Are we still catching cold when America sneezes? | Pendal Group
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Are we still catching cold when America sneezes?

Investors concerned about the banking crisis and recession fears in the US may be missing out on finding investment opportunities in other parts of the world, says Pendal’s CLIVE BEAGLES

MARKETS are watching the US closely as its banking system reels from the impact of higher interest rates on regional bank bond portfolios.

Three US banks have been shuttered during the rolling crisis and regional bank shares have been volatile as markets weigh up the prospect of further failures.

But the crisis has also swept up banks and markets outside the US, which may offer opportunities for investors who can keep calm amid the noise.

Last week Pendal’s Samir Mehta argued that the US regional bank turmoil shouldn’t discourage investors from considering Asian bank stocks.

Clive Beagles, a senior fund manager at Pendal’s UK-based asset manager affiliate J O Hambro, has similar things to say about British bank stocks.

“Many of the UK banks are posting returns on equity of close to 20 per cent in the first quarter,” says Beagles.

“But they all trade at a discount to book value — some of them at 0.4 or 0.5. That includes big names like Natwest and Lloyds.

“Discounts to book value for that kind of return on equity just look silly.”

Beagles says the US market is acting like a “rotating firing squad” that seems to be picking a different name every other day to sell off.

But he believes the banks that are failing in the US are smaller players which are not globally significant.

“The differential between how the US has been regulating their banks and how the UK and Europe are regulating banks is becoming ever clearer — which is frustrating because they have been dragged down a bit by the noise.

Is everyone else still catching cold when America sneezes?

Beagles says the underlying concern many investors have is of a global recession triggered by a downturn in the US.

“There’s an old assumption that when the US sneezes everyone else catches a cold. But I do slightly wonder if it’s going be different this time.

“If this is a crisis, it’s the first one we’ve had where the US dollar is going down rather than up.

“Normally, you head to the dollar for safe haven status.”

Beagles believes the US dollar weakness indicates something different is going on from the usual global contagion. It could point to a period where the US is one of the slower-growing economies in the developed world rather than its traditional role as one of the fastest.

“The banks are just a microcosm of that — they will need more capital and need to be more tightly regulated in a slower US.”

Beagles also cautions against comparisons to previous banking crises.

“In 2008, UK banks had tier-one capital ratios of 4 per cent. Today they have tier-one ratios of 14 per cent.”

Tier-one capital refers to bank’s most reliable and highest-quality capital. A higher tier-one capital ratio generally suggests a bank is better equipped to absorb losses and maintain its financial stability.

“In 2008, there were something like £400 billion more loans than there were deposits — today it’s the other way around.

“The UK as an economy is under-geared rather than over-geared.”

About Clive Beagles

Clive Beagles is a senior fund manager with Pendal Group’s UK-based asset manager, J O Hambro Capital Management. Clive is one of the UK’s most highly respected equity income managers. He has 32 years of industry experience and co-manages the JOHCM UK Equity Income Fund.

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This article has been prepared by Pendal Fund Services Limited (PFSL) ABN 13 161 249 332, AFSL No 431426 and the information contained within is current as at May 17, 2023. It is not to be published, or otherwise made available to any person other than the party to whom it is provided. This article is for general information purposes only, should not be considered as a comprehensive statement on any matter and should not be relied upon as such. It has been prepared without taking into account any recipient’s personal objectives, financial situation or needs. Because of this, recipients should, before acting on this information, consider its appropriateness having regard to their individual objectives, financial situation and needs. This information is not to be regarded as a securities recommendation. The information in this article may contain material provided by third parties, is given in good faith and has been derived from sources believed to be accurate as at its issue date. While such material is published with necessary permission, and while all reasonable care has been taken to ensure that the information in this article is complete and correct, to the maximum extent permitted by law neither PFSL nor any company in the Pendal group accepts any responsibility or liability for the accuracy or completeness of this information. Performance figures are calculated in accordance with the Financial Services Council (FSC) standards. Performance data (post-fee) assumes reinvestment of distributions and is calculated using exit prices, net of management costs. Performance data (pre-fee) is calculated by adding back management costs to the post-fee performance. Past performance is not a reliable indicator of future performance. Any projections contained in this article are predictive and should not be relied upon when making an investment decision or recommendation. While we have used every effort to ensure that the assumptions on which the projections are based are reasonable, the projections may be based on incorrect assumptions or may not take into account known or unknown risks and uncertainties. The actual results may differ materially from these projections.

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