Page 29 - DIY Magazine June 2018

In particular, if the eurozone economy continues to improve and in due course the European Central Bank raises interest rates then their banks will be significant beneficiaries as will those in Japan as both are very interest-rate sensitive.
In Asia and emerging markets longer-term structural drivers from much lower levels of consumer debt and higher savings ratios offer significant long-term growth as financial services remain under-penetrated in many of these countries. The impact of technology, while a threat to the industry, is also an opportunity for those companies that embrace it. For example, as customers of banks increasingly access their bank accounts online or via their smartphone so the need for fewer and smaller bank premises has led to branch networks shrinking. In the US, Bank of America, JP Morgan and Wells Fargo each spend around $10bn per year on technology and have consequently been taking market share from smaller US banks.
EXPECT A RISE IN M&A
In the UK we are used to a very small number of large firms that dominate banking, a trend also seen in Canada, Australia and many other European countries where there was significant consolidation post-financial crisis. As a result, the only consolidation of note in the UK in recent years has focused on the smaller banks with TSB acquired by Banco Sabadell, Aldermore Group acquired by First Rand and CYBG (owner of Clydesdale and Yorkshire Banks) approaching Virgin Money.
Conversely, in the US there remain over 5,000 banks, only one of which - Wells Fargo - can be argued as having a national presence. Regulators have until now been reticent about allowing further consolidation
especially for those banks deemed “too large to fail” but now regulations have been tweaked we expect to see significant M&A activity over the next couple of years. Unless loan growth picks up sharply then the pressure will be on for regional banks to acquire or merge so they can compete more effectively with their larger peers where they are being outspent on technology.
What are the risks? A global recession or much
weaker inflation would be a significant headwind for most financials. Nevertheless, while the sector would suffer along with underlying equity markets, it is a very different proposition today than it was 10+ years ago. Significant risk has shifted from banks’ balance sheets into capital markets making them less sensitive to economic shocks. In the US we would need to go back to the 1930s to find a time when banks had more capital set aside to insure against shocks.
Counter-intuitively perhaps, a duller, more boring banking sector is what makes the financial sector
so much more attractive and interesting. Its size
means that there are plenty of attractive investment opportunities though while it is not only about banking, the performance of banks will be the biggest contributor of returns.
It is a sector that has been easy to overlook for good reason but to quote Willie Sutton, a US bank robber, who allegedly replied when asked why he robbed banks: “Because that’s where the money is”.
* Total return from launch date on 1 July 2013 to 30 April 2018
Disclaimer:
1.Financials Sector: MSCI World Financials + Real Estate Index. 1 July 2013 to 30 November 2017. Total Return in GBP terms. 2.PCFT NAV Total Return. Since launch: 1 July 2013 to 30 April 2018. Total Return in GBP terms. Source: Polar Capital, April 2018 - This is not and does not constitute an offer or solicitation of an offer to make an investment
into any Fund or Company managed by Polar Capital. Polar Capital Global Financials Trust plc is an investment company with investment trust status and its ordinary shares are excluded from the FCA’s (Financial Conduct Authority’s) restrictions which apply to non- mainstream investment products. All opinions and estimates constitute the best judgement of Polar Capital as of the date hereof but are subject to change without notice and do not necessarily represent the views of Polar Capital. Performance is stated net of fees and expenses and includes the reinvestment of dividends and capital gain distributions. Past performance is not a guide to, or indicative of, future results. A loss of principal may occur. The following benchmark is used: MSCI World Financials and Real Estate Index (£ adjusted). This benchmark is a broad-based index which is used for comparative/illustrative purposes only and reflects reinvestment of dividends and, where applicable, capital
gains. Investment results and volatility of the Fund may differ from the Benchmark. Please refer to www.msci.com for further information on this index. It should not be assumed
that recommendations made in future will be profitable or will equal performance of the securities in this document. A list of all recommendations made within the immediately preceding 12 months is available upon request. This document is not a recommendation to purchase or sell any particular security.
29 DIY Investor Magazine | Jun 2018