The worst is over for financials, says New Star's De Blonay

De Blonay believes financials hit the bottom in March and says dominant themes for the second quarter are likely to be reflation and economic healing.

The effects of the US sub-prime mortgage crisis on the broader financial markets have mostly been felt and the worst should soon pass. At this point, the US financial sector should begin a period of rehabilitation, he says.

Financial stocks appear to have bottomed out in March, having fallen significantly since the summer of 2007. This implies that the cyclical downswing in shareprices could be in its later stages, if not over. The markets appeared to be stabilising in response to the Feds repeated and focused actions aimed at significantly reducing the risks of systemic problems, he says.

De Blonay has attempted to weather volatility in the troubled financial sector by focussing on deposit-rich banks with strong free cashflows which have no exposure to over-leveraged markets. He says Norwegian bank DnB Nor has been a significant holding over the first quarter.

The London-based manager says the bank faces a challenging environment, like most other European banks, and the increased cost of funding is unavoidable, while he believes bond portfolios will be affected by widening credit spreads. However, overall he believes the Norwegian bank will prove resilient.

The oil-rich Norwegian economy is healthy and lending remains strong. DnB Nor ended the quarter with a high dividend yield and an attractive valuation relative to its counterparts in the Nordic region and elsewhere in Europe, he says.

De Blonay also remains positive on Zurich Financial, as he says the companys income streams are diversified coupled with its solid capital basis. He also continues to position his portfolio to benefit from high levels of volatility through his position in the hedge fund manager the Man Group, and inter-dealer broker Icap.

Over the three years to the end of March de Blonay has returned 60% with the New Star Global Financials fund compared to a 23.6% rise by the MSCI World Financials TR index.