Market Musings 110726: finding favour in Financials

Market Musings 110726: finding favour in Financials

Podcast: Defence back on the radar

In this podcast, Edmund Shing, Global Chief Investment Officer, argues the case for investing in the defence sector.

Consider Banks and insurance for value

While the dominant stock market theme remains Artificial Intelligence, there are pockets of value that are performing very well at present. One such segment of the stock market is Financials, notably Banks and Insurance. 

US banks have only relatively recently passed their prior all-time high set back before the Global Financial Crisis (GFC) in 2007, 19  years ago.

US Banks have only this year finally set a new all-time high

In the case of European Banks, they have still not yet revisited their 2007 pre-crisis highs… Certain banks have just managed to recapture their former all-time highs, including BNP Paribas in France, for instance.

European Banks: Still not back at the 2007 highs

Interestingly, the European Insurance sector has in fact done rather better than Banks over the last 19 years, recovering faster from the GFC.

European Insurance has been stronger since 2007

Over te last 4 years however, European Banks have been stellar performers, even outperforming US Tech stocks as strong earnings growth and record-high profitability (ROE) has driven a rerating,. Share buybacks and high and growing dividend payments have also boosted shareholder returns.

European Banks have beaten the Nasdaq 100 since 2022

Today, European Financials offer a dividend yield around 5% together with record-high ROE profitability and double-digit earnings growth. This rosy sector outlook is backed by positive macro trends in the form of higher interest rates and accelerating loan demand from both households and companies. 

The current trend of sector consolidation both within-country (e.g. in Italy and Spain) and also cross-border (Unicredit in Italy taking effective control of Commerzbank in Germany) is a further positive, as it could lead to greater integration and thus cost savings, in time  boosting earnings growth).. 

II would expect a modest further rerating of the European Banks sector in the months ahead from its current 10x forward PE, as it offers today a higher Return on Equity than the US banks sector, but still trades at a big PE discount to their American counterparts. 

Given earnings growth of 10%+ and a dividend yield of 5%+, European Banks and Insurance companies could in theory generate a total return to shareholders (price gain plus dividends paid) of 15% over the next 12 months, less impressive perhaps than in 2025 but healthy nonetheless.

ETFs to consider include:

• ESIF  iShares MSCI Europe Financials UCITS ETF (Banks + Insurance sectors)

• CB5 Amundi STOXX Europe Banks UCITS ETF

All the best for next week,

Edmund