Financials fells in October, albeit they outperformed underlying equity markets which sold off towards the end of the month. Europe led the selloff over concerns that rising COVID-19 cases and hospitalisations would lead to further restrictions on economic activity and ultimately lockdowns. Against this background, the Trust’s net asset value rose by 0.6% while our benchmark index, the MSCI ACWI Financials Index, fell by 0.7%.

Our payment holdings were the biggest drag on performance over the month with holdings in PayPal Holdings and MasterCard falling on the back of broader weakness in technology shares. Conversely, US regional banks were very strong over the month, rising by around 15%, with holdings in the likes of SVB Financial Group and First Republic Bank, both Californian-headquartered banks, being two of the biggest contributors to performance.

US bank third quarter results came in much better than forecast with loan loss provisions falling substantially versus the previous quarter. Fee income driven by investment banking revenues came in stronger, with the only negative being weaker net interest income reflecting some continued pressure on net interest margins, from interest rate cuts earlier in the year, as well as a reversal in the loan growth seen following the onset of the health crisis as companies have paid down debt.

US banks outperformed in October as US government bond yields rose over the month on the back of an increased expectation the Democrats would win both the White House and the Senate resulting in a bigger fiscal stimulus. This was seen to outweigh the negatives of higher corporate taxes and regulation, even though these would not be insignificant headwinds for the banking sector.

European banks that released their third quarter results before the month end, including Scandinavian, Swiss and UK banks, have shown similar trends to their US peers, in particular, benefiting from a sharp fall in loan loss provisions. Similarly, the number of borrowers on payment holidays has continued to fall sharply, reflecting the strong rebound in activity in the third quarter as restrictions imposed earlier in the year to counter COVID-19 were relaxed. Despite the concern around increasing COVID-19 cases, European bank shares also outperformed in October.

However, European insurers were particularly weak during the month with concerns rising regarding elevated catastrophe claims and additional business interruption losses associated with second lockdowns. Nevertheless, third quarter results for insurers continued to highlight the improved pricing environment including, for example, Hiscox which reported an accelerated rate improvement in the London market, while Chubb also reported results which beat analyst forecasts once more volatile items were stripped out.

Asian financials rose in October, similarly, outperforming underlying Asian equity markets and global financials. The overall macro environment has been improving in Asia added to which there is some evidence of better control of new COVID-19 infection cases than elsewhere globally which bodes well for the future recovery of the region’s economies. During the month, we saw some recovery in exports (South Korea, China, Taiwan and Singapore) again led by strength in north Asia with their bias to technology-related exports.

Encouragingly, even south-east Asia saw the beginnings of a recovery in exports during the month although they remain materially weaker than north Asia. Third quarter results in India (the Trust’s largest exposure in the region) have been encouraging, with private sector banks reporting resilient asset quality, as collection efficiency returned to pre-COVID-19 levels, while profitability remains strong despite a slowdown in loan growth.

At the time of writing, Democrat Joe Biden is forecast to become President, albeit by a much smaller margin than previously forecast, while the Republican party is expected to retain control of the Senate. Against this background, US banks’ shares suffered some profit-taking from the recent rally on the basis there will be gridlock between the different arms of the US government resulting in any stimulus bill being smaller than had the Democrats also won the Senate.

Outside the shorter-term impact of the US election, the attractiveness of the sector is based around strong balance sheets and that banks will benefit from a cyclical recovery in their earnings as the global economy continues to recover over the next year, while insurance companies benefit from rising insurance rates and improvement in profitability as similar concerns about losses related to COVID-19 or otherwise abate.

Furthermore, as the recovery continues to take hold, when those financial companies that have been prevented from returning capital to shareholders restart buybacks and dividends it will be a positive for the sector. We see this as a question of when, not if. Some strategists also still argue that US government bond yields will rise as the recovery takes hold, even with a smaller stimulus bill, which would benefit our holdings in US banks if it happens. Against this background, valuations remain historically low, especially for bank stocks.

As a result, we took the opportunity to add to a number of our bank holdings over the month, both in the US, Europe and Asia. These included adding to holdings in DNB, BNP Paribas, HDFC Bank, One Savings Bank and Prosperity Bancshares. Against these purchases, we reduced our exposure to payment companies, reducing holdings in MasterCard and PayPal Holdings while also reducing holdings in Allianz and Marsh & McLennan, while we sold our holding in Citigroup.

09 November 2020

Nick Brind

Fund Manager

    John Yakas

    Fund Manager