| BUSINESSWEEK ONLINE : JANUARY 25, 1999 ISSUE | ||||||||
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| COVER STORY
A Tricky Time for Financial Stocks Even if you wanted to invest in Wall Street's most prestigious firm, you can't buy stock in Goldman Sachs & Co. -- yet. There are, of course, myriad other stocks in the bank, brokerage, mutual-fund, and insurance industries to choose from. But the question is, do you want to buy any of them just now? Stock markets around the world were rocked on Jan. 13 by the resignation of Brazil's central bank president and the currency devaluation implemented by his successor. The next day, markets faced another barrage of bad news from Brazil, followed by rumors that the currency could be allowed to decline further against the dollar. On Jan. 13, the Dow ended down 125 points, or 1.3%. And on Jan. 14, it declined a further 229 points, or 2.5%. Financial stocks have suffered some of the worst of the selling. Citigroup (C), the U.S. bank with the biggest exposure in Brazil, fell nearly 3%, to 50 5/8 on Jan. 14. J.P. Morgan (JPM) (JPM) fell 5%, to 101 5/8, and American Express (AXP) (AXP) fell 3%, to 95 15/16. The sector has seriously lagged behind the market for the past year, even though the Federal Reserve lowered interest rates three times, which normally would give financial stocks a leg up, says Sam Stovall, senior investment strategist with Standard & Poor's. Investors have already factored in the impact of Russia's and Asia's economic problems on these stocks, but "they couldn't discount Brazil since nothing had happened yet," he says. "Now something has happened." CLOSELY BOUND. Brazil's woes have reignited long-simmering concerns about U.S. banks' exposure to borrowers and other counterparties in emerging markets. U.S. investors learned how closely bound large multinational banks are to fledgling economies overseas last August and September, when several firms revealed huge trading losses and had to bail out Long-Term Capital Management, which imploded after Russia defaulted on its debt. Analysts believe that U.S. firms have been ratcheting down their exposure to the emerging world, but banks' internal trading practices are far from public, and extended turmoil in Latin America undoubtedly would lead to more loan losses and crimp revenues from trading and investment banking. Despite early January's bad news, however, all is not lost for financial companies. For one thing, the domestic economy is still strong. On Jan. 14, the Labor Dept. reported a negligible increase in consumer prices for December, and the Commerce Dept. announced strong retail sales for December. Low inflation and declining interest rates are good for stocks in general and financial stocks in particular. If Brazil's recession deepens and spreads to other Latin countries, as many analysts believe it will, that should keep inflation at bay in the U.S. and may prompt the Federal Reserve to lower interest rates further. Long-term demographic trends in the U.S. also favor financial stocks. "Fortunately, the U.S. is its own best customer," says Michael Fasciano, manager of the small-cap Fasciano Fund (FASCX), which has about 15% of its assets in financial stocks. "We feel the sector will benefit from the demographics of baby boomers who will need to save more," he says. Continued consolidation in the industry should also give it a boost on Wall Street. NO SURPRISE. As for Brazil, Fasciano thinks it will hurt the the bigger financial stocks more than the smaller companies he invests in. He owns regional banks CNB Bancshares (BNK) (BNK) and Corus Bankshares (CORS) (CORS), and mutual-fund firm Waddell & Reed Financial (WDR) (WDR). He also thinks many firms anticipated the problems in Brazil and have hedged their exposure to the currency. "I think the impact will be less than if [the devaluation of Brazil's real] was a surprise," he says. Roger DeBard, managing director at Hotchkis & Wiley in Los Angeles, also believes that regional banks represent good opportunities for investors who have the stomach to buy in now. These domestic banks are not immune to global economic crises, and some do have international exposure because they lend to companies that do business overseas. But they won't be as affected as global banks and were not bid up excessively in 1998, he says. He likes Bank One (ONE), a combination of three strong banks that covers the markets from the Midwest through the Southeast. "Theoretically, it could be an excellent patch into a truly national banking franchise, or it can expand internally into other areas through acquisition or normal business expansion," he says. Washington Mutual (WM), one of the country's largest savings and loans, is another stock he finds attractive. He notes its strength in mortgage financing and lack of "exposure to the vagaries of currencies and foreign economies." Still, DeBard's advice for investors who have a chunk of cash to invest now is to put only half of it back in the market and then dollar-cost average (investing a set amount monthly over a period of time) in case market values continue to erode. While there may be some good values in financial stocks now, those stocks could get even cheaper thanks to ripple effects from Brazil's current crisis. By Amey Stone with Gary Silverman in New York _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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