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Should you be adding banks to your investment portfolio right now?

by , 16 June 2016
Should you be adding banks to your investment portfolio right now?
Even though South Africa managed to dodge the downgrade bullet last week, the risk of recession, higher interest rates and a lack of foreign funding still plagues the South African banking industry.

But larger fund managers like PSG Asset Management have recently been adding banks to their portfolios. Surely this is a mistake under the current challenging market environment.

Well, let's take a close look at the reasons why they're committing to banks and you can decide if this is right for your investment portfolio too.


Banks have factored in the risks and are well prepared for a downturn

 
Given the current economic situation, South African banks have already started operating using a substantially lower risk appetite. You can see this in the number of loans that were granted over the last five years. Very few loans were granted to over indebted individuals.  
 
Why is this important? Well, if you look at the years before the financial crisis in 2008, banks were handing out loans on a much higher level. The fact that the number of loans granted now are lower, means that means that the banks are making sure that they are not increasing the risk of not being able to collect outstanding debt.
 

But there’s one bank that’s offering better value than all the others right now

 
In the most recent issue of Real Wealth, Joshua Benton found one South African bank offering better value to investors than all its peers.
 
Joshua says, In PE terms, this bank is the cheapest at 8.05. More importantly, the JSE banking sector is on a PE of 12.3 and the JSE around 17. So you’re buying this bank at a massive discount to its peers and its sector.”
 
You see, in 2015, volatility shook global markets causing a widespread sell-off equities and the JSE didn’t go unscathed. Another falling point was when Finance Minister Nene was sacked and investors pulled out of the JSE.
 

Bad for the economy – Great for your portfolio

 
Joshua explains that these economic issues caused his favourite banking share’s price to fall to a one year low of R169. So far in 2016, it’s bounced back to around R180, but it’s still trading at a much lower PE compared to its sector and peers.
 
So what’s been bad for the economy has opened this opportunity to profit for us.
 
In fact, if you add this share to your portfolio today, you could make a 110% gain in 3 years time. 


Should you be adding banks to your investment portfolio right now?
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