Susan Sternglass Noble, manager of the £44.3m AXA Framlington Financial fund, also remains constructive on Japan and has taken a position in Nomura Holdings. She is reducing the fund’s weighting to emerging markets, on the basis that structural problems remain, especially in China. Her biggest weightings are Lloyds, HSBC, JP Morgan and State Street.
Strong businesses
For many, an increase in financials is a natural extension of believing in the durability of the stock market rally and/or the global economic recovery. Matthew Vaight, manager of the £1.1bn M&G Global Emerging Markets fund, for example, has increased his financials weighting as part of a tilt away from defensives and towards cyclicals. He believes a lot of emerging market financials groups have been forced to restructure because of the difficult environment of the past five years, leaving them better businesses overall.
This restructuring has not been confined to emerging markets. As a result, many companies look stronger than they have for some time. The biggest worry for many fund managers, however, is the unpredictability of regulation. For example, the insurance sector is still negotiating the Markets in Financial Instruments Directive (Mifid), the Insurance Markets Directive (IMD) and the Packaged Retail Investment Products (Prips) Directive. Capital adequacy requirements for banks are still subject to flux, and onerous regulation may act as a drag on earnings in the financial sector.
The second problem is that parts of the sector are extremely vulnerable to shifts in the economic cycle. As long as everyone believes US recovery is assured, financials should continue to do well; however, if there were a shift, sentiment could turn quickly against areas such as banking and asset management. Ultimately, the question of whether there is value in the financials sector will depend largely on whether the global economic and stockmarket recovery can be sustained.
Cherry Reynard is a freelance journalist.
