After Shell, BG, Nokia and Alcatel, ITV and Indivior could join the takeover trail

IB Times Video Link:

Edmund Shing: After Shell, BG, Nokia and Alcatel, ITV and Indivior could join the takeover trail

KPMG says the merger and acquisition boom is back in 2015. Certainly, company takeover activity has been hotting up on both sides of the Atlantic these past few months – just think of Shell swallowing up BG in oil and gas, Nokia merging with Alcatel-Lucent in technology and FedEx buying up fellow Dutch logistics group TNT Express.

Figure 1. What factor will drive deal activity in 2015? 

Source: KPMG 2015 M&A Outlook Survey Report

One of the main reasons for expecting more takeovers is the very high level of cash that large companies are holding, and the very low interest cost on company debt (Figure 1). With money burning a hole in corporate pockets, top executives want to go shopping for growth.

In trying to predict who could become the next takeover targets, we need to know the profiles of existing targets: which industries are seeing the greatest number of takeovers and takeover rumours, and what size of company is most likely to be susceptible to a takeover approach?

Technology, healthcare, media, insurance and oil and gas are ripe for consolidation

I see four industries as prime hunting grounds to search for potential takeover targets, given recent takeover and merger activity in recent months:

1. Technology: Nokia is merging with Alcatel-Lucent in telecoms equipment, while US set-top box maker Arris is buying UK set-top-box maker Pace for $2.1bn.
   
2. Healthcare: In generic drug making, Israeli global leader Teva has bid some $40bn in cash and shares for US generic drug rival Mylan. Novartis, the Swiss drug maker, has revealed recently that it is hunting for healthcare acquisition targets in the $2bn to $5bn range.
   
3. Media: AT&T's acquisition of DirectTV in the US and Liberty Global's purchase of Belgian media company De Vijver Media NV highlight the consolidation occurring in the US-dominated broadcast media industry, with media content becoming increasingly valuable to cable and TV distributors.
   
4. Insurance: Lloyd's of London insurers has been the focus for acquisition of late, with both Catlin and Brit Insurance bought up by larger North American insurers. We can also add the merger of close-end life assurer Friends Life with Aviva, highlighting the consolidation wave under way in insurance.

Interestingly, these same industries came top in the KPMG M&A survey too (Figure 2).

Figure 2. What factor will drive deal activity in 2015? 

Source: KPMG 2015 M&A Outlook  Survey Report

What size of company could be preferred for acquisition?

While the Shell-BG deal is huge buying up huge, mid-cap companies are generally more likely to become tasty bite-sized morsels for cash-rich mega cap rivals to buy up growth prospects, relatively easy to finance and without all the complications of combining two huge companies with wide-ranging and complicated operations.

Three potential UK mid-cap takeover targets

1 Indivior (Healthcare)

Indivior (UK code: INDV) is the former pharmaceutical division of cleaning products and food maker Reckitt Benckiser, spun off from Reckitt as an independent, UK-listed company at the end of 2014. Its principal focus is on medicines to treat drug dependency, most notably alcohol, heroin and cocaine addiction.

At a market capitalisation of £1.5bn, it is relatively small versus the UK industry giants GlaxoSmithKline, AstraZeneca and Shire. Furthermore, it remains substantially cheaper on a number of valuation ratios such as price/earnings than any of these larger drug companies. Potential acquirers could be larger US-based drug makers who already produce opioid addiction treatments – Actavis, Endo Health and Janssen Pharmaceuticals.

2 ITV (Media)

There has been a battle for broadcast media content globally in recent months, with persistent takeover rumours surrounding £11bn market capitalisation ITV (UK code: ITV). It has most recently popped up as a potential target for the likes of US cable operator giant Comcast, the largest company in the world by broadcasting and cable revenues.

These rumours have sent the TV share price, and thus valuation, rising substantially since November 2014, with ITV's jewel in the crown being its production arm ITV Studios, responsible for drama series such as Poldark.

3 Lancashire (Insurance)

Lancashire (UK code: LRE) provides "global specialty insurance", operating as a Lloyd's of London insurer like acquired competitors Catlin and Brit Insurance. Attractions include a low valuation, high profitability levels and a juicy dividend yield projected to be as high as 9.5% in the future.

