Chris Lowe is growing more bullish on giant banks and insurers as they gain market share at the expense of their regional peers.
The big banks are increasingly displaying the characteristics of oligopolies in many of the world's biggest markets, Mr. Lowe said .
"They are getting better pricing power because of less competition," the lead portfolio manager for the AIC Global Advantage Fund said yesterday.
AIC Global Advantage is one of the names in the financial services equity category - the top-performing group in July with an average gain of 8 per cent, according to preliminary figures from Globe Investor. (Mr. Lowe's fund rose 10.5 per cent last month, or 19.1 per cent in U.S. dollars.)
Financial services equity funds, which were hit hard last year amid a global credit crisis and ensuing recession, have risen an average of 20.3 per cent for the first seven months of this year.
Looking to build on his recent successes, some of the big banks and insurers that AIC Ltd.'s Mr. Lowe favours now include names like Wells Fargo & Co., Barclays PLC, HSBC Holdings PLC, ACE Ltd. and MetLife Inc.
He also favours larger insurance companies with more diversified earnings and larger investment bases, which means they will have more ability to raise capital - as they have had to do lately.
While financial institutions are expected to incur losses in areas like credit cards as well as consumer and commercial loans in a recession, investors are also focused on this red ink being offset by profits in other businesses, Mr. Lowe said.
"That has been helping the share prices of companies like JPMorgan, Barclays and HSBC."
Investment banking profits are getting a lift from the U.S. and many European governments raising money through bonds for their stimulus packages to give a boost to their economies, he said.
"All that money is being raised through capital markets."
Shares of insurers have been rebounding as their book values have risen along with their massive bond portfolios, said Greg Placidi, manager of AIC American Advantage Fund.
While the book value of insurers took "massive unrealized losses" in the first quarter, and in the fourth quarter of 2008, that has reversed sharply, he said.
"Insurers are seeing their book values increase on average anywhere between 5 to 35 per cent - names like Hartford, MetLife and Prudential."
The share appreciation experienced by U.S. insurers is also having an impact on their Canadian peers like Manulife Financial Corp., whose stock has had a "huge runup" from over $9 a share to over $25, Mr. Placidi noted.
"Manulife was being priced as if it was going to cease to exist. There was no rationalization for a $9-a-share price ... Now people are saying that they are no longer afraid of it going under."
If one looks at the valuation of financials over the past 15 years, they have been trading at two times book value, but "are now trading at roughly one times book," Mr. Placidi said.
"We actually think that financials are very well positioned here" as economies start to recover and revenues start growing again, he said. "You've had a lot of consolidation. You've had a lot of financials around the world go under, which leads the core financials better positioned going forward."
The consolidation of financials is not too dissimilar to what has happened in Canada where a small number of banks dominate, Mr. Lowe said. "If you look at Wells Fargo, it indicates that one out of three U.S. householders have a relationship with it. That is a very, very large market share."
But the upbeat outlook for financials does not mean that market won't have dips from time to time, Mr. Lowe added. "Nothing is linear.
"If you are looking out one to two years through the period of the downturn to the other side of a normal economic environment ... there is no reason why [financial stocks] should be trading at the very low, low levels that they are. They should in some instances be double from where they are."
|Group Average for all asset class as of 31 Jul, 2009|
|Asset class||Effective Date||Group Avg. 1-mo % return||Group Avg. 3-mo % return||Group Avg. 1-yr % return||Group Avg. YTD % return|
|Financial Services Equity||31-Jul-2009||8.1%||20.0%||-20.7%||20.3%|
|Asia Pacific ex-Japan Equity||31-Jul-2009||4.9%||17.2%||-4.9%||27.0%|
|Emerging Markets Equity||31-Jul-2009||4.8%||19.7%||-17.6%||34.2%|
|Greater China Equity||31-Jul-2009||4.8%||22.4%||2.2%||35.5%|
|Real Estate Equity||31-Jul-2009||4.1%||13.4%||-26.7%||5.3%|
|Canadian Dividend and Income Equity||31-Jul-2009||4.0%||13.9%||-9.6%||16.9%|
|Global Small/Mid Cap Equity||31-Jul-2009||3.8%||13.0%||-19.9%||17.4%|
|Canadian Income Trust Equity||31-Jul-2009||3.5%||14.2%||-16.8%||16.6%|
|Canadian Small or Mid Cap Equity||31-Jul-2009||3.4%||12.6%||-22.1%||21.5%|
|Global Fixed Income||31-Jul-2009||-1.8%||0.5%||9.2%||-3.2%|
|Retail Venture Capital||31-Jul-2009||-1.5%||-2.7%||-15.8%||-4.3%|
|U.S. Money Market||31-Jul-2009||0.0%||0.0%||0.8%||0.2%|
|Canadian Money Market||31-Jul-2009||0.1%||0.1%||0.9%||0.3%|
|Canadian Short Term Fixed Income||31-Jul-2009||0.3%||0.4%||4.1%||1.9%|
|Canadian Long Term Fixed Income||31-Jul-2009||0.4%||2.9%||3.3%||1.7%|
|Canadian Fixed Income||31-Jul-2009||0.8%||2.7%||4.9%||4.1%|
|Health Care Equity||31-Jul-2009||0.8%||9.5%||-9.5%||2.3%|
|Average for all funds||31-Jul-2009||2.2%||8.1%||-12.0%||9.4%|
|S&P 500 Composite||31-Jul-2009||7.4%||13.1%||-22.1%||9.3%|
|S&P/TSX Composite Index||31-Jul-2009||4.0%||15.7%||-20.6%||20.0%|
|Includes average of both Canadian and U.S. dollar funds. Source: Globe Investor|
© 2007 The Globe and Mail. All rights reserved.
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