Lazard: We Sold All Lloyds Shares After Brexit Vote And Bought Miners Instead

Lazard Asset Management's head of UK equities Alan Custis says there are opportunities in financial stocks, despite off-loading its holding in the UK’s largest bank

Karen Kwok 14 October, 2016 | 2:15PM
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Financial stocks are looking more attractive to investors, according to the head of UK equities at Lazard Asset Management. But it is not looking to buy back into Lloyds Bank (LLOY) which it sold immediately after the Brexit vote.

“On 24 June – when the result of the EU Referendum was known -  we sold all our Lloyds shares to buy more mining companies,” Alan Custis, UK equity portfolio manager for Lazard Asset Management told Morningstar in an interview yesterday.

“We felt Lloyds was at the centre of everything that is going on in the economy: whether it is a slowdown in housebuilding, lending issues, or Scotland asking for another referendum,” Custis explained.

The EU Referendum certainly created challenges. Custis was not the only fund manager selling shares that he felt would be negatively impacted in a post-Brexit economy.  Neil Hermon, lead manager of the Henderson Smaller Companies Investment Trust has previously revealed his decision to sell out of a number of economically sensitive stocks on the day of a Brexit vote 24 June.

However, Custis does not feel negative on the entire financial sector. He says financial stocks should do better in an environment where central banks look to encourage lending and reinvigorate the financial community. He added that this is the first time he has been overweight in financial stocks for a long time. Insurance stocks, in particular, look more attractive he said.

Clive Beagles, fund manager for the Silver Rated JOHCM UK equity income fund echoes Custis’ views, saying that a potential switch from monetary to fiscal stimulus by the Government would also assist bank earnings.

Beagles added that management action of insurance stock Aviva (AV.) can deliver 10% dividend growth.

No Positivity on Lloyds Share Returns

Custis admitted that the UK economy had performed a lot better than was widely anticipated on the day of the Brexit vote. However he has not bought back into Lloyds' shares since then.

“The UK consumer data has been quite robust post Brexit. The recent Barclays credit card data for September has run to a 15 months high, showing the strength of consumer spending.

“However I think the returns for Lloyds are not showing any positivity or improvement,” Custis said.

“Lloyds is one of the biggest banks in the payment protection insurance (PPI) scandal which continues to have a negative impact. The bank also has a big pension fund deficit.”

Stephen Ellis, director of financial services equity research at Morningstar agreed, indicating his concern that Lloyds will continue to absorb costs for past misconduct.

“Sharesholdesr have already paid some £16 billion because the bank miss-sold PPI.” He said he thought regulatory charges had peaked, but have not disappeared altogether just yet.

The Bank of England’s decision to cut interest rates in August has put further pressure on Lloyds’ profitability, Custis said. Although other banks in the UK face similar problems, Custis said he could see more opportunities for growth with Barclays Bank (BARC).

“We bought Barclays in July as we see it as a good place to start seeing recovery. It has a different proposition to Lloyds. Barclays has a clear plan to improve their businesses and capital ratio,” Custis said.

Custis is also confident that the bank’s management team, lead by the new CEO James Staley, will improve performance.

Lloyds is down 25.5% year to date, with the share price now 7% lower than it was on the 24 June, the date of the Brexit result, when the shares of most UK financial stocks plunged. In contrast, Barclays is down 22.3% year to date, but the bank has recovered from the low it hit on 24 June - with share prices now up by 10% from this point to 170.81p.

To further add to Lloyds’ woes, last week the Chancellor Philip Hammond, ditched plans to sell off the Government’s remaining stake in the bank to retail investors. Hammond said it was “not the right time for a retail offer” due to increased market volatility.

Lloyds Bank has remained on Morningstar.co.uk readers’ radar over the past 12 months, topping the ‘most clicked’ list on Morningstar.co.uk.

“We Are Sleepwalking Ourselves to Another Oil Spikes”

Custis is also overweight in oil and mining stocks. In the short term, he believes the oil price will depend on what OPEC decides on the oil output in November.

However, he says he believes that in the longer term oil prices will rise.  Even Saudi Arabia - one of the biggest oil producers in the world – could not survive with the oil price at $50 a barrel. (The price on Friday 14 October was $52 a barrel)

He said there also a risk of demand for oil falling, before the supply rise in the next 20 years’ time.

“We think it is logical that the oil price will reach $65 in 2018. At this point oil stocks - such as Shell and BP- could pay their dividends comfortably, and the share prices should be higher than it is now. This is why we are happy to continue to hold oil companies,” Custis explained.

The fall in sterling also helps to boost the profitability of oil and other energy company, as their revenue is in US dollars, said Mike Bell, global market strategist at JP Morgan Asset Management. 

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Karen Kwok

Karen Kwok  is a Reporter for Morningstar.co.uk