Just like Catlin and Brit Insurance, Lancashire could be the next to fall prey to a US-based reinsurer looking to expand globally.

So these are three UK mid-cap gems that I like the look of from a fundamental basis, which could also become the subject of a share-price boosting takeover in the next few months.

Lancashire Holding (LRE.L) – A Hot Pot Yield!

Who’s next in the Lloyds insurance serial takeover saga? First Catlin Insurance (CGL.L) is acquired by US reinsurer XL for over 700p per share, then last week Brit Insurance (BRIT.L) accepts a bid from Canadian insurer Fairfax Financial for over 300p per share (post dividend payment), both handsome premia to the pre-bid share price! 

Clearly the global catastrophe insurance market is consolidating fast, as besides these two acquisitions, there have already been two other deals in the US reinsurance sector (RenaissanceRe buying Platinum Underwriters, and Axis Holding merging with PartnerRe).

1. Catlin and BRIT have been kind to their shareholders

Source: Bigcharts.com

Of the big five listed Lloyds insurers, that leaves only Beazley (BEZ.L), Novae (NVA.L) and Lancashire Holdings (LRE.L). According to Bloomberg, bid speculation is already swirling around both Lancashire and Novae. Of these three, I am focusing on Lancashire as an attractive investment for a number of reasons, including its status as a potential takeover target.

What exactly does Lancashire do?

But first, a little background on this stock: Lancashire Holding is a Lloyds insurer that offers global specialty insurance and reinsurance products, principally in the fields of Property, Energy, Marine and Aviation. Its two main property reinsurance products include retrocession written on either a single territory or worldwide basis, and catastrophe excess of loss. 

3 Reasons to Like Lancashire: Takeover Target, Pumped-Up Profitability, Dishy Dividend

First of all, catastrophe reinsurance (where insurance companies like Aviva pay specialist reinsurance companies like Lancashire) is very profitable - after all, this is why the world’s greatest investor, Warren Buffett, operates in this insurance segment with the General Re subsidiary of his company Berkshire Hathaway. 

The four merger & acquisition deals listed above highlight that this industry is becoming all about economies of scale – i.e. the bigger you are, the more profitable you are as you can demand higher insurance premiums for the risk you take on. In the UK Lloyd’s insurance market, Lancashire, Novae and Beazley all appear to be viable takeover targets.

Impressive Growth Record

Lancashire has posted impressive growth since 2006, underlined by the impressive long-term growth in book value that the company has achieved, a cumulative 375% growth rate over the last 9 years (Figure 2).

2. Impressive Long-Term Growth in Book Value + Dividends Paid

Source: Lancashire Group

Delicious Dividends

At a time when high income investments are becoming increasingly difficult to find, £LRE stands out in the FTSE 350 index with its outstanding 9.1% dividend yield, far ahead of any other UK insurer and indeed, the second-highest dividend yielder out of the entire FTSE 350 index (Figure3).

 

3. One of the Highest Dividend Yields in the FTSE 350

Source: Stockopedia

You might think that such a high dividend yield is unsustainable – but I would argue otherwise, given that it has paid a bumper special dividend in 6 of the last 7 years (2011 the only exception) in addition to the regular dividend.

Recent Results Rate Highly

February 12’s Q4 results were solid, with broker Numis highlighting the $92m pre-tax profit in the quarter beating the consensus $58m expectation by some distance, and Lancashire announcing a 50c special dividend (ex-dividend date: 19 March). This should boost confidence in 2015 forecasts, particularly the 90.6c dividend forecast and the forecast of modest growth in book value.

Cheapest of the Lloyds’ Reinsurers

Finally, Lancashire remains the cheapest of the five listed Lloyds’ insurers, as can be seen from the table below (Figure 4):

4. Lancashire is the cheapest of the Lloyds Insurers

Source: Stockopedia

Don’t Just Take My Word For It, Check Out These other Articles on LRE

I am not the only one to believe that Lancashire is a compelling income story; both noted blogger @chrisoil and also Steve Evans of seekingalpha.com have highlighted the many investment attractions of Lancashire, here, here and here. So by all means check out their well-informed views on Lancashire too!

