According to a recent article, based on an analysis by Stanford Bernstein. implementation of the Volcker Rule, a part of the Dodd Frank Act, could nick profits at the eight biggest U.S. banks by $10B per annum.
Banks in the U.S. and also across the pond in Europe have paid billions in fines for various alleged misdemeanors ranging from manipulation of benchmark interest rates, money laundering, mortgage irregularities, mis-selling of financial products and so on. According to this estimate, 10 banks have been fined £130B in the 6 years to the end of 2013.
Considering banks’ role in the global financial sector, how do the above developments affect the rationale for investing in the sector?
Odey's Brook Absolute Return Fund was up 10.25% for the third quarter, smashing the MSCI World's total return of 2.47% in sterling. In his third-quarter letter to investors, which was reviewed by ValueWalk, James Hanbury said the quarter's macro environment was not ideal for Brook Asset Management. Despite that, they saw positive contributions and alpha Read More
Global financial stocks: Value trades, going…going…
The global financial stocks are one of seven remaining value plays left after the 40% appreciation seen in global equities over the past two years, say the Citi Global Equity Strategists in their recent study, “The Last Value Trades.”
“Higher multiples and valuation compression mean that finding relative value opportunities has become harder for global equity investors. But this does not mean that they have disappeared completely. We can find global regions and sectors that could still offer some potential interest to value investors,” say Citi.
A screening for PE of the major regions, global sectors and global mega caps compared to the MSCI ACWI benchmark generated the following chart:
The chart shows the seven sectors that trade at a PE discount to the global benchmark: CEEMEA, Energy, EM Asia, Financials, UK, global mega caps and Latam.
How financials score on other valuation metrics
A comparison of current PE discounts relative to the historical PE discount (represented by the 15-year median) shows that financials are trading at a discount close to their historical median, which is about 15%, as shown below:
On the metrics of dividend yield, price to book and CAPE, financials are placed better compared to the benchmark ACWI:
Financials and fundamentals
Amongst all the value trades, financials score the best 6-month earnings momentum compared to the benchmark, as well as the best growth forecast for dividend per share over the next two years:
Global financial stocks: Conclusion
The above screening method answers the query whether these trades could be “value traps.” The inancials clearly pass muster on the tests for historical PEs, other valuation metrics and fundamentals, with strong earnings momentum and DPS growth.
Here is the comparative assessment for the value trades:
Global financial stocks: Investment action
Here are some ETFs/Funds to be considered to gain exposure to the financial sector:
Select Sector Financial Slct Str SPDR Fd (NYSEARCA:XLF)
Vanguard Financials ETF (NYSEARCA:VFH)
iShares Dow Jones US Financial (ETF) (NYSEARCA:IYF)
iShares S&P Global Financials Sect.(ETF) (NYSEARCA:IXG)
Ishares MSCI Europe Fincls Sctr Indx Fd (NASDAQ:EUFN)