While optimism around an economic recovery has reinvigorated bank stocks in recent months, an Edinburgh-based investment manager says the sector remains relatively “fallow” compared to technology and health care.
Murdo MacLean, client investment manager at Walter Scott in Edinburgh, Scotland, who manages the CIBC Global Growth ETF, says bank stocks remain absent from his portfolios, in part due to their cyclicality.
Banks and financials tend to thrive in periods of robust economic growth, which drives loan demand and interest rate increases, MacLean said in an Aug. 5 interview. Last year, after a period of stagnation, bank stocks — particularly in the U.S. — rode the optimism around an economic recovery from the pandemic.
“Some of these companies were trading on relatively low valuations,” he said. “Hence, when the prospects of a recovery in their fundamentals are presenting themselves, that makes it look quite attractive for a period of time.”
However, MacLean said, the fundamentals often don’t play out like that, “or the valuation re-rates to a level where no longer do they appear quite as attractive.”
In the first quarter, U.S. banks reported strong profits from investment banking operations, but the loan growth hasn’t been that impressive, he said.
“It’s certainly not the case that we’ve ever argued that these businesses will not have their moment in the sun. But we’ve also not changed our opinion that the area itself is relatively fallow,” he said.
MacLean prefers sticking with a bottom-up investing strategy focused on buying “businesses that were already planning for the future” and holding them for the long term.
“We’re looking at these businesses really more in terms of where they will be in the next five and 10 years, rather than where they will be next quarter or where they are today,” said MacLean.
The pandemic’s long-term effects will be more supportive of forward-looking businesses such as information technology and health care, he said. People living longer will also boost the latter sector.
With this in mind, MacLean favours stocks that “are embracing and utilizing technology, are helping people in terms of living longer, living more comfortably … or allowing more automation in the workplace as people do less labour-intensive roles in the future.”
“And those are just two spaces that I think we’ve long been of the view that would become a very significant part of our portfolio, albeit driven by the bottom-up approach,” MacLean said.
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