Further bad news is still to emerge from the banking sector, with banks still unable to properly value the complicated debt structures still sitting on their balance sheets, says Stephen Docherty, Aberdeen Asset Managers' head of global equities.
Citywire A-rated Docherty said the practice of valuing such structures on a ‘mark to model’ rather than ‘mark to market’ basis was still prevalent and placed a question mark over banks.
‘They still have a lot of these structures sitting on their balance sheets,’ he said.
‘I still haven’t invested in US or domestic UK banks over the last four to five years. I understand them as little today as over the last four to five years,’ he added.
Docherty, manager of the Aberdeen World Equity Fund and Luxembourg-domiciled Aberdeen Global World Equity Fund, pointed to the ‘trickle’ of writedowns from banks as evidence that banks were unaware of the extent and implications of the debt structures they held.
‘Why did it not come in one go? Presumably because they couldn’t do it or they didn’t know,’ he argued.
He said that banks will start marking to market once the US housing market stabilises, leverage comes out of the system and the structures become easier to price.
Docherty’s comments come as results from Bank of America (BofA) provoked the worst one-day fall in six weeks for US stocks. BofA reported a better-than-expected $4.2 billion in Q1 earnings yeaterday, but investors focused instead on the bank's growing provisions for credit losses. The bank's results have dampened the signs of optimism for the banking sector seen last week after US investment bank JP Morgan Chase reported by better-than expected first quarter profits.
Docherty was however upbeat about investment opportunities generally across global equities.
‘I’m not calling the bottom of the market – let me be clear on that,’ he said. ‘But valuations are a lot more attractive than they have been over the last five, ten, fifteen years,’ he said.
‘The hardest thing for us has been trying to keep our feet on the ground when there is so much opportunity.’
Docherty pointed to the changes within Aberdeen’s World Equity model portfolio, which forms the basis of the two global equity funds. He manages with a value style and a three-year outlook.
He has bought 13 new stocks over the last 12 months – a break from his normal less acquisitive style, which has seen him add on average two new names a year.
‘We are a bit more cyclically exposed, but not because we think we have reached the bottom. We will buy more of these over the next six to 12 months on weakness,’ he said.
Docherty added that he was moving away from a price-earnings approach towards other valuation methods and that price-to-book ratio was now a more pertinent approach.
Price-earnings are less relevant because earnings forecasts are only just beginning to be downgraded and the profit outlook is increasingly uncertain, according to the Aberdeen global equities team.
But even price-to-book valuations can be flawed if companies are forced to take good will writedowns after a period of aggressive acquisition, Docherty explained.