We remain disenchanted with the outlook for the large incumbent banks. We view this government (and the opposition) as determined to reduce their size and the systemic risk that they represent. Balance sheets remain obscure, and it is not clear what further steps may be taken by the government and regulators to bring about the ‘cultural shift’ that they claim they wish to see. We have a number of macro themes active within the funds, many of which are interwoven, and few run along pure sector lines. A quick glance at our £546m Liontrust Macro Equity Income fund’s industry allocation shows a 9 per cent overweight to financials versus the FTSE All-Share weight of 24.8 per cent, which may lead some to conclude that we have an upbeat assessment of the outlook for banks, its largest component. However, our views on the main macro themes within the sector are summarised as follows.
This political hostility is in stark contrast to the encouragement being given to the establishment and expansion of new, smaller, ‘challenger’ banks. In particular, political support is being given to the expansion of lending to employment-creating SMEs. Although tiny in relation to the incumbents, the challenger banks are expected (indeed, intended) to reduce the market share of the incumbents, while competitively lowering fees and eroding margins.
Around the world, balance sheets of central banks are laden with government debt, partly as a result of quantitative easing. As global recovery begins to take hold, we would expect interest rates to begin to firm, and bond prices to weaken. Ample liquidity, low interest rates and a global thirst for yield suggest to us an environment conducive to corporate acquisition activity.
In the near term at least, we expect corporate earnings growth to be driven more by acquisition followed by rationalisation, than by economic expansion or capital investment. Current low borrowing costs mean that hurdle rates for acquisition will be low, and the opportunities for earnings enhancing acquisitions will be considerable. Our positive view of the outlook for equity markets provides a backdrop to our investments in asset managers, wealth managers, and life assurance companies.
The far-reaching changes to the pension market announced this year in Chancellor Osborne’s ‘Saver’s Budget’ has given immediate impetus to the investment industry. We believe the asset and wealth management sectors will profit from rising equity markets and from long-term demographic support as the crucial 48-64 year old cohort is set to expand significantly in the coming years. The reforms should also create a pool of assets that seek investment alternatives and we foresee opportunities for asset managers to forge closer links with the life industry, exemplified by Friends Life’s decision earlier this year to allocate a £12bn mandate to Schroders.
Jan Luthman is a fund manager with Liontrust Asset Management