Jan 11 Goldman Sachs Group Inc's
investment-management arm is telling clients that the best place
to put their money this year is in stocks of U.S. banks, even
after their recent run-up.
At the same time, Goldman Sachs' wealth management arm is
advising investors looking for higher returns to shun U.S.
Treasuries, most other bonds and even hedge funds, warning that
most hedge funds will generate only mid-single-digit returns.
"There will be lower returns across all asset classes,"
Sharmin Mossavar-Rahmani, chief investment officer of Goldman
Sachs' investment strategy group, told a press briefing on
Friday. "We think this is a very important message, but not
everyone likes to hear it."
The investment strategy group has been advising clients to
put their money in bank stocks for two years. The firm said it
made that investment its top pick for 2013 because the
low-interest-rate environment has rendered financial stocks
Investors have been shunning big bank stocks for years,
citing a weak economy, volatile markets and new regulations that
have clamped down on earnings potential. Until a recent rally
begun toward the end of 2012, shares of some of the largest U.S.
banks, including Goldman's own, were trading below the stated
value of assets on their balance sheets.
But last year, bank stocks gained significant ground,
particularly in the final months of 2012. The SPDR S&P Bank ETF
, which Goldman's investment management team uses as a
basis for its investment thesis, rose 20 percent last year and
is up another 5 percent in the first few weeks of 2013.
Some stocks included in the ETF, including Bank of America
Corp, more than doubled in price last year. The ETF,
which invests in a group of 41 U.S. commercial banks, counts
Citigroup Inc, SVB Financial Group, Ocwen
Financial Corp, Comerica Inc and Bank of America
as its top five holdings.
Goldman's case for further growth in bank stocks in 2013 is
three-fold: attractive valuation, even after the rally;
potential for bigger dividends now that capital levels have
improved; and the idea that investors can use bank stocks as an
easy play on the housing recovery, since more than half of U.S.
banks' loan books are comprised of U.S. real estate.
Brett Nelson, a managing director in Goldman's investment
strategy group who presented the case for bank stocks, forecast
that banks will be able to reach an 11 percent return-on-equity
even with new regulations - less than their historical 15
percent return-on-equity but still better than single-digit
levels that banks have recently been reporting. Return-on-equity
is a measure of how much profit a company can wring from its
balance sheet; it is monitored closely by bank investors.
An 11 percent return-on-equity would imply a valuation of
1.4 times book value - still much higher than the level banks
are now trading at, which is roughly equal to the value of
assets on their books.
"If the concern is that banks are becoming utilities
(because of new regulations), then that's fine," said Nelson,
noting that the utility sector has a 10 percent return-on-equity
and trades at 1.4 times book value.
The amount of capital banks can return to shareholders
through dividends this year will also be a big driver of stock
performance, he said.
"Banks will be the fastest grower of dividends," said
Nelson, who predicts that dividend yields in the sector will
exceed that of the S&P by year-end.