Page 25 - DIY Investor Magazine - Issue 27

S&P500 VS KBW BANK INDEX IN 20201
Furthermore, regulators are likely to remove all remaining restrictions on banks paying dividends and buybacks at some point during the year.
US and Asian regulators took a pragmatic approach, unlike their European and UK counterparts, in allowing banks to continue to pay dividends last year albeit capping the level of payouts. In December, the Federal Reserve announced that banks could restart buybacks, which will be accretive to earnings.
Outside the banking sector, insurance companies are also benefiting from the recovery on the back of an acceleration in the increase in insurance rates for commercial businesses as losses due to business interruption claims and the cancellation or delay of sporting events such as the Olympics which hit profits in 2020, on top of others, fall away.
Asset managers and stock exchanges are also riding the recovery as fees generated from higher turnover from trading or the jump in assets under management from higher equity markets boosts profitability.Against this background, share prices of some growth companies are hitting stratospheric multiples; as interest in stock markets and crypto currencies surges the risks of a repeat of 2000 come to mind.
The madness is being repeated. Share prices are jumping on little or no news. Companies with little or no revenues have seen multiples put on their business that defy logic as evidenced by insider selling. Some investors are saying value no longer matters. However, value always matters eventually.
If you had purchased a basket of global financials on the eve of the financial crisis in May 2007 you would have still made a return of more than 60% over the intervening period, despite the collapse in shares prices during the global financial crisis. By comparison, if you had bought a basket of global technology shares on the eve of the collapse in technology shares in March 2000 you would still be nursing a loss of over 45% assuming you held for the same amount of time, because your starting valuation was so high. In fact, you would have had to wait another three years, over 16 in all, just to get your money back.
The financials’ sector, despite the recent bounce, has seen
a significant derating in its relative valuation to global equity markets over recent years. Absolute valuations remain below historical averages too. Investors who have rightly been focused on more growth areas of the stock market in recent years risk missing out on the rotation into those areas of the market hit hard by lockdowns which have much more upside.
There are also significant opportunities within the sector outside the main banking and insurance sub-sectors. For example, Asian emerging market financials are benefiting from Asia’s better handling of COVID-19 which will allow a faster recovery.
They also continue to benefit from the low penetration of financial services to GDP relative to developed markets, underpinning their long-term growth potential. Payments companies continue to benefit from the shift from consumers using cash to card and the growth of e-commerce.
Source: Bloomberg, 31 December 2020
25 DIY Investor Magazine | Mar 2021