Financial stocks look cheap – but so they should
Philip Gibbs, manager of the Jupiter Financial Opportunities Fund, is buying financial stocks. They're cheap, he says. But they're cheap for very good reasons.
It's still a good time to buy financial stocks. So says Philip Gibbs, manager of the Jupiter Financial Opportunities Fund. And to prove it, he's launching another finance-focused fund.
Now, you can ignore a lot of what fund managers say as being mere hype to sell their own products. But Gibbs isn't so easily dismissed. The Jupiter Fund has made a total return of 868% since launch in June 1997, ranking it first out of all 748 unit trusts over that period. And he played the financial crisis well, switching from equities to cash in 2007, because he was worried about high levels of household borrowing in the US and Britain. He was also sharp enough to move most of his investments outside Britain, avoiding the slide in sterling.
Now he reckons that stocks look good again. "Looking at the period between 1997 and 2002, the average ratio between the equity earnings yield and bond yields has been one to one and has never slipped below 0.7. However, since then the ratio has been around 0.5. In other words, you are getting double the earnings yield on equities as on government bond yields." Just look at the chart below. (Source: Jupiter)
Subscribe to 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
Financial equities look particularly attractive, he says. Cash is paying a return of close to 0%, while government bonds pay 3%-4%, corporate bonds 6%-7% and financial equities 10%. Some stocks are even paying more. For example, the equity earnings yield on Barclays is 14%.
It all sounds very compelling. But financials could be cheap for a reason. As MoneyWeek's James Ferguson points out, therearea lot of bogeymen still lurking around on bank balance sheets. HBOS and Lloyds combined, for example, have only declared loss ratios of 6.7% on their securities. US banks, on the other hand, have realised securities losses of 16.9%. "Our banks appear to have either been very lucky, very clever or still have further losses to realise."
And then there's today's Pre-Budget Report punishment to deal with. Whatever Alistair Darling pulls out of his little red bag, it's unlikely to be good news for banking profits. So despite Gibbs' undeniable track record, we'd have to disagree we'dsuggest steering clear of financials for now.
Sign up to Money Morning
Our team, led by award winning editors, is dedicated to delivering you the top news, analysis, and guides to help you manage your money, grow your investments and build wealth.
Jody studied at the University of Limerick and was a senior writer for MoneyWeek. Jody is experienced in interviewing, for example digging into the lives of an ex-M15 agent and quirky business owners who have made millions. Jody’s other areas of expertise include advice on funds, stocks and house prices.
-
Best funds to add to your ISA or SIPP before the Budget
With Labour expected to increase taxes, ISAs and SIPPs could be a great way to protect yourself from any CGT hikes. We look at the best funds to buy now
By Katie Williams Published
-
Starling Bank slapped with £29 million fine over ‘shockingly lax’ financial crime controls
The Financial Conduct Authority has fined Starling Bank £29 million over failings related to financial crime and its financial sanctions screenings
By Kalpana Fitzpatrick Published
-
House prices to crash? Your house may still be making you money, but not for much longer
Opinion If you’re relying on your property to fund your pension, you may have to think again. But, says Merryn Somerset Webb, if house prices start to fall there may be a silver lining.
By Merryn Somerset Webb Published
-
Prepare your portfolio for recession
Opinion A recession is looking increasingly likely. Add in a bear market and soaring inflation, and things are going to get very complicated for investors, says Merryn Somerset Webb.
By Merryn Somerset Webb Published
-
Investing for income? Here are six investment trusts to buy now
Opinion For many savers and investors, income is getting hard to find. But it's not impossible to find, says Merryn Somerset Webb. Here, she picks six investment trusts that are currently yielding more than 4%.
By Merryn Somerset Webb Published
-
Stories are great – but investors should stick to reality
Opinion Everybody loves a story – and investors are no exception. But it’s easy to get carried away, says Merryn Somerset Webb, and forget the underlying truth of the market.
By Merryn Somerset Webb Published
-
Everything is collapsing at once – here’s what to do about it
Opinion Equity and bond markets are crashing, while inflation destroys the value of cash. Merryn Somerset Webb looks at where investors can turn to protect their wealth.
By Merryn Somerset Webb Published
-
Value is starting to emerge in the markets
Opinion If you are looking for long-term value in the markets, some is beginning to emerge, says Merryn Somerset Webb. Indeed, you may soon be able to buy traditionally expensive growth stocks on the cheap, too.
By Merryn Somerset Webb Published
-
ESG investing could end up being a classic mistake
Opinion ESG investing has been embraced with enormous speed and zeal. But think long and hard before buying in, says Merryn Somerset Webb.
By Merryn Somerset Webb Published
-
UK house prices will fall – but not for a few years
Opinion UK house prices look out of reach for many. But the truth is that British property is surprisingly affordable, says Merryn Somerset Webb. Prices will fall at some point – but not yet.
By Merryn Somerset Webb Published