If you can find a more interesting 9% yielding income stock than Lancashire in the UK market today, then please do let me know! In the meantime, I think that 9% is simply too good to pass up. Get it while you still can!

Edmund

Direct Line can insure solid yields for income-hungry investors

Watch my IBTimes Video: Click Here

Direct Line's tootling red telephone television advertisements may have been annoying but they were certainly memorable. The same can also be said for another of Direct Line's insurance brands, Churchill – yes that one, with the nodding dog and the "Oh yes!" catchphrase.

A collection of top insurance and rescue brands

Aside from the main Direct Line telephone and online insurance brand, the Direct Line Group also operates the Churchill, Privilege insurance brands and the Green Flag breakdown assistance business.

All in all, Direct Line is one of the UK's biggest insurers, with a UK personal motor insurance market share of 14%, and a UK home insurance market share of 17%. Overall, this puts Direct Line third in terms of UK insurance business written after Aviva and AXA.

The Direct Line brand relaunches with Winston Wolf

Business remains solid despite continued pricing pressures in the property and casualty insurance market. Direct Line's recent brand overhaul should boost new business, with the Winston Wolf character appearing on TV adverts highlighting the improved Direct Line customer offering.

It should allow the company to compete more effectively with the proliferation of insurance price comparison websites such as comparethemarket.com. Remember, Direct Line doesn't appear on any price comparison websites.

Impressive cost reduction boosts profits

The cost base is also being managed impressively, with the company's total costs down 6% over the first nine months of 2014 compared with the same period in 2013. Continued efforts to reduce costs are a prime driver for profit growth over the next two years, with earnings per share forecast to rise steadily in 2015 and 2016 and dividends following (Figure 1).

1. Direct Line Is Forecast Earnings, Dividend Growth This Year, Next 

Source: stockopedia.co.uk

A key feature of Direct Line's restructuring effort is the sale of its international operations to Spanish insurer Mapfre for £430m, generating a pre-tax gain for the company of £160m. Most if not all of these sale proceeds will be returned to shareholders once the deal has completed and the cash hits Direct Line's bank account, representing potentially a bumper dividend.

UK Car Insurance Premia to Go Up By Up to 10%

According to the AA,

"The cost of car insurance could rise by up to 10% in the coming year, and home insurance premiums are unlikely to go any lower.

The latest index of the cheapest deals on the market showed that the cost of annual comprehensive car insurance had risen by 0.2% to £540 in the final three months of 2014.

But the total was still £200 cheaper than the peak in 2011, the AA said.

It predicted rising motor insurance bills during 2015."

Source: BBC News

This would clearly be good news for Direct Line's profitability.

But best of all, a sustainable 7% dividend yield

We come to what is possibly Direct Line's key attraction for income-hungry investors: a 7% dividend yield (Figure 2)! This is more than double the 3.4% on offer from the FTSE 100 index as a whole, and well ahead of all other major UK insurers who offer 4.3% on average.

2. Direct Line Offers the Best Dividend Yield of the Major Insurers 

Source: stockopedia.co.uk

Go with the price flow

Direct Line's price trend is positive too, with its share price hitting a new one-year high at 305p (Figure 3). While most retail investors recoil with horror at the thought of buying a share at its high, professional investors like to do this, as it shows that the share has strong upwards price momentum. Academic studies tell us stocks that go up generally continue to keep going up.

3. Direct Line Share Price is Breaking Out! 

Source: stockopedia.co.uk

Buy into Direct Line's impressive consumer story

In short, I see the Direct Line story as a success story in consumer finance, with some of the most instantly recognisable and thus strongest brands in the form of the red telephone and the Churchill dog, and with an enviable record of high customer satisfaction, crucial for winning repeat insurance business over the long-term.

Given the choice between a buying shares in a bank or an insurance company, I would today plump for an insurance company given the attractive dividends on offer, plus a more stable regulatory environment (which is clearly not the case for the banks).

In Direct Line, we have a stock that is simultaneously offering a tempting 7% yield and which is hitting new one-year share price highs – now that is a good deal.

Want High Yield and Momentum? Go for Insurance!

