Ever since the markets began to falter in mid-July, the big name financial companies have been pummeled as headline after headline brought news of their extensive exposure to sub-prime loans. First Bear Sterns (BSC) came out announcing that their two premier hedge funds were essentially worthless due to extensive investments in worthless credits. Goldman Sachs (GS) followed suit a few weeks later announcing that their leading hedge fund was down approximately 30% for the year. The shares of both companies have suffered greatly, Bear Sterns falling from its high of 170 to nearly 100, and Goldman Sachs falling from its high of 233 to nearly 160. In Friday's market Dow components Citigroup (C), J.P. Morgan & Chase (JPM), American International Group (AIG), and American Express (AXP) all led the index up from a nearly 350 point loss.
So does this means that the financial companies have finally bottomed out and are ready for steady rises? Most financials have single digit multiples with high growth forecasts for the future but this is not necessarily enough to make them a good trade or investment. Goldman Sachs and Merrill Lynch have global exposure however they have yet to disclose the true toll that their investments have taken on their balance sheets.
In this time of volatility and uncertainty, American based financial firms are not the most straightforward way to deal with the market volatility. UBS (UBS), Credit Suisse (CS) and Deutsch Bank (DB) are three Europeans firms that are better ways to play the current market conditions. They will benefit from the strengthening European economy as well as the strengthening Euro. While they are invested in sub-prime loans and will suffer losses, theses companies have been unduly beaten down. They have low multiples and all have high growth forecasts.
Other promising investment outlooks include global financial ETFs such as the iShares S&P Global Financials Sector Index Fund (IXG) which has shown strong growth since its initiation. Currently, IXG has fallen considerably off of its June 2007 highs, however this will reverse once the global situation improves. Like UBS, Credit Suisse and Deutsch Bank, this ETF has taken a significant dip that can be used to any investors advantage. There are no signs that the current U.S. economic situation will restrict world economic growth in any substantial way. Financial firms in Europe, Asia and Australia all have excellent growth forecasts and IXG will reflect this in the coming quarters.
While the current market conditions make trading any financial firm risky, investors should look for companies that are relatively isolated from the U.S. financial situation. As a trade and as an investment, the iShares ETF and European Investment Banks are safer investments with high growth prospects.
Disclosure: Author has a long position in some of the above-mentioned securities.