Despite the FTSE 100’s recent bout of volatility the market remains well-ahead over the past year with financial stocks driving 40 per cent of the top movers.
As financials including banks, asset managers and life offices are coming off very low bases, experts are optimistic there could be more investor gains to come.
Fears over a tapering off or complete withdrawal of quantitative easing in the US have sent international markets into a tailspin over the past month and the UK’s bluechip benchmark index was far from immune, shedding some 6 per cent over the past 30 days.
But longer term, the index is still trending upwards, with a 13.5 per cent gain over the past year – and banks, asset managers and life offices are leading the way with 40 per cent, or eight of the top 20 risers in the index, being from the financial services industry.
Top of the list among the financials is Lloyds Banking Group, up by 101.8 per cent over the past year. Lloyds chief executive Antonio Horta-Osorio declared the bank is on track to return to profitability in 2013, allowing the Government to start selling its stake in the firm.
Fund broker Hargreaves Lansdown has also witnessed its stock soar, rising 87.2 per cent while asset manager Schroders has firmed 70 per cent. Other major movers include Standard Life, up 63.5 per cent, Aberdeen Asset Management 55.4 per cent ahead with Barclays and Prudential respectively up by 54.6 and 48.2 per cent.
But financials, especially asset managers and insurance companies, are a typical geared play on the market as when indices rise, they tend to follow.
The Share Centre investment research analyst Graham Spooner says: “These are confidence plays. Given the rally the market enjoyed up until recently, we had been quite wary of a correction coming along.
“But looking at the progress the banks have made, we believe on a three to five year view, there is a potential value-play there. But we would not recommend piling into them.”
Charles Stanley Direct head of investment research Ben Yearsley adds: “The economy seems to be ticking along better and putting the recession behind it and the banks have been beat up for five years now.
”At some point this is going to change. Lloyds and Royal Banks of Scotland have both seen strong rises, especially the former. Long-term there is potential, especially when dividends re-emerge. And banks remain inexpensive shares by historic standards.”
Dividends have traditionally been one of the main attraction from banks. Pre-crisis, seven UK mainstream banks paid dividends – representing some 20 per cent of all dividends. Fast forward and they make-up only half of that, with just three banks, Standard Chartered, HSBC and Barclays, paying out to shareholders.
Yearsley adds: “The long-term trend for asset managers and life companies is positive though, If you take the UK’s lack of pension and saving provision, where more and more people are going to have to act to provide for themselves in later life, these two sectors look set to benefit.”
Both Prudential and Aviva are on The Share Centre’s current ‘buy-list’ as are Barclays and HSBC, while Spooner says they are positive on Legal & General and Standard Life.
Spooner adds: “With the asset managers, Aberdeen has enjoyed some tremendous momentum but it has hit a set back as result of China’s slowdown, given its exposure to emerging markets.
But overall investors need to take account of whether or not all the shocks have come out of the banking system, could there going to be another Libor scandal for example? There is a high level of risk here but from a long-term perspective there could be value realised.”