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The results of last December’s stress tests have prompted Threadneedle’s Cormac Weldon to move to an overweight in financials as he calls the end of the banking crisis.
Weldon, running the £1.8bn Threadneedle American fund, said the results of the Federal Reserve’s stress tests indicate the sector has returned to health. The manager was underweight the sector through most of 2011, but moved to an overweight position late last year.
“Last year’s stress tests were severe and even factored in the possibility unemployment levels could spike to 13%,” said Weldon.
“The fact the banks passed these tests means they are able to start buying back stock and raising their dividends again. The sector is now well-reserved, much less leveraged and healthy in comparison to its European counterpart. It signifies the end of the financial crisis,” he added.
The string of positive economic data that has emerged from the US this year has prompted a more bullish outlook for the region in general, said Weldon. He identified three key tailwinds to the US recovery: the banking sector’s increasing strength; the industrial sector’s recovery, driven by the shale gas discoveries; and the manufacturing sector’s reduction in capacity.
“In the medium term, we are optimistic about growth in the US,” said Weldon.
The manager bought US investment banks Wells Fargo and J.P. Morgan late last year due to their cheap valuations and strong balance sheets.
However, the Threadneedle manager said there still are a number of possible threats to the US recovery, and he does not expect GDP growth to be greater than 3% for the next few years.
“Unlike other countries, the US is not really engaging in fiscal austerity yet, and it is likely to be on the table next year. We are not sure of the timing or size of this move, but investors need to start acknowledging the risks,” said Weldon. “There is also the risk the government will not renew important tax cuts set to expire at the end of this year.”
Other managers have also shown increased confidence in the US banking sector, including Investec’s global equity team and Jupiter’s financials manager Guy de Blonay.
The Investec global equity team raised their weighting in US banks from an underweight to neutral at the turn of the year.
“The US took early and prompt action to address the problems in its financial system. There is now light at the end of the tunnel in terms of the banking sector getting rid of its bad debts. Balance sheets are strong and loan growth is healthy,” said strategist Max King.
De Blonay bought back into US banks including J.P. Morgan and Goldman Sachs in February 2012, encouraged by the more positive US economic data, and raised his exposure to the US as a whole to about 30% of his £495m Jupiter Financial Opportunities fund.
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