Global Financial Services Stocks Revive
Andrew Leckey

When you've been banging your head against the wall, it feels so good when you stop.

Global banking problems, though far from solved, aren't as brutally painful as they've been at times during the past two years. A number of banks, especially those with substantial emerging-markets business, have left the head-banging behind.

With earnings and stock prices of global financial services companies rising, the sector once again is looking like a viable investment for a well-rounded portfolio.

"While there is currently a combination of economic strength and optimism, many banks operating in emerging markets are benefitting mostly from economic strength," said Andrew McMenigall, an Edinburgh, Scotland-based senior investment manager in global equities for Aberdeen Asset Management Inc. "The banking system is generally healthier, with greater global liquidity driving strong business momentum in a number of markets."

His firm's Aberdeen Global Financial Services Fund (GLFAX) is up 11 percent this year. Many of the 23 stock holdings in its portfolio derive considerable profits from Asia and other emerging markets.

Despite the global crisis, financial services companies remain significant contributors to the world's economy, McMenigall noted, which makes them an important portfolio component.

These major stock holdings in his fund reflect that belief:

-- Bank Bradesco (BBD), Brazil's third-largest bank with 4,600 branches, is the fund's largest holding. Thanks to a quality loan portfolio and growth in retail lending, the bank's stock is up 21 percent this year following last year's 126 percent increase.

-- Standard Chartered Plc (STAN, London Stock Exchange), based in the United Kingdom, derives most of its revenue from Asia, the Middle East and Africa. On rapidly growing net income and declining loan losses, its stock is up 19 percent this year, following last year's 85 percent rise.

-- Dah Sing Financial Holdings Ltd. (DSFH, Hong Kong Stock Exchange) is a broad-based banking and financial services holding company in Hong Kong that is benefiting greatly from China's significant growth.

"There's been a surge in the shares of banks because governments are making money available to help the banks survive," explained Ron DeLegge, editor of ETFguide.com in San Diego. "However, in light of number of institutions that have failed, been rescued or have sold themselves to stronger competitors, you definitely don't want to get stuck with a hot potato."

The uncertainties associated with any one stock is the reason why he prefers the broader exchange-traded funds SPDR S&P International Financial Sector ETF (IPF) and iShares S&P Global Financial ETF (IXG). Rather than core holdings, these financial services ETFs are "complementary pieces of the puzzle," he said.

Even though a number of global bank stocks have already had a good run, he doesn't consider the cycle to be over and sees more opportunities ahead.

"The time to jump off this merry-go-round would be if the cycle of low interest rates were to change or there was a change in policy by regulatory agencies," said DeLegge.

Right now, many banks are hoarding cash because they don't know what regulatory agencies are going to do and wouldn't want to be caught again in a situation where they lack enough capital, he said.

"We saw the U.S. dollar slide in the recent quarter and that helped overseas financial names," noted Jeff Tjornehoj, senior research analyst for Lipper Inc. in Denver. "In addition, a lot of Spanish and European banks have been on a tear lately because they are stating publicly that they aren't going to pay interest on a lot of savings accounts anymore."

Conditions might be right for the world's banks to outperform other sectors because their stock has been unfairly -- and in some cases fairly -- punished and positive days are ahead, Tjornehoj said.

Here are some of the most popular holdings in global financial services funds, according to Tjornehoj:

-- Barclays Plc (BCS) is one of the largest banks in the United Kingdom, with operations around the world. Because Barclays avoided huge write-downs taken by other investment banks and has made serious financial inroads into China and Africa, its stock is up 8 percent this year following an 80 percent increase last year.

-- Lloyds Banking Group Plc (LYG) of London was almost capsized financially by its ill-timed 2008 acquisition of HBOS Plc., the bad-loan-loaded Halifax Bank of Scotland. However, following a government bailout, it has improved its financial position and now controls one-third of the U.K. mortgage market and one-half of its savings market. The stock is up 41 percent this year following last year's 26 percent decline.

-- UBS AG (UBS), one of Switzerland's two large banks and a top banker to the financial elite of the world, had more than its share of problems in the global financial downturn. Thanks to a government rescue plan plus a new chairman and CEO, however, it is making a comeback. Punctuating that point, its stock is up 10 percent this year following last year's 8 percent rise.

"We expect global financial services companies in our portfolio to continue to consistently manage their businesses as they have the past few years, which is what allowed them to withstand trying market conditions," concluded McMenigall. "Any positive sentiment in the stock market would drive these financials higher."

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