Investment Opportunities 11

Why financials could continue to rally

Nick Brind, co-manager at Polar Capital Global Financials Trust, explains why the sector is a good bet In many countries, a very small

Ten years ago, Lehman Brothers filed for bankruptcy and the head- lines written about the ensuing global financial crisis live on. Te financial sector was branded as toxic, making it uninvestable in many people’s minds. Since then, banks globally have paid out more than $300bn in fines while in the UK, payment protection insur- ance (PPI) alone has cost in excess of £40bn. Despite this enormous cost,

the financial sector has returned 64.7%1

over the past five years

(according to the MSCI World Financials + Real Estate Net Total Return Index), which was when we launched the Polar Capital Global Financials Trust to play the sector’s recovery. Tomas Edison stated: “Oppor-

tunity is missed by most people because it is dressed in overalls and looks like work”. Understand- ably, an easy mistake to make after the crisis was to tarnish the entire sector with the same brush as a small number of large banks and believe that the payback on researching the sector wasn't worth it. Today, financials represent over

20% of global equity markets. It’s not just about banks, which repre- sent the largest part of the sector.

1. Financial sector: MSCI World Financials + Real Estate Index. (31 July 2013 to 31 July 2018) Total return in GBP terms.

This is not and does not constitute an offer or solicitation of an offer to make an investment into any fund or investment 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. As of August 2016, the MSCI removed Real estate as a constituent from the MSCI World Financials Index. Benchmark data above illustrates linked performance of the MSCI World Financials Index prior to August 2016 and MSCI World Financials + Real Estate Net Total Return Index since August 2016 to present.

It’s also about insurance companies, stock exchanges, asset managers, specialist finance companies and property companies. Since the middle of 2016 the share

prices of US banks have risen sharply on the back of rising US interest rates.

Assuming interest rates

continue to trend gradually higher, the sector will continue to benefit as banks increase the rates they charge on mortgages and loans, while being slower to raise what they pay to depositors. Tis will, in turn,

increase the profits those

banks make. If and when the European Central Bank and Bank of Japan raise

interest rates, banks in both regions will be significant beneficiaries as they’re very interest-rate sensitive. In Asia and most of the emerging markets around the world, longer-term structural drivers — lower levels of consumer debt and higher savings ratios — offer signif- icant long-term growth as financial services remain under-penetrated in these regions. Te impact of technology (fintech)

on the sector is significant, not only as consumers increasingly shift to using cards over cash, but mobile banking over branch banking is resulting in the need for fewer and smaller branch networks.

number of large banks dominate their markets, while in the US there remain over 5,000 banks. Regu- lators had been reticent about allowing consolidation, especially for those banks deemed ‘too big to fail’, but this is changing and with the need to invest more in tech- nology to compete with their larger peers, we

expect cant mergers to see and signifi- acquisitions

(M&A) activity over the next couple of years. There are still risks — a global

recession, or much weaker inf la- tion, would be as headwind for


significant a sector as

global equity markets. But in the US, for example, we’d have to go back to the 1930s to a time when banks had more capital set aside to insure against losses. A duller, more boring banking

sector is what makes the financial sector a much more attractive prop- osition today than it was 10 or so years ago. As the great economist John Maynard Keynes said “When the facts change, I change my mind. What do you do, sir?”

For more information please contact

T: 020 7227 2700


Opportunity is missed by most people because it’s dressed in overalls and looks like work Tomas Edison

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