Michael Clark, manager of Fidelity MoneyBuilder Dividend Fund (GB0003860904) and IC Top 100 Fund Fidelity Enhanced Income (GB00B3KB7682), explains why it might be time to revisit some banks.
"The first half of 2014 saw the stock market value of many banks on the continent surge," he says. "But it has been a different story for their UK counterparts with the FTSE 100's five UK banks delivering lacklustre performance, despite a backdrop of an improving UK economy.
"Low interest rates, subdued market volatility and the strengthening of sterling have hit investment banking units, while continued exposure to conduct and litigation charges caused ratings agency Moody's to downgrade its outlook for the UK banking sector from 'stable' to 'negative.'
"While this suggests a rather grim outlook, there are some UK banks which could prove the bears wrong and do well over time. The sector is home to some high quality companies which generate high cash flow sufficient to fund both future growth and increase dividend payments.
"HSBC Holdings' (HSBA) share price relative to the market has fallen back to the very low levels seen during the Asian crisis of the late 1990s and this creates an investment opportunity. HSBC has good exposure to fast growing markets in Asia, which accounts for around 60 per cent of its profits, and has the best banking book in the UK, with very low exposure to high risk property loans.
"Over the longer-term, the development of capital markets in China and the greater convertibility of Renminbi, should be major positives for HSBC. It is not involved in the Chinese domestic lending issues so my view is that it has good exposure to the right markets in the Far East.
"The bank is very conservatively run and is making good progress externally in terms of better compliance, regulation and capital; and internally in terms of cost control and growth initiatives. Overall it is a steady compounder with a good dividend yield of 5 per cent, and has a proven and successful business model with long-term viability."
