Is it time to get back into these Financial Services shares?

Financial services shares have been hit by Brexit, but some of them are looking cheap now.

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Banks, insurers, and any shares that have anything to do with financial services, all took a hit from the Brexit vote. But while the banks will certainly suffer if they lose their European freedoms, why should it be so tough for companies that manage our investments?

A turnaround quarter?

I’ve been watching Man Group (LSE: EMG) for some time, thinking the shares were starting to look undervalued as their slump continued — from a high in April 2015, the price fell by 50% to close at 109p yesterday. But today we’re looking at a 14% rise in early trading, to 124p, after an expectations-beating third-quarter trading update.

The company revealed net inflows of $1.3bn in the quarter, mainly into its quantitative funds. Added to that we had a positive investment movement of $2.5bn, to take funds under management up 5.6% overall to $80.7bn. That investment movement amounts to a gain of 3.2%, and we should be wary of judging things on such a short timescale (especially against the background of the events of the past three months). But it does suggest the tide is turning, and sentiment certainly seems to be improving.

Looking at the wider picture, we still have a fall in EPS of nearly 50% forecast for this year, but that would put the shares on a P/E multiple of a relatively undemanding 14.

If we really get the 5.6% dividend yield that the City is forecasting (and it wouldn’t be well covered), it would be starting to look good. On top of that, a 35% earnings rebound predicted for 2017 would drop that P/E as low as 10.3, and dividend cover would be lifted to 1.9 times. That makes Man Group shares look tempting to me.

A continuing recovery?

Shares in Aberdeen Asset Management (LSE: ADN) also hit a down spell starting in early 2015, but 2016 has seen a decent recovery — since a low on 11 February, the shares are up 56% to 328p, so is this the start of something big?

Like Man Group, Aberdeen’s earnings are expected to fall this year, though with a smaller drop of around 35%, and there’s also a rebound pencilled-in for 2017, but again less extreme at about 10%.

Aberdeen’s most recent trading update, for the quarter to June, told us of a modest increase in funds under management of 3% to £301bn. That’s despite a net outflow of £8.9bn in the period, and is thanks to a £17.5bn improvement in asset values. Again it’s only a short-term snippet, but if that kind of performance can continue in the long term then we could be looking at a good investment here.

The only things that make me a little wary at this stage are the current share valuation and my lower confidence in the dividends. The shares are on forward P/E ratios of 17 and 15 for this year and next, and though predicted dividend yields are high at 5.7% to 5.8%, cover of less than 1.1 times by September 2017 isn’t so solid.

As long-term investments, I think both of these stocks should reward shareholders well, especially as both firms are highly cash-generative and are pursuing confident dividend policies. But on current valuation, Man Group looks the more attractive of the two to me right now.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has recommended Aberdeen Asset Management. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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