Time to Love Non-Life Insurance

One of the key investment themes that I continue to champion is that of the "Hunt for Yield". Here we are, in a period where global central banks are conspiring to keep short- and long-term interest rates as low as possible in order to shore up what is fragile economic growth in the "New Normal" of a post-crisis Developed World. 

At a time when government bonds, and even investment-grade corporate bonds, are no longer offering anything like attractive yields to maturity, where can income investors turn? One solution is to subscribe to Neil Woodford's new fund, which unsurprisingly is stuffed yet again with AstraZeneca (LON:AZN), GlaxoSmithKline (LON:GSK) and tobacco companies like Reynolds American, as it was back in his old funds at his former employer Invesco Perpetual. 

I prefer a stock-picking approach, focusing on sustainable value and momentum. Within the UK stock market, the sector that looks best placed on these metrics is the UK non-life insurance sector, containing such high yield gems as Brit (LON:BRIT), Amlin (LON:AML) and Catlin (LON:CGL) within the Lloyds of London reinsurance segment, and the RBS spin-off Direct Line Insurance (LON:DLG) in more classic Property & Casualty insurance. 

High and Sustainable/Growing Yields

Each of these four insurers offer prospective dividend yields in excess of 5%, up to 10% in the case of recently refloated Brit (LON:BRIT). 

Dividend payout ratios are of the order of 60% except in the case of Brit (LON:BRIT), and Returns on Equity are typically between 10% and 13% this year and next. All of which suggests that not only are these high dividend yields sustainable (except in the case of a sharp unexpected drop in earnings), but that long-term dividend growth should be in the region of 4-6% going forwards. Perhaps not exceptional, but certainly more than enough to compensate for inflation.  

Value aplenty too

To read the rest of this article, please click on the web link below:

http://www.stockopedia.com/content/want-high-yield-and-momentum-go-for-insurance-84575

Hunting Bond-Beating Income Ideas: Stocks, Funds

With short-term bank deposit accounts now offering well under 2% interest, and even loaning money to the UK government for 10 years (via Gilts) only garnering a meagre 2.7%, a lot of savers and investors will be wondering where they can put their money for a better income stream. 

Look to Corporate bonds?

The first obvious port of call could be sterling investment-grade corporate bonds, which offer a 3.8% yield at present, a 1.8% improvement on the yield offered by UK 5-year gilts (Figure 1).  

1. UK Corporate Bonds Offer 3.8% Yield

Source: Bloomberg

The easiest investment vehicle for this would be an ETF like the Core £ Corporate Bond UCITS ETF (code: SLXX), which charges just 0.2% per year in management fees for this bond exposure and yields 3.5% net of fees. 

What about income funds? 

A second possibility would be an income fund of some description, which could potentially yield as much or more than UK corporate bonds, but which can also include some element of dividend growth going forwards.

 An interesting income proposition in the investment trust world could be the income shares of the JPMorgan Income & Growth investment trust (code: JIGI), which invests in blue-chip income stocks. This split-capital trust is due to wind up at the end of November 2016, at which point investors will receive the net asset value per share of the fund less winding-up costs. 

At the moment, these income shares trade at a 8.4% discount to the final Redemption Price of 103.4p, while offering a generous 4.7% dividend yield. If the NAV was to remain at its current level at wind-up date, then income share investors stand to receive 9.9p in cumulative dividends between now and then, plus another 8.6p from the closing of the gap to the redemption value, i.e. 18.5p in total on a 94.75p share price, or nearly 20% return over the next 2.5 years, roughly an 8% annualised return with good visibility. 

Otherwise, an dividend income-focused ETF like the iShares UK Dividend UCITS ETF (code: IUKD) could be an option, offering a 4.0% dividend yield from a dividend-weighted portfolio of UK large-cap stocks including SSE, Imperial Tobacco and BP.

Both of these fund choices would give you a one-stop equity fund offering a yield above the 3.5% from the UK corporate bond ETF. 

Choosing Bond-Beating Income Stocks

The third option is to make up your own income stock portfolio by choosing a number of high-yielding stocks. If we take the target as a current yield above the corporate bond ETF's 3.5%, and add requirements to favour stocks that should also deliver an above-inflation rate of dividend growth going forwards, then we can create our own "bond-beating" stock portfolio. 

