April 8, 2008 / 2:06 PM / 12 years ago

UPDATE 1-"Bottom fishing" of global fincl stocks risky: Merrill

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April 8 (Reuters) - Investors should resist the temptation to time the bottom in global financial stocks based on their perceived undervaluation, said Merrill Lynch chief investment strategist Richard Bernstein, who views “bottom fishing” of financial stocks as risky.

“We continue to suggest underweighting financial stocks because of the myriad of risks facing the sector. This applies to financials in a global context, not simply to U.S. financials,” Bernstein wrote in “The RIC Report.”

Merrill’s U.S. as well as global quantitative strategy groups view financials as significant “value traps” — stocks that appear to be undervalued, but have no visible catalysts to keep them from becoming even more undervalued.

European and U.S. insurance companies, however, remain the preferred industry within the overall sector, Bernstein said.

The analyst noted that investors appear to have considered only credit conditions and have largely ignored the coming slowdown in global growth.

Investors are just starting to realize that the deflation of this credit bubble is not simply a “US subprime problem,” Bernstein said.

“Indeed, they are just beginning to see a tightening of global credit markets. The cost of capital is rising around the world, and financial markets are beginning to react to that fact,” he said.

Many observers have commented on the Federal Reserve’s aggressive interest rate cuts as a reason to be more bullish on the economy and to buy financial stocks, Bernstein said.

However, central banks really only control the price of credit and not the availability of credit as they cannot force financial institutions to start or stop lending, he said.

“That means that it may be somewhat myopic to focus solely on the Federal funds rate,” Bernstein added.


Despite the bleak near-term outlook for the financial sector, long-term investors should start considering where the financial sector’s next avenue of growth might lead once it goes through what promises to be a considerable consolidation and balance-sheet repair process, the analyst said.

“We think it is going to lead to the non-US consumer,” he said, while noting that U.S. savings rates are negative and balance sheets highly levered.

In most other developed countries savings rates are higher, debt levels lower and net worth higher, Bernstein noted.

The long term — 10 years or more — investment theme might be to try to capitalize on the potential purchasing power of non-US consumers, Bernstein said. (Reporting by Tenzin Pema in Bangalore; Editing by Jarshad Kakkrakandy)

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