Financial markets remain volatile and, while there has been a recent rally, it appears there is still no solution to the issues in Europe.
The probability is high that Europe will go through the same process as Japan did and the growth rate could be very low for a long time. That means investors need to look outside of the developed markets they are so fond of and towards emerging markets.
There are excellent opportunities for investors as the emerging market financial services companies operate very differently to their developed world counterparts.
India and most other financials are showing good gains – Indian banks specifically benefitted from their government’s sudden new found conviction to push through long overdue reforms. This is pleasing for investors as some were losing conviction and were tempted to reduce Indian bank exposure when the growth rate decelerated.
Our research showed earnings growth would remain positive and that valuations were again at a multi-year low point. If the government “stays the course” and gets India back on a 7% real GDP growth rate, Indian banks are very undervalued.
Indonesia and Thailand are also performing well. Tisco, the Thai bank, gained 20% during the last quarter and Aeon Thana gained 83%. In addition, Daegu Bank, Korean Reinsurance and Bank Rakyat Indonesia provided good returns, mainly on the back of very satisfactory results.
These results evidence the decision not to invest in Europe at the present time where there is still unpredictability, rather going for a lower return with emerging markets but with a much higher degree of certainty of returns.
The large global banks still need to be reviewed and analysed but, in current market conditions, JP Morgan is the only one that comes through our extensive review process. The main reason is that the LIBOR scandal has been priced in and there is little investment banking undertaken.
A decision was taken to reduce the Barclays holding, after a 20% price gain, and instead invest in Sberbank. Sberbank is the largest bank in Russia and future earnings will benefit from the current spend on technology and its dominant branch network in a country where individuals are increasingly starting to use credit cards and personal loans.
Most importantly, Sberbank trades as a price/net asset value per share of 1.3x, while the forecast return on equity is around 22% – clearly very undervalued despite the always present political risk.
Finally, thoughts turn to the reinsurers. Despite the recent hurricane season they still remain good investments. We have switched some of our Amlin holding into Catlin and Lancashire and switched Banco do Brasil into Banrisul (also in Brazil), as well as marginally increasing our exposure to US banks.
Kokkie Kooyman is global fund manager at Sanlam Investment Management.
Markets have rallied hard
No real solution to Europe yet
Investors underweight equities
Equities are cheap
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