 billion in assets under management, said that rising interest
rates and the flattening yield curve could point to a recession in 2020, meaning financial stocks are less attractive
Investment bank Houlihan Lokey Inc looks attractive despite the prospect of declining economic growth given its focus on middle-market
mergers and acquisitions, which should see above-average deal activity as the threat from technology disruption grows, he said
"Banks are clearly safer than they were 10 years ago," he said
"At the same time, they will see a decline in earnings soon and it's easy for a fund manager to not have those listed on a client
statement if we go into another crisis."
