Skip to main content

SPDR's Chesworth Bullish On Outlook For Financials

Following the announcement that British banks passed the latest BofE stress tests and Jay Powell’s suggestion that there is enough regulation facing US banks and interest rates need to rise, Rebecca Chesworth, Senior Equity Strategist for SPDR ETFs at SPDR UK suggests this could provoke increased flows into US financials.

US financials piquing interest

Shifting political sands and monetary policy in the US look set to provide a boost to the financial sector.

  • YTD flows into US-dom US Financials ETFs +$8569m*
  • MTD flows into US-dom US Financials ETFs +$759m* (24/11/17)

Source :SSGA – all industry funds

  • As interest rates rise, the difference widens between what banks can charge borrowers and what banks pay for funding. The impact of the widening spread can go straight to banks’ bottom line with no impact to operating costs, providing a notable margin boost.
  • After years of solidifying their balance sheets, large US banks find themselves with significantly more capital than regulators require, especially in the face of potential deregulation by the Trump administration. Estimates of excess capital held by US banks are $120–$130 billion (according to Morgan Stanley and Goldman Sachs).
  • The strong stock market is feeding through to better results across the financials sector, boosting the portfolios of asset managers and valuations of insurers’ assets, and driving business for investment banks. What’s more, not only would cutting corporate tax rates to 20% benefit the bottom line of a sector with an average effective tax rate of nearly 30%, it could also stimulate the economy more broadly.
  • We could be overdue for a sector reallocation. The Information Technology sector has had a tremendous run this year, returning 27.6%. This momentum run is unlikely to continue when investors look for better value. As the second biggest sector, with much lower valuations than the biggest, the Financials sector is easily placed to take over market leadership from Tech.

Rebecca Chesworth, Senior Equity Strategist for SPDR ETFs says:

‘We saw an interesting sector rotation– into Financials and out of the very crowded Tech sector which has run so well this year. At the heart of this was a chink of light in the tax reform discussions, now sitting with the Senate. There has been a lot of contradictory news on the outlook for the Republican’s tax plans in recent weeks and was one reason why the stock market fell a few weeks ago.

If the bill does pass the Senate, the House and the Senate will then have to reconcile differences between their two respective bills; both chambers of Congress need to pass identical bills before the bill can be sent to the President to be signed into law. This progress is partly behind the 4% rise in the US Financials over the last few days, which has also been helped by renewed strength in US bond yields.

Flow into US Financial ETFs have been mixed so far this month, after strong flows beforehand, but all eyes remain on whether this sector will take sector leadership from Tech. Heavy in-flows over the last couple of days suggests new popularity of the former.

Whilst there are other positives for Banks in the coming year such as anticipated a loosening of capital and distributions, the rest of the Financials sector will benefit from the strength of equity markets. One thing to watch though is that US Government could run out of money on 14th December.’