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De Blonay slashes China and buys US banks for 2011 growth

De Blonay slashes China and buys US banks for 2011 growth

Jupiter Financial Opportunities manager Guy de Blonay has slashed his exposure to Chinese banks and dramatically rebuilt his exposure to US banks as he takes sole charge of the fund.

De Blonay, who became lead manager after Philip Gibbs relinquished co managership at the end of the year, said the Citywire Selection-listed fund had been zero-weighted to US financials two months ago, but US financials now account for some 30% of the portfolio.

The dramatic switch sees the fund's two biggest holdings become Citigroup and JP Morgan, which de Blonay said currently represented 8% and 7% of the fund respectively.

Tightening Cycle

Gibbs and de Blonay had shifted the portfolio on the view that Asia is currently struggling to contain growth and is going through a tightening cycle that will dent short term profitability. At the same time he thinks while the West is still struggling to kick start growth,  lending is easing and economies are starting to recover.

De Blonay told Citywire: 'We have reduced Chinese banks in favour of US banks on the anticipation of a much better year [for US banks] in 2011.'

De Blonay said he expected to see higher levels of capital from the big US banks put to use in the form of higher dividends, increased merger & acquisition activity or share buy backs this year.

'US banks are at relatively low valuations and with the fiscal stimulus,  the economic recovery does seem to be sustainable. Run rates of 3% to 4% should drive profitability in US companies. Consumer confidence is still good despite the weak housing market.'

At the same time de Blonay has become more cautious over the short term outlook for China and other emerging markets as he sees then struggling to keep growth in check, and predicts that the tightening cycle will dent profitability of emerging market financials in the short term.

'We dont know how long the tightening cycle will take in the East so have reduced our exposure to emerging markets. There is now only one Chinese bank in the top 10 and it is mainly made up of US banks.'

'This shift is the realisation that the US should surprise on the upside and US financials, at good valuations, will be the prime beneficiaries.'

US growth

De Blonay's comments about cheap US banks driving US share price growth  in 2011 echo those of  Legg Mason's veteran Bill Miller last week.

De Blonay said the current relatively benign inflationary backdrop for the US was a key part of his decision making process.

'The US should see low rates for another year but 10 year treasuries going from 2.5% to 3.5% tells us that we are entering a new inflationary environment and we might have to play rate rises earlier than thought -possibly the end of 2011 or the start of 2012 depending on the state of the global economy.'

De Blonay stressed that the tightening cycle in Asia needed to be watched closely as inflation has started to pick up quite aggressively.

'The tightening cycle is being implemented to ensure stability but also to sustain growth going forward. China, India and Indonesia's markets have all corrected over the uncertainty of the length of the tightening cycle. It is a consolidation period these markets had to go through.'

At the same time, de Blonay has reduced his stake in EM-focused Standard Chartered slightly, and maintains his exposure to top 10 holding HSBC, which was increased towards the end of the year.

'HSBC was increased because we thought its US business would benefit from the economic improvement there. Standard Chartered  is a pure emerging markets market play and we may have to look closely at this if the emerging markets continue to go through the tightening cycle.'

Over the year to the end of November, the fund has returned -4.56% compared to 3.57% by the FTSE World/Financials TR benchmark.

Over three years, the fund has returned 16.45% compared to the FTSE World/Financials TR benchmark's return of -22.25%.

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