Financial stocks such as IOOF are offering ‘standout value’ for investors, according to Nikko Asset Management, with diversified financials particularly looking cheap after a difficult year.
In an investment update, the firm said diversified financials had had an “extremely difficult” year in 2020 as they were hit hard by the market downturn in March. Net flows also dried up as a result of the volatility, which was heightened by the pessimism caused by the Royal Commission.
In its company quarterly results, IOOF’s funds under management, advice and administration was down $0.4 billion to $202.4 billion for the quarter to 31 December, 2020. An uplift of $12.7 billion was offset by the $8.1 billion from the termination of the BT platform relationship together with $1.5 billion from the liquidation of IOOF’s cash management fund and a $0.4 billion one-off transfer from the cash management trust.
Brad Potter, head of Australian equity at Nikko, said: “The sector now looks extremely cheap with stocks like IOOF standout value. Should market volatility subside in 2021, fund flows into the superannuation and investment system should return, given cash provides little protection to inflation or longevity risk. A return to organic growth should see the sector re-rate materially from here”.
Shares in IOOF lost 48% during 2020 compared to returns of 1.4% by the ASX 200.
According to FE Analytics, IOOF was held by Legg Mason Martin Currie Select Opportunities and VanEck Small Cap Dividend Payers ETF at 4.1% and 2.8% respectively.
Meanwhile, Nikko said it expected banks to return to being the highest-paying dividend sector after dividends were restricted by the Australian Prudential Regulation Authority (APRA) last year.
Potter said the outlook now was better than it had been six months ago as a result of robust housing lending growth, strong capital position and modest credit growth outlook.
“The level of loan deferrals has reduced materially, and the banks look well provided for the increase in bad debts post government support reducing and finally removed. Unlike international banks, which are leveraged to the long end of the interest rate curve, net interest margins for Australian banks are unlikely to move higher in the short to medium term given the outlook for cash rates,” Potter said.
“The sector looks attractively priced within an environment where a number of the tail risks have reduced substantially. Over the next few years, we believe banks will return to the mantle as the highest paying dividend sector.”
The only big four bank to report positive returns last year was Commonwealth Bank which returned 6.5% during 2020 compared to returns of 1.4% by the ASX 200. ANZ lost 4.8%, NAB lost 5.2% and Westpac saw the biggest losses of 18.7%.
