Every week, a professional investor tells MoneyWeek where he’d put his money now. This week: John Yakas, manager of Hiscox Far Eastern Financial and European Financial funds
There have been few places to hide during the sell-off in global financial stocks. But the indiscriminate falls are beginning to provide opportunities in parts of the financial sector.
Not all financials are exposed to the worst hit US securities markets (such as subprime mortgage lending). And even in a recession, different sectors are affected in different ways (commercial banks generally suffer most because of their large loan books). Equally, not all regions have felt the impact; Asian financials are arguably the most defensive. They have strongly capitalised and liquid balance sheets, are at different stages in the economic cycle, and their economies have greater levers to boost domestic demand in the event of recessions.
The key place to look is at financial stocks whose capital is not at risk (most valuations are already assuming sharp falls in short-term earnings). Many sectors (such as fund managers, life insurers and Asian or emerging-market banks) are clearly less exposed. Here are three stocks that currently meet most of these criteria.
National Bank of Greece (NBG:US) is the largest bank in Greece with a dominant deposit franchise (an advantage in the event of limited wholesale funding availability) and a growing position regionally, especially in Turkey. It has no exposure to US subprime securities markets or other affected US securities markets, and its capital position isn’t under threat. The economy is also likely to be more resilient than most, as wages rise and investment spending, helped by EU inflows, continues. Peripheral European countries also tend to benefit more from cuts in EU interest rates, due to their stronger underlying growth.
The outlook is bright, driven by further deepening of the Greek financial sector, stronger than average GDP growth, and exposure to other emerging markets whose financial sectors should keep evolving, even if there is an overall slowdown.
Dah Sing Financial (440:HKG) is a medium-sized commercial bank in Hong Kong with a growing insurance business. Ultimately, its fortunes are tied to those of Hong Kong. Here, the economy has remained resilient: falling interest rates have boosted the domestic property market, consumer confidence is improving and strong Chinese growth continues. Further falls in US rates feed into lower rates in Hong Kong, even though the domestic economy is unlikely to need monetary easing.
Valuations remain very attractive after recent sell-offs in Asian financials and, like most smaller banks in Hong Kong, there is potential for further consolidation within the sector – assuming Chinese banks decide to boost their presence in Hong Kong.
Prudential (PRU:LN), as with other UK financials, has seen its share price fall sharply and is now very attractively priced. There is no longer a premium assigned to its fast-growing (and unique) Asian franchise. With high savings rates and a shift away from simply putting savings in the bank, the outlook for life insurance in the region remains excellent. Prudential has one of the few genuinely regional franchises in Asia, making it an attractive target for many banks or insurers.
Concerns are focused on its UK and US business, but the former has been significantly restructured (exiting low margin business) and the latter’s exposure to subprime is very limited, although it continues to have exposure to other investments in the US.
The stocks John Yakas likes
Stock, 12mth high, 12mth low, Now
National Bank of Greece, US$14.09, US$9.05, US$12.84
Dah Sing Financial, HKD83.00, HKD55.80, HKD60.01
Prudential, 818p, 545p, 649.5p