Unloved, but are bank shares also underpriced?
After their public battering in recent times, banks have been among the best stock-market performers, but don't expect a smooth ride from now on
Sunday 18 November 2012
It's been an eventful year for banks, to say the least. From Standard Chartered's fine for allegedly hiding transactions with Iran, to Bob Diamond's resignation from Barclays over Libor rate manipulation – you wouldn't think bank shares were the place to be this year.
And it seems there are more storms gathering on the horizon, with the Serious Fraud Office expected to file charges imminently against former traders over the Libor scandal.
But despite the torrid times banks have gone through recently, financials have been the best performing sector over the past few months, even though they have remained widely unpopular. If banks are so unloved by the masses, to the point where they are really cheap, the question is: is it time for you to be investing in them?
"If you ask a group of investors what's happened to banks this year, they'd all say they've gone down – they have a negative perception," says Mark Dampier, the head of research at Hargreaves Lansdown. "Sentiment is so poor against them – if more people say 'don't go there', you might be able to make an investment case for them."
Even though bank shares have done particularly well over the past few months, they have come from a pretty low level, having been severely beaten up, and some fund managers believe there's still a lot more room for share prices to go up.
"Banks are one of the cheapest and most unloved areas of the market. They have been unloved for a long period of time – a proper reason to have a look at them," says Guy de Blonay, the manager of the Jupiter Financial Opportunities fund. "You should probably look at UK banks again, because you want to look at a sector ahead of their return to the dividend register."
He adds: "These companies are on the mend, trading at very attractive valuations, and over the next three years will be able to come back and pay a dividend."
Giving credence to this view, Royal Bank of Scotland's chief executive, Stephen Hester, recently said the bank might be able to resume dividend payments to shareholders after 2013, which Mr de Blonay says bodes well for the sector as a whole.
Many of the risks facing banks are also ones that could soon blow over, rather than dog these institutions for years to come. Mr de Blonay says: "There are all sorts of 'one-off' risks that are lingering – but these are not long-term risks, and the stock price is already telling you this. So buying shares in RBS, for example, is already discounting such one-off events."
Shunning the sector might also mean missing out on some fleeting buying opportunities. "It is rare to get the chance to buy a franchise-leader like Lloyds – one that has a 30 per cent share of the domestic and small corporate banking market – at this level of valuation," says Sanjeev Shah, manager of the Fidelity Special Situations fund.
"Banks continue to be unloved by most investors, and despite strong performance of late, the sector continues to trade at depressed valuation levels," Mr Shah says. "In the short term, the economic environment is obviously tough, but on a longer-term view the recovery prospects remain strong."
However, there are other risks that could mean banks are not worth investing in. "My problem is that they're not transparent – no one could understand them," says Mr Dampier.
"The bank culture has been like this since I started – we've seen the payment protection insurance mis-selling, now there's the manipulation of Libor – what else is there to come out? You could say it's in the share price – maybe it is, maybe it isn't – but do you really have to be in banks? They are not paying dividends, either."
Mr Dampier says Neil Woodford at Invesco Perpetual, one of his top fund manager picks, has stayed away from banks for a while and has not shown signs of wanting to buy back in. Mr Woodford has owned bank shares in the past, and in the 1990s had about 30 per cent of the Invesco Perpetual Income fund invested in the sector, with Lloyds as a large holding.
The unstable situation in major economies is another reason to be wary of plunging into bank shares. Philippa Gee, at Philippa Gee Wealth Management, says: "I would be highly sceptical about investing in banks as a short-term money-making market opportunity. I personally doubt that we have completely finished the bad news about banks and with a possible further correction in markets, you could see bank stocks fall back."
Indeed, knowing when to buy and sell shares is tough, even for seasoned day traders, so opting for a collective investment fund could be a wise move. Ms Gee tips the JPM Global Financials fund, where its largest regional holding is the US, at just under 40 per cent.
"I would suggest investors also look at more diversified funds, such as Artemis Global Growth, which currently has approximately 16 per cent invested in banking stocks, or Liontrust Income – a UK rather than global fund – which currently has about 19 per cent in financial stocks," she adds. "Be very wary of being too specific in your investment approach – it can work well but it could also expose you to unacceptable levels of risk to your capital."
Although funds investing solely in financials are likely to undergo a choppy ride in the short-term, returns could be highly attractive over a longer time-scale. Ben Seager-Scott at Bestinvest says: "For investors with a long-term view, I would suggest Jupiter Financial Opportunities. While the fund has not participated in some of the rallies of recent years, it demonstrated the strength of this approach by avoiding the ugly falls following the collapse of Bear Stearns in 2008."
