What Do International-Stock Managers Think About Financials?
Many are keen on emerging-markets banks.
Many are keen on emerging-markets banks.
International-stock managers' opinions on financial stocks are always important. Banks and other financial issues combine to form the largest sector in most overseas exchanges just as they do in the U.S. market. And whereas such stocks make up 16% of the overall market here at present, they constitute 25% of the typical exchange abroad--and they make up more than 30% of the markets in Brazil, China, and several other emerging markets.
Interestingly, many foreign-equity skippers have been drawing a sharp distinction between the outlook for emerging-markets and developed-markets financial stocks in recent months. These managers believe that the relatively strong GDP growth rates and overall economies in the developing world should lead to robust loan-growth rates for their banks, and they believe that the opposite is true for banks in Europe and Japan.
What's more, these managers think that emerging-markets lenders generally have healthier loan portfolios and balance sheets than their developed-markets peers. And they're confident that the relatively low financials-services penetration in the developing world provides exceptional opportunities for the companies in the sector. These skippers have been quite keen on emerging-markets banks and rather wary of their developed-markets counterparts as a result.
Many See a Bright Future for Emerging-Markets Banks
A diverse set of large-cap-oriented international-stock managers shares these views. Bill Fries, Wendy Trevasani, and Lei Wang run Thornburg International Value (TGVAX) with an eclectic strategy. They do own France's BNP Paribas and other European financials in that foreign large-blend fund, but in 2010 they have been favoring emerging-markets financials such as Standard Chartered (STAN) (which is based in the United Kingdom but derives the vast majority of its revenue in emerging Asia and other parts of the developing world), Industrial and Commercial Bank of China, China Merchants Bank, the Hong Kong Exchanges and Clearing, and Turkey's Garanti Bank.
Simon Hallett and his comanagers employ a high-quality discipline at Harding Loevner International Equity (HLMIX). They bought India's ICICI Bank and Brazil's Itau Unibanco this spring, and that foreign large-growth offering's financial stake is composed entirely of emerging-markets banks or developed-markets banks that focus on the developing world like Standard Chartered. (The sole exception is the German insurer and asset manager Allianz (ALV), which has a sizable and growing presence in emerging markets itself.) Steven Thornber manages Threadneedle Global Equity (IGLGX) using a moderate growth style, and he has kept that world-stock offering light on European banks this year while he has purchased several emerging-markets banks.
Meanwhile, a number of smaller-cap foreign-equity skippers believe that financial companies in the developing world are in much better shape than their peers in the developed world. Roger Edgley, who runs Wasatch International Growth (WAIGX) using a bold approach, is one of them. He has sought to find banks where "old-fashioned face-to-face lending and deposits are still used as the predominant means of assessing risk." And his foreign small/mid-growth offering holds Egypt's Commercial International Bank, India's Allahabad Bank, Indonesia's Bank Tabungan Pensiunan, and Mexico's Banco Compartamos.
What's more, some world-allocation and international-bond managers feel the same way. Dennis Stattman, Dan Chamby, and Aldo Roldan of BlackRock Global Allocation (MDLOX) have been cautious on European banks and have been finding opportunities in emerging Asia and Latin America this year. Art Steinmetz and Sara Zervos of Oppenheimer International Bond (OIBAX) recently noted that it wasn't too long ago when Greek banks buying Turkish banks was seen as a good thing for the Turkish banking system, whereas now the Turkish banks look far better than many developed-markets banks. Their fund owns very little developed-markets bank debt other than covered bonds.
Some See Light at the End of the Tunnel for European Banks
Not all international-stock managers are bearish on European banks. Artisan International (ARTIX) has been undermined in 2010 by its big stake in European financial stocks. Mark Yockey concedes that investors have been worried about too much debt in the region--just as they have been worried about too much debt in the United States--and that this is something to be concerned about. But he points out that you can't have economies without banks, that certain banks on a long-term basis represent wonderful franchises, and that the stronger ones are going to be even in a better position to grow in the future. (He believes there are essentially banking oligopolies in some European countries.)
Further, some foreign-equity managers, including Thomas White of Thomas White International , believe the fact that fewer European banks than expected failed the recent stress tests has improved sentiment about the financial health of the industry. They also think that the new more-stringent disclosure requirements will increase transparency and help rebuild confidence in the region's banks. These managers haven't necessarily made major portfolio moves based on these events, but they do see them as encouraging developments.
Four Reasons to Think Twice
Although quite a few international-stock managers have been favoring emerging-markets banks over developed-markets ones in recent months, individual investors still have several reasons to think twice before they rush out to buy an exchange-traded fund or another offering that focuses on the former. First, the majority view isn't always correct. Second, emerging-markets banks aren't necessarily as attractively valued today as they were when the managers highlighted above were buying--or adding to--them earlier in 2010. (For example, Standard Chartered is up 13% over the past three months and 24% for the year to date through Sept. 15.)
Third, many individual investors already have ample exposure to emerging-markets financials. The managers cited above are just a few of the many international-fund managers who have been adding to their exposure to emerging-markets banks and the like in 2010, and most diversified emerging-markets managers keep around one fourth of their assets in the financials sector year in and year out. And fourth, sector funds and emerging-markets offerings are quite volatile by nature, and funds that focus on one particular sector in the developing world are exceptionally explosive investments.
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