Using www.stockopedia.com's UK stock screening tool, I built my own simple screen looking for UK stocks that yield 3.5% or more, whose dividend is covered by earnings to the tune of at least 1.5x (to leave room for future growth) and which are in the top 30% of Stockopedia's combined StockRanks ranking (which combines Value, Quality and Momentum criteria). 

Here is the list of the Top 25 stocks on the resulting screen, ranked by best combined StockRank:

2. Bond-Beaters UK Screen

Source: www.stockopedia.com

This screen, if replicated as a 25-stock equal-weighted portfolio, would have an average dividend yield of 4.6% and dividend cover of nearly 2x, leaving ample room for profit and dividend growth. 

You may notice that a couple of sectors are well-represented here, including the Insurance (Catlin, Amlin) and Property (UK Commercial Property Trust, New River Retail) sectors, which remain two of my personal favourite UK sectors for the moment given their attractive combination of value and momentum.

Of the names in this list, I would be keen on Amlin (code: AML) given its strong record of profitability and very steady historic dividend growth (more detail here), and also New River Retail (code: NRR) given its low level of net gearing for a property company (18% of equity) and leverage to an improving UK consumer (as real average wage growth turns positive at last). 

Edmund

Insuring a growing 6% yield with Amlin

Hunting for yield? Look no further than Amlin!

Want a 6% income that should grow? Like companies with long-term track records of growth and high profitability? Like “value” companies that trade on as P/E of 10x or less?

Then Amlin (code AML.L) is an excellent UK company for you to look at!

Who is Amlin?

Despite the fact that Amlin is a member of the FTSE Mid-250 index and sitting at a market capitalisation of £2.2 billion, you would be forgiven for never having heard of them.

Amlin is an insurance and reinsurance company that operates in Lloyds of London. It provides insurance cover to companies in the following areas: Catastrophe Reinsurance, Marine and Aviation Insurance, Commercial & Domestic Property & Casualty insurance as well as International P&C.

Geographically the company operates globally with main markets being North America, Continental Europe and also the UK.

Three reasons to Like Amlin: 6% Yield, growth record, profitability

First of all, the income – a prospective 6.1% dividend yield for this year based on the current share price of 442p. There is little reason to expect this dividend not to be paid at this level, given that:

The expected dividend of 26.9p is well covered by expected earnings per share of 42.7p;
Amlin has maintained or grown its dividend each year for each of the last 10 years (Figure 1), making it it is what I call a “dividend aristocrat”.

1. AMLIN HAS A STRONG RECORD OF DIVIDEND GROWTH

Source: Bloomberg

So if you like regular and growing income, Amlin is a good choice.

Secondly, long-term growth. Amlin grown its dividend steadily over time by an average of 27% per year since 2003, and is forecast by analysts to grow its total dividend further by 4% both this year and next.

To read the rest of this article and see further charts,
please click on the link below:

Insuring-a-growing-6-yield-with-Amlin

Has the market overreacted to the Budget’s impact on UK insurers? Perhaps yes...

As I am putting metaphorical pen to electronic paper, UK life insurers are getting well and truly clobbered following the pension changes unveiled by Chancellor George Osborne in today’s UK Budget.

Insurers suffer precipitous share price falls

The annuity specialist Partnership Assurance has lost 52% so far today, while life insurer Legal & General has dropped over 13% and Standard Life over 6%. The trigger for these precipitous share price declines has been the announcement that pensioners will no longer need to take out an annuity with their private pensions when they take retirement, but will instead be take out as much from their private pensions as they like, without restriction.

The situation prior to today

Without going into too much detail, as I am not a tax adviser but rather an investor, let’s recap the situation prior to today. A prospective pensioner with a defined contribution (also called “money purchase”) private pension could take 25% of their private pension out in cash tax-free at the time of retirement – as has been the case now for many a year.

No more annuities?

The Chancellor’s pronouncement today, releasing pensioners from restrictions on their private defined contribution pensions, has been translated into a collapse in the future demand for annuities, as pensioners will now be able to withdraw as much as they like from their private pensions. Of course, this pension income will be treated as taxable income, potentially raising much-needed further income tax revenues for the HM Revenues & Customs.

