November 2016

November 23, 2016

The panel met in the aftermath of Mr Trump’s US election victory, and to a degree we managed to keep conversation away from politics…

Banks – opportunity or threat?

The panel had a wide-ranging discussion on investing in banks. In summary: emerging markets are different to developed markets. In emerging, a great time to buy a bank is when the government is trying to hold down the currency. This increases the monetary base, pretty much guaranteeing growth for a local bank. In developed markets, the banks are currently unloved and under-owned but the question is whether increasing rates (and hence an increasing Net Interest Margin) offset their other risks – especially competition from fintech, a possible increase in loan losses with asset prices having risen over the last eight years, pressure on fees, and the potential for financial repression. The Panel’s preferences were not unanimous, but high quality banks in Sweden, the US, UK, and Sri Lanka were suggested; Italian banks, less so.

Japan and the yen

The panel remain concerned about the yen. It feels as though it is a question of when rather than if it will weaken as monetary options are reaching their natural limits. A weakening yen has traditionally led to deflation elsewhere (as Japanese goods become cheaper), but has been positive for Japanese equities. Japanese exporters have a natural hedge against the currency impact and are therefore of particular interest.


As well as banks and Japanese exporters that will benefit from a weak yen, the panel also discussed other investment opportunities. UK domestics are on sale at a significant discount after the fall in the pound post-Brexit (but the panel caution on buying whisky stocks if you believe interest rates are rising – an inherently lengthy inventory cycle compounds the cost of financing this stockpile). The panel was also interested to note that Pzena Funds, who share charts of valuation spreads dating back to 1964, are showing value stocks at around their largest discount to the market as a whole for the entire period. We end this fly on the wall with a quote from the Pzena 3Q 2016 quarterly report to clients: “In environments with wide spreads like today, the historical data have been quite compelling; wide valuation spreads and the resolution of uncertainties have generally led to extended periods of value outperformance.”

Peter Hollis, Russell Napier, Angus Tulloch and the Kennox investment team.

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