How to Buy Financials in a Post-Cyprus World

Rudy Martin

China is expected to have 167 million “mainstream” consumer households by 2020, according to McKinsey estimates.

Mainstream is defined as those with annual disposable income of between $16,000 and $34,000.

That’s more than 10 times the 14 million, or 6%, who currently fit that definition

McKinsey also anticipates there will also be 120 million households with $6,000-$15,999 of spending power.

I’ve been telling my Global Trend Trader subscribers that this is part of the biggest worldwide mega-trend we’re following right now — the emerging middle class.

And this rapidly growing population is something you can bank on … literally … even after the banking debacle that rattled a nation! In fact, today I have two global financial opportunities for you, one in China and one, believe it or not, in Europe.

After all, one man’s trash is another’s cash!

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Why I’m Banking on World-Class

Returns From Global Consumers

The developing economies around the world represent more than just a base for supplying products and services to the world’s developed nations.

Their economies are on the rise, in large part, because of consumers who are making more money, living and eating better, and living longer, in many cases.

But here’s what really seals the desirability of the emerging markets as an investment choice:

  • With a greater population than the developed world, they represent a potentially bigger source of customers for products and services of international industry.
  • The populations of many of the developing nations are increasing, as opposed to the lower-than-maintenance birth rates in most developed nations. And, most importantly …
  • Starting at a relatively small base — especially when compared with the developed countries — their middle classes are increasing exponentially. This is leading to huge gains in new consumers emerging from “subsistence living” to incomes that enable them to buy cars, computers, brand-name clothes and other status symbols.

With these new realities, emerging markets now offer a double-whammy of potential investment benefits:

  • As suppliers of manufactured goods, natural resources and services to the developed world, and
  • As rapidly expanding sources of middle-class consumers with discretionary income to buy the output of worldwide industry.

A One-Time Phenomenon …

The current transition of emerging markets into modern, developed economies is a one-time phenomenon comparable to the Industrial Revolution or the dawn of the digital age. It represents an opportunity no profit-seeking investor can ignore.

My proprietary stock-ratings model is pointing toward emerging financials as a play. But not every country’s financial companies are stock-pick contenders. Nor should we interpret a buy signal in financials as a mandate to buy banking stocks.

However, I’ve been telling my subscribers to avoid Chinese financials. And my forecast was proven true this week, as many of China’s financial stocks got slammed yesterday after its Banking Regulatory Commission imposed new rules to deter big-money traders from taking big risks.

Plus, its Cabinet called for new measures to deregulate interest rates.

My favorite way to play the Chinese financials took a hit as well. But as far as I’m concerned, these regulators just gave us a big buying opportunity, because the money coming to it from its citizens is – unlike a traditional bank – immediately adding to its bottom line … and will be for years and even generations to come!

I’ll tell you about that play in just a moment. First, for long-term investors, I’m suggesting accumulation of one stock that has a solid rebound potential.

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Financial Investing in a Post-Cyprus World

The situation in Cyprus has a lot of investors questioning global financial companies.

And like any good crisis, investors are selling first and asking questions later.

A good example of an overlooked financial stock is Amsterdam-based ING Groep (ING) in Europe.

ING Groep said it had about $1.2 billion of exposure at year-end to companies registered in Cyprus, but that its credit risk linked to the island was negligible.

The real story here is how Cyprus has affected the ongoing restructuring of the company.

The company blames the current crisis environment in Europe for creating economic uncertainty and reducing investor appetite for European financial offerings.

As a result, the Dutch bancassurer has scrapped its plan to list its combined European and Asian insurance and investment operations.

Now, it seems the best way out is to sell or spin out the more-attractive Asian part of the package and wait for other options on European operations.

But time is not on the company’s side. it needs to spin off its insurance and investment management operations by the end of 2013, which it agreed to in return for European Commission assistance.

At the peak of the 2008 crisis, it received 10 billion euros of Dutch state aid. And now it’s time to pay up!

So the situation here really favors the potential industry buyers, like U.S.-listed Prudential (PRU) and Canadian-listed Manulife (MFC) that have the resources and infrastructure to build in Asia.

I wish they could buy all of ING. The whole company is a deep-value play. The stock sells at less than half of book value, which really discounts what is in the portfolios. And on an earnings basis, it’s priced at five times next year’s consensus forecast.

In a more-normal environment, this stock would sell at 10-12 times earnings which is an easy double from here.

As it is, the more-realistic expectation is for the stock price to gradually recover as the restructuring plan resumes.

Getting back to China and its exploding consumer class, here’s …

A Sound Way to Invest in China’s Financial Future

It seems there’s a China view of nearly every industry, and in the case of insurance that’s certainly true.

And that’s why I added China Life Insurance (LFC) to the list of stocks to buy in Global Trend Trader recently.

I’ve think the recent pullback in financial stocks, especially in China, is a major buying opportunity.

LFC’s a value play too. Consider this:

1) It’s a whale of a company. China Life has been listed for nine consecutive years on the Fortune Global 500 list, and its rank moved forward drastically from 290 in 2003 to 113 in 2011. So it’s less likely to have the type of accounting issues that plague smaller-cap Chinese stocks.

2) It’s in a growing market. Life insurance in Asia is a great business to get in to. The population is young, they have rising wealth and the products provide both insurance and wealth management benefits.

3) It’s a leader in the game. It’s the largest life insurer in the People’s Republic of China, with 40%-45% of that market.

4) It’s a beneficiary of financial reforms. Last year, Chinese life insurers posted slower premium income and policy-fee growth, as low interest rates prompted investors to switch to high-yield wealth-management products issued by banks.

But that’s likely to change.

Chinese regulators have been reading the news from Europe, too! They’ve told banks and financial companies to limit investments of client funds in credit assets that aren’t publicly traded, and to isolate the risks from their operations.

5) It’s a rebound play. LFC’s net profit plunged 40% last year, but it was no surprise and the country’s largest life insurer by premiums will likely see a change in fortunes this year. The positive investment yields from the stock market and a low base of comparison should help China Life’s net profit rise 30-40% this coming year.

Best of all, the stock is now trading around book value and from my perspective has an easy 20%-50% potential

These are just two ideas in the financial sector that have been overlooked. It’s likely there are more buy ideas where these came from.

Until next time,

Happy Trading!

Rudy