Global financial stocks have outperformed the market in the past year, and while generalisations in this diverse sector can be difficult to make, some broad contributory factors are discernible.
Looking firstly at the US, there have been a number of drivers for banks in particular. As perceived beneficiaries of Donald Trump’s expansionary plans, banks responded well to the steepening of the yield curve, given the post-election expectation of meaningful and long-lasting increases in interest rates.
Subsequent doubts over the administration’s ability to deliver on its lofty economic promises induced a pause for breath in the banking sector. But news of the winding back of some of the restrictive regulations invoked following the global financial crisis, and June’s positive review of capital adequacy by the US Federal Reserve, has spurred further interest. The latter piece of news means banks will be able to downsize balance sheets and increase dividend payouts to shareholders.
In Europe, the overall environment has been improving and the share price strength of the financial sector is testament to a modest recovery.
Despite the ambiguous comments of European Central Bank (ECB) president Mario Draghi regarding the removal of the “punchbowl”, our view is that economies remain fragile and still reliant on monetary stimulus. We note too that sentiment has been improving with regard to Chinese banks, with key credit indicators – non-performing loans and net interest margins – showing some glimpses of recovery.
However, a broader observation is that financial stocks, and banks in particular, do not tend to deliver a consistency of returns when looking for quality secular winners as opposed to trading cycles. Tepid economic growth and low interest rates are likely to remain for some time yet.
After several years of quantitative easing, it is near impossible to predict the timing or likelihood of meaningful and sustainable economic recovery, or monetary normalisation.
This is not to say banks should be shunned, but in terms of structural themes in the financial sector, other growth areas such as insurance might pique greater interest.
Companies such as Hong Kong-based AIA and UK-listed Prudential demonstrate a consistency of returns that differentiates them markedly from banks. Both have also delivered strong share-price performance over the past 12 months. Following policies enacted by China earlier in the year to stem capital outflows, both companies reassured investors their growth prospects remained strong.
The key driver for growth, especially for AIA, is the strong demand for protection policies in greater China and more widely in Asia, as financial markets in the region become more sophisticated and more people move up the wealth ladder.
The second theme relates to the growth and development of the cashless society, and in similar vein to insurance, the scope for penetration of all forms of payment methods into developing markets. China opened its card-processing industry to foreign companies recently, presenting an opportunity for firms like Visa to potentially double sales in the long term.