Last year was a very good year for global financials. We believe the trends that supported financials’ performance in 2017 will continue in 2018.
Watch the video or read the transcript below.
Trends that supported global financials in 2017.
Last year ended up being a very good year for global financials, the MSCI Financials Index ending the year up about 23%. We are excited about the prospects for financials in 2018, because the same trends that started in 2017 should continue in 2018. So what are these trends?
- There has been a pick-up in global growth. For the first time in almost 10 years we are seeing synchronised global growth. This means there is not any one country that is driving growth – there are growth engines almost everywhere we look.
- In our company visits everywhere we go, we find that economies are becoming stronger and banks are reporting stronger demand. We see this in the US (aided by Donald Trump’s tax reform), Europe, Germany, Holland, Belgium, France, Portugal and Ireland – to name a few.
- Commodity prices have also been strengthening, which is very good for emerging market countries like Brazil, Russia, Turkey, Indonesia and Mexico.
How do we expect these trends to continue supporting financials in 2018?
The main benefit comes from high interest rates, which are pushed by higher inflation. Central banks will have to react to rising inflation pressures by raising interest rates. Since we’ve had a very long period of unnaturally low interest rates, this will immediately flow through to financials’ bottom line. With higher interest rates, banks can immediately charge more interest on loans. At the same time, because banks are operationally clean – having disposed of all non-profit businesses and having cut costs – the benefit of higher interest rates will have a direct impact on their bottom line.
A second very important point is bad debts – the banks’ loan books are all very clean today. You often find that after a crisis, credit committees tighten up a lot, which means bad debts will be quite low. The most important thing for many stock-picking funds is that an environment like this helps new and upcoming smaller companies, since these companies can use a growth period to take market share from the larger incumbents.
Overall, we think this will be a very good year for global financials. Emerging market financials in particular should benefit (because of the commodity price cycle) as well as smaller financials, which should take market share and be more aggressive in this period of strong growth.
Sanlam Global Financial Fund
Denker SCI Financial Feeder Fund
Nedgroup Investments Financials Fund
SCI stands for Sanlam Collective Investments.
Denker Capital is an authorised Financial Services Provider, and an appointed investment advisor to Sanlam Investment Management (Pty) Ltd an authorised Financial Services Provider. The information in this communication or document belongs to Denker Capital (Pty) Ltd (Denker Capital). This information should only be evaluated for its intended purpose and may not be reproduced, distributed or published without our written consent. While we have undertaken to provide information that is true and not misleading in any way, all information provided by Denker Capital is not guaranteed and is for illustrative purposes only. The information does not take the circumstances of a particular person or entity into account and is not advice in relation to an investment or transaction. Because there are risks involved in buying or selling financial products, please do not rely on any information without appropriate advice from an independent financial adviser. We will not be held responsible for any loss or damages suffered by any person or entity as a result of them relying on, or not acting on, any of the information provided.