Caution is the watchword, then, when looking to invest in banks, and one option is to go with a diversified fund run by an experienced manager to gain this exposure as shares languish at cheap prices. Even then, remember that this sector has its own peculiar problems which could be exacerbated if the global economy takes a turn for the worse.
Emma Dunkley is a reporter for Citywire.co.uk
Simon Read: Frozen in time - the expat British pensioners who deserve a better deal
Weekly Money: Round-up of the personal finance stories you may have missed 19-23 January
Bargain Hunter: From The Outsider to 1984, catch a cut-price classic, read it in the rye
Donald MacInnes: My wasted hours in the retail deserts of Dixons-Carphone
Money Insider: Smart alternatives to the pensioner bond
- 1 Rowan Atkinson to sell £10 million McLaren 'supercar' he crashed into a tree and a lamppost
- 2 The truth about 'girl things': Three cheers for Heather Watson's honesty
- 3 Man who held up 'hire me' sign at Waterloo station returns a year later with 'I'm hiring' sign
- 4 Saudi preacher who 'raped and tortured' his five -year-old daughter to death is released after paying 'blood money'
- 5 Men behaving badly: Urinating while standing, 'manspreading' and the gendering of selfishness
British Muslim leaders outraged after Eric Pickles says followers of Islam should 'prove their identity'
UK terror fears: My jihadist son returned from Syria mentally scarred – now he is being ignored
Nigel Farage: NHS might have to be replaced by private health insurance
Billy Crystal: 'Stop shoving gay sex scenes in my face'
'We would evict Queen from Buckingham Palace and allocate her council house,' say Greens
French court convicts three over homophobic tweets, in case hailed as a 'significant victory' by LGBT rights campaigners
iJobs Money & Business
Negotiable: Recruitment Genius: A Tax Assistant is required to join a leading ...
£16000 - £25000 per annum: Recruitment Genius: This is an exciting opportunity...
£45000 - £47000 per annum + bonus + benefits: Ashdown Group: Java Developer / ...
£35000 - £38000 per annum + Benefits: Ashdown Group: Marketing Manager - Marke...
Day In a Page
Hibernate during winter and make your living during the summer at this busy guesthouse with panoramic sea views, in the village of Lynton
A four-bedroom penthouse next to the Tate with direct views of St Paul's from two floors of luxurious living space
A four-bedroom detached home surrounded by spacious gardens and woodland, close to New Pudsey
An 18th-century, three-bedroom home near Langstone Harbour built from ships beams with vaulted ceilings and wood burning stoves
A five-bedroom semi-detached home with a mix of period and modern features in a popular and convenient location
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
A three-bedroom villa with self-contained flat, minutes from Lake Windermere
A deceptively spacious, beautifully presented Georgian home with 3000sq ft of living space and five reception rooms
A five-bedroom Victorian home with four receptions, superb gardens and paddock in Pembury
An eight-bedroom house on the south side of the The Green with cinema, wine cellars and summer house
This 17th century beauty is full of rustic cosiness, while the detached home office means you can also run a business
Four exclusive apartments in a Grade II-listed former medical school with 2,275 sq ft of living space and 18ft ceilings
A five-bedroom terraced house on the popular Peterborough Estate, ideally located for both Eel Brook Common and South Park
A state-of-the-art farm-building conversion on the former Cliveden Estate, with 11,420sq ft of internal space, cinema and wine cellar
A three-bedroom, 15th-century cottage with original features in the picturesque village of Sissinghurst
A six-bedroom terraced house with large south-facing roof terrace, cinema room and wine cellar
A new seven-bedroom home built in Queen Anne-style with swimming pool and parkland views in Mortimer
A listed, four-bedroom farmhouse in the rural hamlet of Rushall with detached barn, four acres of gardens and paddocks
A first-floor flat with two bedrooms, a spacious reception room and communal grounds in a leafy part of London
A three-bedroom flat with a spacious rootop terrace and balcony, accessed from a private gated courtyard
A Grade II-listed pile with six bedrooms, stables and 39 acres of grounds in Standlake
A two-bedroom flat with boutique hotel-style interiors, close to the foodie haunt of West End Lane
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion
Enjoy summer by the Thames in this two double-bedroom converted warehouse in Rotherhithe village