The sale after 17 years of the last of the government’s stake in NatWest has led some to claim that this was good news for the banking sector. The stock overhang has been removed, and the sale has got the state off its back, they say.
Don’t count on it. Instead, this could herald open season for the government on the UK’s banks, meaning higher taxes, more regulation and the endorsement of new crackpot compensation schemes dreamed up by disgruntled consumers and grievance-chasing lawyers.
MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
The banks would seek to mitigate the loss of income by removing their deposits from the BoE and either investing in short-term gilts or lending to the private sector at whatever interest rate they could get. The former would bring down yields in the short term, helping the government to finance its borrowing requirement; the latter would reduce private sector borrowing costs. The snag is that the BoE would lose control of market interest rates.
The stimulus to monetary growth would create a spiral of rising inflation and a weakening currency, with the Bank of England and government powerless to stop it. Banks would be trebly hit: by the loss of revenue, the boom leading to bust with multiple insolvencies, and by the lower valuation of their shares in foreign currency terms.
Investors should instead consider the Polar Capital Global Financials Trust (LSE: PCFT). Almost 90% of the trust’s assets are invested outside the UK: 40% in banks (JPMorgan is the largest holding at 7%), 18% in insurance and 38% in financial services such as Mastercard and Visa. The portfolio has returned 19% over one year, 54% over three and 118% over five. Since NatWest, Lloyds and Barclays have all performed considerably better than that, now might be a good time to switch out of UK financials and into PCFT.
Moving away from bank stocks
PCFT managers Nick Brind and George Barrow have significantly reduced their exposure to banks in the recent years – their allocation to the sector was 59% of the portfolio three years ago and 49% two years ago. “Some banks are great businesses,” says Brind, “but we see better opportunities elsewhere.”
“The sector has performed very well and valuations have risen but earnings have grown faster than the market,” he says. “When we started, 12 years ago, the sector was trading on a 15% discount to the broader market; now it’s on 12 times earnings or 11 times excluding the data-service companies such as Visa and Mastercard. This is a 30% discount to the market.”
Financials have been widely distrusted by investors since the 2008 financial crisis, but “banks have been forced to clean up their act, and a lot of risk has been shifted off-balance sheet. The financial system has much more capital and liquidity, household and corporate balance sheets have seen a significant strengthening, yet the sector remains unloved.”
The sector would benefit from lower interest rates and lighter-touch regulation in the US and Europe. “We believe it would take a severely negative macroeconomic scenario to end the sector’s relative outperformance,” says Brind.
PCFT is trading at a 5% discount to net asset value (NAV). It offers the chance to redeem at NAV every five years, and the latest redemption cut the market cap by more than 40% to £350 million. Fees have been reduced, and a revised dividend policy pays 4% of NAV yearly.
An equally compelling investment worth considering is Polar Capital’s Global Insurance Fund, which has returned 98% over five years and 223% over 10.
This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.
-
MoneyWeek experts' best investments for the next 25 yearsMoneyWeek's experts predict the best investments for the next quarter-century. Tips range from defence and agriculture to Vietnam and Jardine Matheson
-
How to navigate the ups and downs of investment marketsMax King has spent over 40 years managing a fund and investing privately. Here are the key lessons he has learnt
-
MoneyWeek experts pick the best investments for the next 25 years
MoneyWeek's experts predict the best investments for the next quarter-century. Tips range from defence and agriculture to Vietnam and Jardine Matheson
-
How to navigate the ups and downs of investment markets
Max King has spent over 40 years managing a fund and investing privately. Here are the key lessons he has learnt
-
MoneyWeek's best calls of the last 25 years – the key trends we got rightFrom the early days of the gold bull market and the credit crunch to the advent of populism and post-Covid inflation, MoneyWeek has made some excellent calls
-
'How I brought MoneyWeek to the masses'Launching MoneyWeek gave ordinary investors information – and hence power, says Merryn Somerset Webb
-
'Why I launched MoneyWeek'Inspired by The Week and uninspired by the financial press, Jolyon Connell decided it was time for a new venture. That's where MoneyWeek came in
-
'My predictions for the next 25 years'Opinion What will the world look like when MoneyWeek celebrates its 50th birthday? Matthew Lynn shares his predictions
-
How have central banks evolved in the last century – and are they still fit for purpose?The rise to power and dominance of the central banks has been a key theme in MoneyWeek in its 25 years. Has their rule been benign?
-
What MoneyWeek has learnt in the last 25 yearsFinancial markets have suffered two huge bear markets and a pandemic since MoneyWeek launched. Alex Rankine reviews key trends and lessons from a turbulent time
