Mediterranean banks are offering an attractive investment opportunity again even in former European debt crisis countries like Greece, according to Colin Finlayson, co-manager of the Aegon Strategic Bond Fund.
With inflation elevated, Finlayson says fixed income investors are naturally seeking to invest in sectors that can perform well in a challenging environment for bonds, often favouring financials over lower yielding utilities or industrials. But he says some investors might be surprised which corners of the market are beginning to offer opportunities after years in the wilderness.
“Bank debt tends to do well in an inflationary environment or when interest rates are rising,” Finlayson says. “Steeper yield curves and increased economic activity are good for banks, and they offer an additional yield pick-up compared to other sectors like utilities. As a result we have exposure to financials and a lean towards high yield over investment grade, albeit in slightly unusual areas in certain cases.”
One of these is Greek banks, which he says look attractive even without taking into account the broader global economic recovery.
“A lot of good work has been done by the Greek banks to clean up their balance sheets and remove a lot of bad debts,” he says. “They have received some support from the government as well as the ECB to assist their recovery. They have moved a long way from the dark days of the sovereign debt crisis.
“This has now put Greek banks in a position where they look attractive and offer value relative to many other parts of the banking sector. However, it remains crucial to undertake fundamental analysis to understand what, as an investor, you are really buying and what risks you are taking to access that spread. We hold bonds from both Alpha Bank and Piraeus Financial, which came to the market recently with a new issue at an attractive level.”
Spanish and Italian banks are also appealing options in the current environment, argues Finlayson, who says financials from both countries play an important role in the strategic portfolio.
“We like banks such as Intesa Sanpaolo and Unicredit in Italy, and Banco Sabadell and BBVA in Spain,” he says.
“These banks offer good investment opportunities, but to find them in Europe you have to dig deep as you are dealing with different countries, different jurisdictions and different capital structures. Those opportunities do exist, however, and we are looking to invest in the very best of them.”