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Investors look to banks for value in raging bull market

Investors look to banks for value in raging bull market

In 1994, the K Foundation, comprising members of UK pop group The KLF, burned £1 million on the Scottish island of Jura.

This was not a sensible investment.

But investors today might be forgiven for thinking they are in a similar kind of situation.

Stock markets across the developed world have been hitting highs, while prices of bonds have risen and yields contracted. In this environment, to paraphrase Yazz, perhaps ‘The Only Way Is Down’.

Hanging in there

Multi-asset fund managers I spoke to, in an effort to find investment areas currently exciting them, voiced concerns about today’s markets.

‘There doesn’t seem to be a lot of obvious value anywhere at the moment,’ said John Husselbee, head of multi-asset at Liontrust. ‘There’s nothing that’s screamingly cheap at the moment, we are so far into a bull market,’ commented Simon Evan-Cook, manager of Premier multi-asset funds.

‘For us it’s about avoiding areas that are dangerous and trying to do “well enough”,’ continued Evan-Cook. ‘It’s sensible not to expect to make the same absolute returns in the next seven years that were made in the last seven years.’

Even so, Husselbee pointed to the falls in Asia and emerging markets after Donald Trump’s US presidential election victory. ‘For no fundamental reason, these markets sold off more than 5%. That gave us an opportunity to top up. Noise in the markets, in the form of protectionism and Trump’s desire to rip up trade agreements, obscured the economic fundamentals. What you’re looking for is the signal, not the noise.’

Re-emerging opportunity

Evan-Cook sees ‘valuation opportunities’ in emerging markets, with India currently ‘a lot more exciting’ than China. In India ‘the chaos breeds opportunities’, he said.

‘People were very excited about emerging markets going into 2007, due to the growth of the middle class,’ Evan-Cook pointed out. ‘That went too far, there was over-investment, the excitement burst and companies struggled to do well. But now those advantages of 10 years ago are coming through.’

Evan-Cook said small and mid cap companies could tap into this growth. ‘Smaller companies offer access to the domestic economies and the demographic trend,’ he said. ‘If you buy the index you gain exposure to state-owned companies, commodities and other mature businesses.’

Improving environment

Anthony Gillham, co-head of the multi-asset team at Old Mutual, sees opportunities in developed world banks. ‘Banking has had a tough time since the 2008 financial crisis,’ he said. ‘But the sector has spent a long time rebuilding robustness of balance sheets in particular.’

Gillham said much of the regulatory hurdle and negative perception ‘is starting to break down’, with regulators becoming more pragmatic. He believes Trump can appoint people with a ‘lighter touch’ to regulatory commissions. Moreover, there is an opportunity for a bank such as Lloyds to cut costs and improve margins, ‘now it’s all but been returned to private ownership’.

He said there was scope for banks to increase their loan book in Europe. Rising interest rates could also improve margins for banks. ‘Regarding portfolio construction, banks make more money when rates rise, and rates in Europe are negative,’ said Gillham. ‘So they become a hedge against rising interest rates, which hit fixed income.’

Portfolio construction is key to managing multi-asset funds and this involves more than just picking winning sectors. Husselbee said: ‘If you had 11 of the best football players it wouldn’t necessarily get you the best football team. You want the 11 players who work best together and that’s what you’re looking for in a portfolio.’

This balanced approach might not, as the rapper Nas sings, help you ‘Find Ya Wealth’. But it should ensure your investments do not go up in smoke, even in the current challenging environment.

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