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The banks to back: Inside Polar Capital's Global Financials Trust
by Sarah Miloudi on Sep 26, 2013 at 08:01
Polar Capital's John Yakas believes that it is too early to go all out on emerging markets, but he has been upping his exposure following the recent sell-off, branding it an ‘excellent’ entry point.
Yakas, who co-manages Polar Capital's new Global Financials Trust alongside Nick Brind, told Wealth Manager that while the £152 million fund is still cautious on developing economies, investors should not overlook the emerging market opportunity.
He said: 'I think people forget how attractive the business of financial services is in a lot of these markets. You have got a sector where there's high profitability, you've still got growth, albeit at a lower level, and of course the huge sell-off we've just had has ended up with valuations being at quite a low level.'
Through to July, the sell-off in emerging markets – which was prompted by fears over sluggish growth and the impact of the Federal Reserve's plan to wind down quantitative easing - dragged equities down to valuations of around one and a half times book on average and one standard deviation below their historic average rating versus developed markets. It also had a devastating impact on currencies, with the likes of the Indian rupee slipping to a record low against the US dollar before its central bank intervened.
Yakas said that he and Brind decided to add to emerging markets during the dip, taking the trust’s exposure to the region to about 20%, though still keeping it below the maximum 40% level it can hold.
He said that while it was still too early to get fully exposed to emerging markets, for individuals happy to invest over a longer horizon, the recent sell-off created an 'excellent' entry point.
UK banks: Only halfway there
As well as owning Sberbank, the largest bank in Russia and Eastern Europe, Yakas and Brind also have exposure to the recovery story playing out in UK financials, where the government recently kicked off the process of returning Lloyds Banking Group into private hands following its decision to reduce its stake by 6% in exchange for £3.2 billion from institutional investors.
The trust has exposure to Barclays, but not Lloyds and Royal Bank of Scotland (RBS) shares. Yakas said that while the trio of lenders has found favor with investors after streamlining their balance sheets, he believes that valuations are only halfway through the normalisation process and that the discount between Lloyds and Barclays is too large.
Elsewhere, he believes North American banks such as JP Morgan are also much further ahead in the cycle compared to their Continental counterparts like BNP Paribas. This is an important point for investors to keep in mind, Yakas argued, because it has pushed investor sentiment towards European institutions.
But within Europe, and the UK’s big three in particular, different dynamics are driving the investment case.
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- Polar Capital Global Financials Trust PLC
- Sberbank Rossii OAO
- Lloyds Banking Group PLC
- Barclays PLC
- Royal Bank of Scotland Group PLC
- JPMorgan Chase & Co
- BNP Paribas SA
- W&G Investments PLC
- Lloyds Banking Group PLC
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