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Emerging Markets Investment - Banks, Why Are They Attractive Now? - Citi UK

16 October 2017Emerging Markets
Emerging Markets Investments - Market Insights - Citi UK
  • According to Citi analysts, investors' biggest concern when it comes to investing in banks relates to credit quality – in particular, banks' exposure to foreign-currency-denominated corporate loans. However, corporate free cash flows in emerging markets (EMs) have improved and so has credit quality. Profits have also begun to rise and debt is now more in local than foreign currencies.
  • Asia EM's debt profile has moved from predominately overseas debt to a greater percentage being in local currencies. In Asia (except Japan): 70% of the debt is in local currencies, 13% in USD and 16% in other currencies. Both Hong Kong and Singapore – as financial centers – have the highest weight in foreign versus local currencies according to Citi analysts.

  • However, banks and financials rank highly in Citi's models as investors gradually warm up to the idea of owning financials and even banks of late. Citi analysts continue to see merit in owning financials in an EM portfolio, as banks generate the second-highest returns in EM, lagging just behind the energy sector.
  • The financials sector has delivered the second-highest earnings growth since the global financial crisis; it is the only sector now at a lower price-earnings ratio. According to Citi analysts, the most attractively priced banks are predominantly Chinese and some Korean – while the more expensive banks are generally in India or Indonesia.
  • Citi's view is that besides holding value, banks and the financials sector also offer good earnings revision as well as price momentum – all great attributes for performance, especially in the fourth quarter of this year.

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