The New Star Global Financials Fund fell 11.9%* in September while the FTSE All-Share Total Return Index lost 13.2%* and the FTSE Global Financials Total Return Index fell 10.3%†.The US House of Representatives' initial rejection of the White House's "troubled asset relief programme" (Tarp) triggered one of the worst daily market drops on record. Congress eventually approved the Tarp, however, in an effort to stabilise the financial system and restore confidence. Despite this, a wave of financial failures, emergency takeovers and nationalisations hit stockmarkets hard despite the provision of exceptional amounts of emergency liquidity from central banks.Over the longer term, the US Treasury rescue package and the focus on equity injections should help to restore confidence to stockmarkets characterised by exceptional levels of risk aversion. Only when comprehensive government action, including full-scale capital support, is provided, however, will global banking stocks be close to an inflection point.Stock selection remains imperative. At the month end, poorly-capitalised universal banks faced nationalisation risks while well-capitalised banks such as BNP, Santander and HSBC, with diversified revenues, strong retail franchises and funding base, appeared best placed to survive and benefit from market share gains.
In the next few months, selective banks may not do too badly relative to other sectors because of the de-rating they have suffered. If the economy deteriorates more than is forecast, cyclical and more volatile sectors will fall further, meaning these banks may outperform relatively, given that their share prices have fallen far and already reflect gloomy expectations about prospects.