Stock up

Wall Street has a new, unlikely sage: Willie Sutton.

The clich Sutton coined to explain his blazing career in bank robbery - "Because that's where the money is" - offers fitting reason today for investing in the financial-services sector.

For much of the recent equity boom, financial-services stocks have barreled ahead on Wall Street like an overladen armored car. Investors who hitched a ride have come away like bandits.

The sector has yielded a better than 115 percent since 1996, according to the Standard & Poor's 500 Financial Index.

In coming months, however, financial-services stocks pose the same prospects as bank robbery: high return but high risk.

Several uncertainties now hound financial stocks: global financial turmoil, high stock valuations, and the prospect of an overheating economy and higher interest rates.

The big money-center banks - especially those that do business in countries with developing economies - look especially vulnerable to a slump.

But although foreign instability can affect the entire sector, regional banks, small banks, and low-valuation commercial property/casualty insurers show the most promise. These firms are most likely to merge and their overseas dealings are scant.

Overall, however, "bank stocks have been lackluster for the last few months, and it could continue," says David Berry, research director of Keefe, Bruyette, & Woods in New York.

Over time, though, analysts say financial services ranging from insurance, to brokerages, to retail banks should flourish. "Long term, these are good stocks to hold," says Mr. Berry. They should climb on several megatrends:

*Globalization. Before global financial markets began to implode 18 months ago, dozens of nations worldwide had dismantled barriers to both cross-border capital flows and investment by foreign financial institutions.

Moreover, the International Monetary Fund made greater foreign access to capital markets part of its conditions for aid to financially troubled nations.

South Korea especially is more open than ever to foreign financial companies. The trend unlocks a trove to US companies.

Japan, for example, offers an enormous, enticing plum to outsiders.

Authorities are opening up their capital markets to outside companies. And, savers there sit atop $10 trillion of savings. It's currently in conservative postal savings accounts but ripe for private-sector management, such as mutual funds.

*Deregulation. A retreat by government regulators is opening up new private-sector opportunities.

In Japan, such market reforms are called the "Big Bang."

And much of Europe in January adopted a single currency, wiping out much government meddling at the national level and making if far easier for financial businesses to range across borders.

The US Congress is also moving toward razing the barriers between brokers, banks, and insurers. (See story, page 16.)

*High-tech boom. The rapid growth and sophistication of computers, the Internet, and telecommunications are bringing financial services to more people at a lower cost than ever.

Online trading, for example, has exploded, creating new opportunities, and pitfalls, for established brokers, newcomers, and their investors. (See story, page 14.)

*Demographics. Prior to the recent financial-market turmoil, rapid economic growth in many developing countries created a vast, new middle-class market for financial-service companies. Economic revival would renew this trend.

Moreover, in Europe and the US, baby boomers are moving into their peak savings years.

*Consolidation. New technology and the collapse of regulatory barriers are spurring an urge to merge among financial institutions. Notably, Citicorp and Travelers Group last year announced a $70 billion marriage.

Initially, at least, stock prices usually surge after such announcements.

"We are seeing a breather in mergers, but they should pick up again after year 2000" when the threat of computer malfunctions passes, says analyst Jacqueline Reeves of Salomon Smith Barney.

The mergers signal the rise of "McBanks," or "financial supermarkets," where consumers can find a full range of services for their capital under one roof.

But as financial stocks ride these megatrends, they could hit some bumps, especially in the form of financial turmoil abroad.

Indeed, financial stocks were among the hardest hit by Russia's debt default last August and the subsequent global crisis. Banks have cut risk but remain vulnerable because they depend on liquidity and market confidence.

"Bank stocks are the global bear market's bellwether stocks," according to Ed Yardeni, chief economist at Deutsche Bank Research in New York. "These stocks," he adds, "are losing upward momentum."

"There are worries about overseas exposure for money-centered banks - they will have losses," says Berry.

And a backlash against globalization and the removal of border barriers might reverse growth in foreign markets.

Many financially troubled countries, especially those with growing public resentment of Western influence, might mimic Malaysia and clamp down on outside banks and investment companies.

At home, a comeback of inflation from a hot economy could take analysts by surprise and send stocks plunging. If inflation drives prices higher, financial firms, especially insurance companies, would see some erosion in profits.

"The entire market would be hit [by rising rates], but insurance companies in particular tend to move inversely with rates," says Jeffrey Hopson, insurance analyst at A.G. Edwards in St. Louis.

Economists are not yet sounding such alarm bells. Moreover, a downturn in the global economy suggests deflationary pressures will intensify.

About these ads
Sponsored Content by LockerDome

We want to hear, did we miss an angle we should have covered? Should we come back to this topic? Or just give us a rating for this story. We want to hear from you.

Loading...

Loading...

Loading...

Save for later

Save
Cancel

Saved ( of items)

This item has been saved to read later from any device.
Access saved items through your user name at the top of the page.

View Saved Items

OK

Failed to save

You reached the limit of 20 saved items.
Please visit following link to manage you saved items.

View Saved Items

OK

Failed to save

You have already saved this item.

View Saved Items

OK