Sentimental journey - Public opinion may have changed but the banks themselves have not


Kevin Murphy

Kevin Murphy

Fund Manager, Equity Value

Ever since 2009, people have inevitably asked us about UK banks. Regular visitors to The Value Perspective will be well aware of our views on the sector and so questions kept coming as to why on earth we would ever own the likes of Barclays, Lloyds and Royal Bank of Scotland. The banks were nasty businesses, people argued, but – whether or not they had a point – it does not automatically follow that they are bad investments.

In the stockmarket, as in real life, there is good news and bad news. When share prices are going down, people tend to focus on the bad news and use it to rationalise what is happening to the market. Similarly, when share prices are going up, people use whatever good news is out there to justify that.

The banks have been unpopular for some years now and, as the bad news kept coming through the course of 2011, the market kept hating them. More recently, however, as banks’ share prices have begun to rise (not least, we would argue, on the back of their valuations) people have started to justify that with some of the more positive news that is out there.

They now point, for example, to the quality of the core franchises, the profitability of new lending, a softening of the financing market, the dilution of new regulations and so forth. Over the last few months, we have certainly started to see sentiment towards the banks begin to thaw.

As steadily rising share prices continue to bolster sentiment (and of course vice versa), not only are we receiving fewer questions about banks, those we are being asked are far more positive in nature – not so much why we would own them but, for example, when they will start paying dividends once more.

It is probably too early to suggest the tide has turned completely but, while we would argue little about the banks as businesses has fundamentally changed, investor opinion undeniably has. It is a fact of market life that sentiment follows share prices. People obviously feel more positive when share prices are going up and now the rising price in the banking sector is beginning to work its magic.


Kevin Murphy

Kevin Murphy

Fund Manager, Equity Value

I joined Schroders in 2000 as an equity analyst with a focus on construction and building materials.  In 2006, Nick Kirrage and I took over management of a fund that seeks to identify and exploit deeply out of favour investment opportunities. In 2010, Nick and I also took over management of the team's flagship UK value fund seeking to offer income and capital growth.

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