This has been quickly translated by the stock market as: “There is no further need for annuities, and therefore demand for annuities is going to dry up”.

To read the rest of this article, including the two insurers where the stock market has overreacted, click on this Mindful Money link: 

Has-the-market-overreacted-to-the-budgets-impact-on-uk-insurers-yes

Bail on your bank shares! Buy insurance, real estate instead

Look at the widening gap between financial sectors

I think this first chart gives you a good idea of why I am not keen on UK-listed banks at the moment – the stock market has been falling out of love with them over the last 10 months, following a series of frankly poor results (Figure 1).

If you had been invested in the UK Banks sector (HSBC, Barclays, Lloyds TSB, RBS, Standard Chartered) since January of last year, you would today have seen precisely zero price appreciation on average to today – your only gain has been in dividends paid.

Contrast this with the stellar performance of two other UK financial sectors: Insurance and Real Estate, both of which have gained around 30% over the same period. That is a big difference!

 But there are of course some very good reasons for the relative under-performance of Banks – most notably from:

1. Their poor sets of results, generally missing analysts’ estimates for profits and earnings;
2. The ongoing sagas of tighter banking industry regulation and also continual provisions for the costs of various mis-selling and price-fixing scandals, which seem to linger like a bad food odour and taint the industry.

Banking scandals do not go away

I haven’t got enough space in this short article to list all the “bad stuff” that the banks have been caught doing over the past few years – just note that we now have a potential Gold price scandal centred around the daily London pm gold price fix, which involves Barclays and HSBC amongst others.  So this latest scandal can potentially be added to the long list of issues that the banks are already paying for, in the form of fines and compensation to victims.

And bank results have not been good

On the results front, these have been somewhat disappointing; even today Standard Chartered has announced results, another bank undershooting analysts’ profit forecasts for end-2013 (net income reported of $3.99bn versus an average analyst estimate of $4.25bn).

UK banks, particularly those like Barclays, HSBC and RBS that still retain substantial investment banking activities are struggling to bring down costs (principally salaries) sufficiently to reach their targeted cost-income ratios (a measure of banking efficiency). Put simply, if they do not pay high salaries and bonuses to investment bankers who are performing well, these employees will simply jump ship and work elsewhere. And an investment bank is really the sum of its talented individuals – if they all leave, what value is left?

To read the rest of this article, see the charts and my UK large-cap stock recommendations in Financial sectors, click on the link below:

Bail on your bank shares! Buy insurance, real estate instead

CNBC TV Guest Host! Why I still prefer Insurance to Banks...

Yes, I was once again Guest Host on CNBC Europe's Squawkbox show from 7 to 9am. Thanks to the London Tube strike, I had to get up at 5am to get a car to the studio at 5:30am! 

We discussed a whole slew of company results, including some of my favourite stocks such as Alcatel-Lucent (restructuring and seeing the benefits in better gross profit margins) and AstraZeneca (which every analyst has loved to hate because of its upcoming drug patent expiries like the statin Crestor). 

I was asked what I thought about European Banks in the wake of the announcement of Credit Suisse's results - I maintained that I still prefer Insurance companies to Banks. To find out why, please click on the CNBC TV web link below to watch the video:

Edmund on CNBC - Prefer Insurance to Banks

While today's Bank of England interest rate announcement should be uneventful, this afternoon's European Central Bank (ECB) announcement could be more interesting, as there is a good argument for the ECB to add further stimulus to help economic growth in the Eurozone. So far, while German manufacturing is picking up nicely, France is lagging badly behind (not helped by President Hollande's antics). 

The Eurozone still needs all the help it can get, so here's hoping that President Draghi does something!

Edmund

On Sky News' Jeff Randall programme (27/01/2014), re RBS loss

RBS's trading statement last night (27 Jan 2014) was a real shocker, confirming yet again that European banks (like US banks) are not yet out of the post-crisis maelstrom that has repeatedly engulfed them. For my part, I appeared on the Jeff Randall show on Sky News to discuss this unexpected additional collection of revelations, which will drive RBS to a massive loss for 2013 overall. 

