Q: What’s your perspective on non-US financial stocks?
Krishna Mohanraj, CFA
Let's start with the international financials as a group because that's the biggest group in the international benchmarks. And that is interesting because in the US the benchmark is dominated, as you know, by the tech stocks. Whereas when you go outside the US, financials are the biggest grouping, but financials as a whole is a highly heterogeneous group. There's a lot of different sub-sectors and geographies. So, they've performed well in aggregate, but to understand it, you have to unpack them one by one.
The reason insurance companies have done well is because they've benefited from strong pricing on the property side. Rates have generally gone up, which has been a positive for their investment income. So combined, they've done well.
Banks, again, banks are a very local, I would call a bank a very local animal. A Spanish bank has its own dynamics versus an Indian bank versus a Peruvian bank. As a group, I would call out the European banks, especially the Southern European banks. If you go back 10-12 years during the crisis, they were at high leverage levels, bad asset quality, interest rates were low for a long period of time. A lot of that began to reverse over the last couple of years and combine that with cheap starting valuations, they have done well in the recent year or so, a year and a half, maybe.
I'll also call out Asian financials, specifically China, some of the Chinese banks and real estate companies. They've done well recently after the government announced potential support for the real estate sector and essentially a combination of measures that they think are needed to revive the economy. So, especially with some of the Asian banks and also both Chinese and Japanese banks, we are unlikely to ever own any of them to be very honest, because we are actually happy to ignore businesses, especially when we think they're not analyzable. We think even for a local Chinese investor, Chinese banks are just too opaque — bad disclosure, history of bad corporate governance, excessive influence by the local and state authorities. Those are not the kind of businesses we want to ever own. And in fact, it's a good example for us to point out because we are not trying to match the benchmark. We are trying to be selective in finding unique ideas that we can have the confidence to hold through thick and thin over a long period of time. So, we are happy to ignore some parts of these markets because we just have so many other opportunities that are interesting.