Donald Trump winning the US presidential election has accelerated the strong run in performance of US financials. This is being driven by a number of favourable developments.
The US economy continues to perform well and macroeconomic indicators have generally surprised positively. It is increasingly likely that the Federal Reserve has achieved a soft landing for its economy which has been taken favourably by equity markets, evidenced by the S&P 500 Index rising 24% so far this year. The fact that the Federal Reserve has started cutting interest rates is favourable for certain parts of the financials sector such as banks (improving net interest income1), consumer finance (improved spending) and alternative asset managers (higher revenues).
President-elect Trump is expected to reduce corporate taxation which will boost corporate earnings, although it will also increase the fiscal deficit. He is also expected to reduce the burden of financial regulation, for example by making leadership changes at federal regulatory agencies and the Federal Trade Commission, which is currently led by Democratic Party appointee Lina Khan. This creates a favourable backdrop for financials which are heavily regulated. It could also increase M&A activity, as long as approval processes are moderated, which would be positive for investment banking and private equity businesses.
Trump’s actions are likely to be inflationary and we have already seen bond markets react with the 10-year US bond yields rising towards 4.4%. The resulting steepening of the yield curve, where the spread between long and short-term interest rates widens, should be favourable for banks which tend to borrow at short rates and lend at long rates.
The situation is clearly different from 2016 when Trump’s first election win came as much more of a surprise and US equities traded at lower valuations. Nevertheless, he is clearly positive for US financials and we have been arguing for some time that investors should consider diversifying away from growth exposures, while the relative valuations of financials remain compelling compared to the wider market.
The valuation of US large-cap (BKX) and small-cap banks (KRW) relative to the S&P 500 (SPX) are compelling
Source: KBW Research, Nasdaq, FactSet and Bloomberg. Index multiples historically calculated monthly by SPDJI; KBW and Nasdaq have been calculating this data since 31 March 2015. Note: P/E stands for price-to-earnings ratio, which relates a company's share price to its earnings per share.
1. Net interest income (NII) is the difference between revenues generated by a bank's interest-paying assets and the cost of paying out interest
Nabeel joined the Polar Capital Financials team as an analyst in August 2013 working closely with Nick Brind, focusing on the US, Latin America & Australia.
Prior to this, Nabeel worked as an operations executive at Polar Capital. Nabeel began his career in August 2008 with Habib Bank, where he worked within a variety of functions.
