FINANCIALS 2009
Riding wild horses
• In Global Financial Sector: Strategy – through a glass
darkly (19 December 2008) we suggest stabilisation of UK
economic data may come in 2010. This could mean a more
positive outlook emerges at the end of the year.
• However, for those still of a defensive mindset, an
improving rating environment is still seen as an
opportunity for Lloyd’s market and reinsurance stocks.
• Our central economic scenario would mean 2009 is still
going to be a hard road for the general financials sector.
In the small cap arena, we continue to focus on longterm
savings trends as a driver of growth.
TABLE OF CONTENTS
Executive summary .............................................................................................................6
Valuation .............................................................................................................................11
Investment priorities..........................................................................................................13
Deflation.............................................................................................................................17
Catalysts for 2009 ..............................................................................................................19
Our strategic view...........................................................................................................................19
Potential triggers .............................................................................................................................21
Rating changes ..................................................................................................................27
Summary ........................................................................................................................................28
Paragon..........................................................................................................................................29
Fairpoint .........................................................................................................................................30
Tenon Group ..................................................................................................................................31
PayPoint .........................................................................................................................................32
Moneysupermarket.com..................................................................................................................33
Collins Stewart ...............................................................................................................................34
Liontrust Asset Management...........................................................................................................35
Blue Oar .........................................................................................................................................36
Cavanagh.......................................................................................................................................37
Sector summaries..............................................................................................................39
Asset management .........................................................................................................................40
Brokers ...........................................................................................................................................44
Lloyd’s vehicles ...............................................................................................................................53
Credit finance .................................................................................................................................56
UK personal financial advice ...........................................................................................................59
Companies.........................................................................................................................61
Aberdeen Asset Management Outperform ..................................................................................62
Advent Capital In Line .................................................................................................................64
Ambrian Capital In Line ...............................................................................................................66
Arbuthnot Banking Underperform................................................................................................68
Arden Partners In Line.................................................................................................................70
Ashmore Outperform.................................................................................................................72
Beazley In Line...........................................................................................................................74
Begbies Traynor Outperform .......................................................................................................76
BlueBay Asset Management In Line............................................................................................78
Blue Oar Underperform.............................................................................................................80
Brewin Dolphin Outperform.........................................................................................................82
Brit Insurance Underperform.......................................................................................................84
Brooks Macdonald In Line ...........................................................................................................86
Canaccord Capital In Line ...........................................................................................................88
Catlin Outperform.......................................................................................................................90
Cattles Underperform ................................................................................................................92
Cavanagh Underperform.............................................................................................................94
Cenkos In Line...........................................................................................................................96
Charles Stanley Underperform....................................................................................................98
Chaucer Underperform...........................................................................................................100
Close Brothers Underperform....................................................................................................102
Collins Stewart In Line...............................................................................................................104
Daniel Stewart Underperform ....................................................................................................106
Davenham Underperform.......................................................................................................108
Evolution Outperform...............................................................................................................110
F&C Asset Management In Line................................................................................................112
Fairpoint In Line ......................................................................................................................114
Hansard Global Outperform ......................................................................................................116
Hargreaves Lansdown Outperform............................................................................................118
Henderson Group Outperform...................................................................................................120
Hiscox In Line..........................................................................................................................122
IFG Group Outperform...........................................................................................................124
IG Group In Line ......................................................................................................................126
Intermediate Capital In Line.......................................................................................................128
International Personal Finance Underperform ...........................................................................130
Invista Real Estate In Line.........................................................................................................132
Lancashire Holdings Outperform ...............................................................................................134
Libertas Capital Underperform...................................................................................................136
Lighthouse Underperform .......................................................................................................138
Liontrust Asset Management Underperform..............................................................................140
Mattioli Woods Underperform ....................................................................................................142
Moneysupermarket.com In Line ................................................................................................144
Neovia Outperform ..................................................................................................................146
Numis Outperform ..................................................................................................................148
Panmure Gordon In Line ...........................................................................................................150
Paragon Outperform...............................................................................................................152
PayPoint In Line ......................................................................................................................154
Polar Capital In Line ..................................................................................................................156
Provident Financial Underperform .............................................................................................158
RAB Capital In Line...................................................................................................................160
Rathbone Brothers Outperform .................................................................................................162
Rensburg Sheppards Outperform..............................................................................................164
Shore Capital Outperform..........................................................................................................166
St James’s Place Underperform................................................................................................168
STM Group In Line...................................................................................................................170
Tenon Group In Line..................................................................................................................172
Tullett Prebon Outperform.........................................................................................................174
WH Ireland Underperform .......................................................................................................176
Disclosure information....................................................................................................178
Advent Capital (Holdings) plc, Ambrian Capital plc, Canaccord Capital plc and Hansard Global plc are
corporate broking clients of Fox-Pitt, Kelton Limited. All information contained within this document in
relation to Advent Capital (Holdings) plc, Canaccord Capital plc and Hansard Global plc is a marketing
communication. It has been prepared in accordance with the FSA Conduct of Business Sourcebook
Rules (COBS 12.3.2) concerning the promotion of investment research independence and is also not
subject to any prohibition on dealing ahead of the dissemination of investment research.
EXECUTIVE SUMMARY
Although our central economic outlook does provide hope for an equity market rally
towards the end of 2009, the underlying economic risks remain for the UK at least until
2010. This means we continue to reposition our stance on the small & mid cap
financials looking for positive drivers of value longer out but remaining cautious about
deflation.
Four major research studies in the last three months set out this perspective. We
continue to feature our defensive stance on the non-life insurance sector in particular.
Lloyd’s Vehicles: A shelter in hard time’ (6 November, 2008) highlighted the risk
management and portfolio diversification factors that combine with improving
insurance cycle prospects to make this an area of focus in small and mid cap
financials. Our more recent study of the sector, Lloyd’s Vehicles: Preparing for a deep
freeze and the hothouse (22 January), however, points to how our central economic
case could relieve some of the need to seek defensive shelters on a longer view and
we are hopeful that the hardening insurance cycle could lead to some rerating
particularly for Catlin and Lancashire Holdings.
In the meantime, the capital strength of the Lloyd’s vehicles provides a bastion in the
current market. We also think UK Personal Financial Advice: We come with nothing,
we leave only with love (13 November, 2008) highlighted the long-term drivers in the
UK savings market suggesting that deleveraging has some long-term healthy effects
benefiting stocks in this subsector. While not as defensive an option as the Lloyd’s
vehicles, the high levels of recurring revenues in parts of this subsector provide some
downside protection and lead us to highlight the value dynamic that would arise from
our central strategy assumptions of a recovery in sentiment in the US and the UK.
European General Financials: Sector focus – hope springs eternal (28 January) also
repositions ratings among the larger market capitalised companies in the general
financials sector for a return to confidence in equity markets at the end of 2009. This
analyses the impact on investment priorities in the sector from our central economic
thesis set out in Global Financial Sector: Strategy – through a glass darkly (19
December 2008). This strikes an optimistic note seeing key economic variables
reporting stabilisation by 4Q09 in the US, which could mean the market begins to focus
on a more positive outcome for 2010, even in the UK. We see this as creating a case
to revisit the asset management subsector once the up and coming results season is
out of the way and to consider the best positioned stockbroking models. The end result
is that the balance of ratings in the general financials sector now perhaps surprisingly
favours those stocks with equity market gearing. Indeed, as set out in Figure 2, we
have shifted the balance of our ratings away from those stocks that have direct
exposure to the economic cycle because we think earnings risks remain in the
ascendant. | 