Wealth managers falling out of favour

Wealth management companies face falling out of favour with Australian investors, with analysts pointing to the likelihood of a series of earnings downgrades in coming weeks and advising their clients to remain underweight.

The analysts are predicting that virtually all publicly-listed companies in Australia with an exposure to wealth management face downgrades in their earnings per share (EPS).

The predictions have come in the wake of a 10 per cent share price slip in early February for financial services house and fund manager IOOF after disclosing that its first half profit had fallen short of the $16.3 million posted a year earlier.

What is more, some analysts are predicting that the EPS downgrades for some of Australia’s largest publicly-listed companies could be in the order of 10 per cent, with some being as high as 25 per cent.

Exemplifying the sentiment, an analysis issued to clients by Goldman Sachs JBWere analysts said that unless the broader market recovered everything it had lost since January 1, and did so fairly quickly, “virtually every company with a meaningful exposure to wealth management earnings would be facing EPS downgrades”.

The analysis, a copy of which has been obtained by Money Management, said the real question ought not to be, ‘Who’s next?’, but, ‘When will the others be downgraded and by how much?’.

It said that the analysis was not so much a matter of opinion as a matter of mathematics in circumstances where analysts’ forecasts invariably assumed ‘normal’ equity market performance (which generally means capital gains plus dividends equalling roughly 10 per cent a year).

The analysis said that as soon as markets produced lower returns than this, funds under management/revenue growth expectations needed to be re-based.

It said that the downgrades had already been factored into wealth managers’ share prices but, even so, there was a need to be cautious, because large EPS downgrades would still tend to have a negative impact when they finally came through.

The analysis said that it was possible that “just as many investors were afraid to sell the wealth managers in the extremes of the bull market, most would be afraid to buy until it is very clear that markets are getting very close to staging a recovery”.