Many economists and international organizations have opined on the potential dangers of a British decision to leave the EU next week, but its jarring impact on the market may have a different meaning for long-term investors. Already it has helped put many banks on sale.
Firms in the UK’s financial sector “would likely incur a setback to their earnings and economic disruption,” if a majority of British citizens vote yes on a June 23 referendum to decide whether to leave the EU, Sarah Ketterer (Trades, Portfolio) of Causeway Capital has said. Fear of the Brexit fallout has already hit the country’s financial sector, dropping it 29.9% in the recent year, the third most precipitous sector decline in the FTSE.
Officials at the IMF, however, have sounded alarms about the potential macroeconomic reverberations that could also occur if the UK leaves. In the U.S., financials now stand as the second worst-performing market sector over the recent year, down 9.4% compared to a 1% decline for the S&P 500. In its United Kingdom 2016 Article IV report, the IMF reported, “Contagion effects could result in spillovers to regional and global markets, although the primary impact would be felt domestically. While there is wide uncertainty around the market reaction to a leave vote, as the historical experience with similar events is limited, it is expected to be negative and could be severe.”
Yet while a vote to exit “would precipitate a protracted period of heightened uncertainty, financial market volatility and slower growth,” as Gerry Rice, spokesperson for the IMF Communications Department warned in a June press conference, the duration of negative impacts is uncertain.
As long-term investors followed by GuruFocus weigh the pros and cons on the UK, EU and global markets, several have said they will still selectively invest in strong companies as the general market uncertainty prices them at discounts.
First Eagle Investment (Trades, Portfolio) Management’s Senior Sovereign Analyst Idanna Appio said: “In terms of other opportunities, there are already some British companies that have started to trade at discounts to our estimates of their intrinsic value. Selectively, our portfolio managers are beginning to build small positions,” and they expect more if there is an exit vote.
The Invesco European Growth Fund (Trades, Portfolio) said: “Market volatility may remain elevated due to a broad range of macro-economic uncertainties (in both emerging and developed markets) and this could provide attractive buying opportunities for long-term investors.” (The Invesco European Growth Fund (Trades, Portfolio)’s largest sector is financials, with a host of firms from different regions.)
The Morgan Stanley Institutional Fund Global Franchise Portfolio first quarter commentary said was more cautious: “This difficult macro outlook and the gathering deflationary clouds are hardly a propitious backdrop for us as bottom up stock pickers. They present an increasingly difficult outlook for the companies we invest in – or hope to invest in. We are, of course, used to uncertainty and this uncertainty is not in itself problematic, provided one is given a good margin of relative safety on valuation to hold an existing stock or invest in a new stock idea.”
Bernard Horn (Trades, Portfolio) of the Polaris Global Fund said: "We capitalized on market volatility, purchasing companies at attractive valuations. Many of the newly-added companies had been on our research screens for years, backed by carefully crafted fundamental analysis. These ‘richly valued’ stocks came off prior highs allowing us entry, as evidenced by various financial and IT sector purchases. Portfolio turnover is likely to increase in the coming months, as we intend to capitalize on ongoing market turmoil. We believe that volatility will persist, as even modestly-growing economies might still experience some downside risks.” (Horn cited purchases of J.P. Morgan (JPM, Financial) after a 20% drop, Franklin Resources (BEN, Financial) and Siam Commercial Bank (BKK:SCB, Financial).)
Bill Nygren (Trades, Portfolio), manager of the Oakmark Fund, has been drawn to the U.S. financial sector for its depressed valuations, saying in his first quarter letter: "At Oakmark, we remain focused on assessing the long-term underlying value of businesses, which we believe are much less volatile than stock prices. As such, the financial sector’s pronounced weakness has made the segment more attractive to us, and despite recent share price declines, financial companies still represent almost one-third of the Fund’s equity holdings.” (Nygren cited his worst performers as Bank of America (BAC, Financial) and Citigroup (C, Financial).)
In addition to uncertainty surrounding a distant Brexit, U.S. financials face decades-low interest rates and concerns about energy exposure. An All-in-One Screener search for large-cap U.S. financial stocks bought by 10 or more gurus in the past three months whose prices have dropped year to date produced 13 results. The stocks that had dropped the most in price were: Bank of America Corp. (BAC, Financial), Citigroup Inc. (C, Financial), Goldman Sachs Group Inc. (GS, Financial), State Street Corp. (STT, Financial) and American International Group Inc. (AIG, Financial).
Bank of America Corp. (BAC, Financial)
Bank of America shares have declined 20% year to date, making it the worst performing financial firm matching the screen criteria. It also ties with Wells Fargo & Co. (WFC) as the most-held, with 39 guru owners. Its shares closed at $13.40 each Friday.
Bank of America has a market cap of $137.64 billion with a P/E ratio of 10.55 and P/S ratio of 1.81. The trailing 12-month dividend yield of Bank of America is 1.49%. The forward dividend yield is 1.50%. Bank of America had annual average earnings growth of 15% over the past five years.
Citigroup shares fell 18.4% year to date to $42.48 each. The global bank had 31 guru holders as of the end of the first quarter.
Citigroup has a market cap of $124.68 billion with a P/E ratio of 8.54 and P/S ratio of 1.73. Its trailing 12-month dividend yield is 0.47%. The forward dividend yield of Citigroup is 0.47%. Citigroup had annual average earnings growth of 11% over the past five years.
Goldman Sachs Group Inc. (GS, Financial)
Goldman Sachs shares fell 17.9% year to date, to $145.64 each. Twenty-eight gurus held the capital markets company’s stock.
Goldman Sachs has a market cap of $60.5 billion with a P/E ratio of 16.44 and P/S ratio of 2.27. The trailing 12-month dividend yield of Goldman Sachs is 1.77%. The forward dividend yield is 1.77%. Goldman Sachs had annual average earnings growth of 0.10% over the past 10 years.
State Street Corp. (STT, Financial)
State Street shares fell 12.8% year to date, to $57.94 each. The asset management company has 18 guru owners.
State Street has a market cap of $22.94 billion with a P/E ratio of 13.28 and P/S ratio of 2.36. The trailing 12-month dividend yield of State Street is 2.34%. The forward dividend yield of is 2.36%. State Street had annual average earnings growth of 2% over the past 10 years.
American International Group Inc. (AIG, Financial)
AIG stock fell 12.4% year to date, to $53.42 per share. The insurance corporation had 25 guru stockholders.
AIG has a market cap of $59.78 billion with and P/S ratio of 1.29. The trailing 12-month dividend yield of AIG is 2.24%. The forward dividend yield is 2.39%.
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