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01092018

U.S. fund managers trim bank stocks on profit worries

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According to Goldman Sachs, the average unit fund in the US reduced its share in financial companies by almost 1.1 percentage points in the second quarter to about 14 percent, which is the highest for a quarter compared to 2013.

The departure from banks, insurance companies and mortgage lenders was caused by the fact that the financial sector did not cope with the broad S & P 500 index by more than 5 percent since April.

Many fund managers believe that banks have already reached their peak income. One red flag is that the US Treasury yield curve is flattening, as short-term yields are rising in anticipation of an increase in US interest rates from the Federal Reserve, while long-term yield falls on concerns about economic growth and trade strains. This situation usually compresses the profit of the bank.

Some investors fear that long-term profitability may fall below short-term profitability. Such an inversion of the yield curve, which can signal an impending recession.

"The flops of the yield curve, the harder it is to make money," said Jan McDonald, co-leader of the financial research group Janus Henderson Investors, which controls assets under the management of 370.1 billion dollars, adding that "the funds are inspected and say that if we we will see a weaker growth, we need to get out of the financial state. "

The spread between the yield of two- and 10-year Treasury bonds US2US10 = RR is trading around its very flat for 11 years. The growth of short-term rates leads to an increase in the cost of borrowed funds of the bank, while the drop in long-term rates limits the amount of payments for loans.

Nevertheless, McDonald said that large banks such as JPMorgan Chase and Co (JPM.N), Bank of America Corp (BAC.N) and Citigroup Inc (C.N) remain attractive, even if the sector as a whole does not. He noted that large banks invest in online platforms and mobile applications, which makes them more attractive for millennia and less dependent on expensive affiliates.

"The US retail banking industry is moving from the post-crisis phase of risk management to the fintech phase of managing customer experience," he said.

Ben Kirby, portfolio manager of the investment fund for Thornburg investment income worth $ 15.4 billion. USA, said that its fund is more moving to European banks, such as ING Groep NV (INGA.AS), which is caused, in particular, by the recent sale of shares after a steep decline in the Turkish lira. This year, the Turkish currency fell by more than 40 percent due to growing tension with the United States and fears that the country's central bank is losing its independence under President Tayyip Erdogan.

"For the past 10 years, the US has been a market lover, and this has led to an assessment that is slightly more stretched, and an economic cycle that is a little more mature," Kirby said. "If in Europe it happens earlier, and growth accelerates."

In general, according to Thomson Reuters, in the financial sector S & P 500, the ratio of trading prices to revenues is 14.5, and for the year to date it has grown by 2.2 percent. The broad S & P 500, by contrast, traded with a lagging P / E of 22.06 and is almost 9 percent over the same time.

According to Lipper, investors also retreated from financial activities, and the Financial Sector Select SPDR, ETF, which tracks financial stocks in the S & P 500, while losing $ 1.7 billion. USA as a result of outflows in the last 4 weeks.

Although banks have stronger balances than at the beginning of the financial crisis 10 years ago, "it's difficult for us to find anything that can worry about financial performance," said Tom Plumm, manager of the Plumb Equity Fund, valued at $ 29.7 million.

Instead of banks, Plumb has its largest positions in credit cards and payment companies Visa Inc (V.N) and Mastercard Inc (MA.N), which continue to grow, as more retail purchases are made online rather than in physical stores.

"It's a mistake to get out of the big macro trend too quickly," he said.
 
Kyle Martin, an analyst at Westwood Holdings Group, a Dallas firm with assets under management of $ 21.6 billion. USA, said that the increase in interest rates and the yield smoothing curve may point to a recession in 2020, which means that financial stocks are less attractive.

The investment bank Houlihan Lokey Inc (HLI.N) looks attractive, despite the prospect of a decline in economic growth, given its focus on mergers and acquisitions in the medium-term market, which should see higher transaction activity, as the threat from a technological malfunction grows, he said.

"Banks are obviously safer than 10 years ago," he said. "At the same time, they will soon see a decline in profits, and the fund manager will not be able not to have the client listed in the application if we move into another crisis."
 




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