Financial stocks look cheap – but so they should

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)

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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.