22 Apr 2020
Our scepticism and our underweight exposure to US, UK and EU banks have kept the Jupiter Global Financials strategy safe from the bulk of the unfortunate deluge of dividend cancellations and profit warnings that COVID-19 has induced. Where we do have exposure, it is focused on banks and insurance companies with quality management teams in developed countries such as Switzerland or the US, such as the Swiss regional lender Banque Cantonale Vaudoise.
JP Morgan reported this week and, as we expected, the tone at the post-results call when discussing the economy was sombre. CEO Jamie Dimon explained that the situation is moving rapidly and is likely to deteriorate further. As such, he believes that investors should anticipate additional reserve builds over the next three quarters, which could be “meaningfully higher in aggregate over the next several quarters” relative to Q1 if a 40% drop in GDP unfolds in Q2. Given that even JP Morgan is uncertain about the US’s economic path, with a high likelihood that forecasts will get worse before they get better, we remain cautious on the banking sector overall.
The strategy continues to focus on companies that embrace and/or enable a digital strategy. Social distancing and isolation measures put in place to contain the COVID-19 crisis are accelerating a change in consumer behaviour, which we believe will be to the benefit of digital advances of financials in sub-sectors such as real estate, private equity, banks, insurance, data, exchanges and payments.
In the payments space, companies have come under pressure in the short term due to the impact of store closures. For example, data from Bank of America suggests card transactions were down by more than 30% in the last week of March in the US.
However, if we move from a lockdown to more typical recession conditions, history suggests payment volumes should be relatively resilient – they were still up year-on-year in 2009, for example. Over the medium term, we also believe COVID-19 can accelerate the transition to cashless societies. LINK, a leading ATM operator in the UK, suggested cash usage has halved since the lockdown. E-commerce is also a bright spot in this environment, with a substantial increase in demand in areas like groceries and electronics.
We believe that some of this shift in consumer behaviour is likely to persist post the COVID-19 crisis. Payment processors that are well capitalised and can weather the storm will benefit, in our view – in particular, e-commerce players like Adyen and Paypal.
This article is intended for investment professionals and is not for the use or benefit of other persons, including retail investors.
This article is for informational purposes only and is not investment advice. Market and exchange rate movements can cause the value of an investment to fall as well as rise, and you may get back less than originally invested.
Every effort is made to ensure the accuracy of any information provided but no assurances or warranties are given. Issued by Jupiter Asset Management Limited, registered address: The Zig Zag Building, 70 Victoria Street, London, SW1E 6SQ, United Kingdom, which is authorised and regulated by the Financial Conduct Authority. No part of this article may be reproduced in any manner without the prior permission of JAM.