A Banking Tale of Woe

Let's have a quick recap of all the various scandals that banks have been involved in of late:

1.  PPI insurance mis-selling;
2.  Credit card theft insurance mis-selling;
3.  Mis-selling of interest rate hedging products;
4.  Mortgage-Backed Securities misrepresentation (adequate disclosure not given);
5.  LIBOR interest rate fixing;
6.  Foreign Exchange rate fixing;
7.  Inability to apply current Money Laundering regulations in Mexico;

Actually, I have probably forgotten one or two more, as there have been so many... I haven't even included the latest statement from the German banking regulator BAFIN, who believe that investment banks have also been involved in rigging precious metals prices...

FULL DISCLOSURE at this point: I have in the past worked for Barclays Capital, one of the banks involved in these various issues. 

This gives local and EU-wide banking regulators yet another stick to beat the banks with, similar to JPMorgan's experience Stateside. 

Stick with UK Insurers

Given the choice, I would stick with my preference for Insurance stocks over Bank stocks any day, particularly in the UK. Banks still have to fully comply with Basel III capital requirements, not to mention increasingly tough regulatory scrutiny from local banking regulators. 

UK Insurers Beat Banks Hands Down!

My favourite UK insurers include the closed fund life assurance companies Phoenix (PHNX), Resolution (RSL) and Chesnara (CSN), all of which remain cheap on price/book and price/embedded value ratios, and all of which offer bumper dividend yields of 5.5% to 8%.

Global Financial Market Trends - Animated Slideshow with Audio Commentary

For my views on key global financial trends, watch this 4-minute video clip, which goes through a short slideshow of key market charts, together with an audio commentary.

I hope you find this helpful,

Edmund

Banks Breaking Higher In Spite of US Political Roadblocks

Given the drag to US economic activity from the ongoing US government shutdown, and the looming need to raise the US debt ceiling (before the US government runs out of money!), I am surprised to see that US investment banks and broker-dealers continue to do very well, with hardly a pullback in sight. 

US Broker-Dealers Bounce off 3m Moving Average

Boosted by Retail Investors Buying Stock Funds

This particular index comprises investment banks such as Goldman Sachs and Morgan Stanley, stock and commodity exchanges such as the CME, ICE and NYSE Euronext, and electronic trading platforms with as TD Ameritrade and E*Trade. They are all clearly benefiting from the current bull market in stocks, and the swtch by retail investors away from bond funds back towards equity funds, e.g. in the form of buying equity ETFs. 

Money Still Flowing Into Equity ETFs

European Financials Lead the Stock Market

In Europe, the same trends can be seen, with both the European Banks and Insurance sectors at or breaking new highs:

European Banks break a new year high

European Insurers also hitting a new high

You might argue that financial markets are perhaps being a little too sanguine over the risk of a US government debt default; the accepted consensus seems to be that a US default would wreak complete havoc on the US and global economies (not to mention global financial markets), and thus will be avoided by a combination of the US Treasury and Federal Reserve at all costs. 

Nevertheless, the fact remains that volatility remains historically low in spite of the political deadlock, and investors are still stuck looking for somewhere to invest their savings where they can garner a half-decent return, which is still leading them back to stocks and shares. 

Implied Volatility Still Close to Multi-Year Lows

Personal caution

I personally would rather be a seller into this rally than a buyer, as I believe that any eventual debt ceiling deal in the US could result in the stock market cooling off, as it is often better to "buy on the rumour, but sell on the news". 

That said, the US and European Banks and Insurance sectors still contain many companies that look attractively valued when looking at P/E, dividend yield or price/book valuation metrics, at a time when the US stock market overall could be argued to be already fully valued (as was argued recently by the famed investor Julian Robertson in a recent CNBC TV interview: Julian Robertson interview).

So what to do? I am still heavily invested in the UK, European, US and Japanese stock markets for now, but I must admit, I am looking to sell down positions sooner rather than later. After all, we are still not even halfway through the month of October, which has proven a pretty volatile month for stock markets in the past (see previous post for details)...

So invest in banks and insurers if you are confident of a successful resolution to the US debt ceiling issue, and if you believe that upcoming quarterly earnings releases from giant US banks such as JP Morgan and Wells Fargo will not disappoint expectations. 

Good luck,

Edmund