In this week’s IDB we discuss fixed income, looking specifically at financials and why London & Capital continue to focus on this sector.
Financial bonds remain a strategic hold for London & Capital portfolios. A gradual credit upgrade cycle is underway as a result of bank balance sheet deleveraging (lower risk-weighted assets), an increase in capital base (higher Core Equity Tier 1 ratio) and more flexible funding.
We believe investors should continue to focus on financials and benefit from the security of buying bonds in a highly regulated sector, where banks are forced to be more transparent with their balance sheets. Furthermore, financials remain key players in the global economic system and as a result, systemically important banks are considered ‘too big to fail.’ Although spreads have narrowed, financials still offer attractive absolute and relative valuations.
Contingent Convertibles bonds (CoCos) have attracted long-term investors and are a key focus of London & Capital. Rising CET1 ratios, comfortably above trigger levels, have provided a solid backdrop for performance year to date.
In summary, financials remain a medium-to-long term value driven strategy as we believe they offer favourable absolute and relative valuations. London and Capital will continue to focus on Globally Systemically Important Financial Institutions (G-SIFIs) and National Champions.