Emma Wall: Hello, and welcome to Morningstar. I'm Emma Wall, and here with me today to give us three financial stock tips is Guy de Blonay, manager of the Jupiter Financial Opportunities Fund.
Hello, Guy.
Guy de Blonay: Thank you, Emma.
Wall: So what's your first financial stock?
de Blonay: The first one would be a peripheral Europe stock to be found in Italy called Unicredit (UCG). I think the opportunity here is at different levels. The first one is the recovery of the periphery. So the risk premium reduction, the restructuring story that this stock offers in selling non-core assets, repositioning the companies into countries it feels comfortable with, and the Italian domestic recovery as well as with as you probably saw the latest developments in politics where a new potential Prime Minister taking over that has much better plans for reforms, but also the valuation of peripheral Europe, in general, but very much, Unicredit as an example, with deep discount to its book value.
So, you could believe in a normalization that could – a normalization of profits that could ultimately if capital ratios are adequate and the regulator is happy with it that this company could see its discount narrow towards its book value and that could offer some decent upside.
Wall: Of course, people will hear Italy and hear banking and they'll think risk. We know about the Spanish banking sector. There has been a lot of consolidation there, which has sort of reduced risk. How risky is an Italian banking stock?
de Blonay: Well it's true that the fear in the past has been towards, I suppose, at provision levels, not being adequate, but I think the very positive sentiment that is surrounding peripheral Europe is the commitment from the ECB and Mario Draghi to do whatever it takes to keep these countries afloat, but very much enable them to benefit from a lower cost of borrowing.
And I think that would enable these economies to start to actually grow again, the likes of Spain, but Greece as well and Portugal and very much Italy, not that much, perhaps Italy will grow probably for the next three years about 1%, but that's more than…
Wall: That's positive.
de Blonay: That's positive, and it’s clearly keeping the bears away from the deflationary potential scenario that many are pushing forward to believe. So, I think the provision might actually be adequate as the economy recovers and that non-performing loans starts to reduce.
Wall: What's your second stock?
de Blonay: The second stock would be a growth stock called MasterCard (MA), a company that is at the forefront or very much in the middle of benefitting from a cash to cashless economy. So, we're spending more and more over the internet through networks, such as credit card networks, Visa (V), MasterCard, American Express (AXP) or PayPal, for those who know eBay or have been using their payment processors.
So, the idea here is that more and more on a global basis – or the middle class is growing quite fast and more and more of us are using networks or their credit card or the Internet to buy Christmas presents, groceries to be delivered at home, books, DVDs and also even watching films on-demand at home.
So the migrations from cash to cashless economy is not a question of if, but the question of how long it will take for most of us on the globe to start to do it, and I think to be involved in a company that has such a secular growth story such as MasterCard, it is an opportunity for us to offer in our fund an exposure to that growth
Wall: What's your third stock?
de Blonay: The third stock would be obviously Lloyds (LLOY). Lloyds, I think, is we've talked about it. It's an interesting company, because it has shown that restructuring stories from very early on as managements are repositioned in a company after a change in management, the new management repositions the company towards what it does best in its core market, gets rid of exposures that aren't seen as non-core, focuses on profitability rather than revenue growth.
So doesn't spend stupid money to chase growth, but very much retrench, cut costs, and produce profitability that can give some – can provide investors with capital return. But then instead once the earnings power is returning to normal, use a portion of that earnings not to fund irrational growth, but very much give it back to shareholders to enable the story to have a second phase and become a dividend play rather than simply a restructuring play. So, we've been with Lloyds from a restructuring story to now a potential dividend play that will very much attract a large portion of investors in the U.K. to start with.
Wall: Guy, thank you very much.
de Blonay: Thank you, Emma.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
