Today’s stock-market volatility spells bad news for financial services companies, especially those with large asset management arms. Assets under management inevitably plunge when markets slump, while investor inflows turn into outflows. These two financials have endured a rough few months, but days like these make excellent buying opportunities for long-term investors.
China crisis
Asia-focused banking behemoth HSBC Holdings (LSE: HSBA) is down 15% in the last three months, due to the global sell-off, concerns about slowing growth in China and Trump’s threatened trade war. The bank also disappointed shareholders, who were upset by the fact that 2017 adjusted pre-tax profits rose just $2.1bn to $21bn. First world investor problems, eh? Many also took umbrage at the fact that HSBC said little about returning cash to shareholders.
HSBC looks like a bargain to me right now, trading as a forecast 13.3 times earnings, with an anticipated yield of 5.6%. Its price-to-book value is precisely 1, so all the risks seem effectively priced-in. Earnings per share (EPS) are forecast to grow 56% this year and 5% in 2019.
Bargain bank
The big worry is the global economy in general, and China in particular, where growth is slowing markedly as the authorities rein-in credit excesses. Like Jupiter, HSBC also faces a challenging year – so what’s new? Chief executive Stuart Gulliver stepping down after seven years adds to the uncertainty.
Higher interest rates may work in HSBC’s favour, finally allowing it to widen net interest margins. This may be the best bank around and further stock market volatility could throw up an even better buying opportunity, but I reckon you have a pretty good one today.
Knocked out of orbit
Jupiter Fund Management (LSE: JUP) is trading 4.95% lower today following its disappointing trading update for the three months to 31 March. The “highlights” read more like lowlights: quarterly net outflows totalling £1.3bn, assets under management decreasing 6.6% to £46.9bn since 31 December.
Chief executive Maarten Slendebroek admitted a challenging start to 2018, blaming “a period of market turbulence together with subdued demand.” Rising outflows did not come as a surprise, as he warned that Jupiter is now sourcing more asset growth from its international distribution partners, which will make its flow profile less predictable in the short term.
Dark star
Jupiter is looking to drive growth with further diversification by product, client type and geographic reach, but even the best laid strategy can come unstuck when markets are selling off. Fund management is a risky sector to move into right now, with the nine-year bull market run exceedingly long in the tooth. The global economy is still growing, but many analysts I speak to now predict a recession in 2019. That said, some have been predicting a recession for years.
Jupiter is a tempting buy-and-hold with a projected yield of 6.6%, although cover is relatively thin at 1.1. Forecast EPS growth is a solid 4% in the 2018 calendar year, then 6% in 2019 (although stock market volatility may have something to say about that). Trading at a forecast bargain price of 13.1 times earnings, today’s disappointment looks like a buying opportunity. You may get an even better one if market volatility persists.
