Economic data is currently showing a deterioration in the outlook for global growth, while a moderation in inflationary pressures suggests we are approaching – or have already reached – a peak in the global interest rate hiking cycle. While developed market inflation has started to come down, if it were to fall significantly in 2024, how would this impact financial services and fintech companies?
Cyclical value…
We expect the current market conditions, with relatively high inflation and growth above recessionary levels, to continue into the first half of 2024. While we think interest rates are unlikely to move much higher from here (if at all), we do not expect to see a return to the near-zero levels that many had become accustomed to previously. With inflation levels remaining some way above target, and as growth continues to be more robust than expected (particularly in the US), we think central banks are unlikely to feel pressure to rapidly cut rates to spur growth.
For now, we remain focused on identifying “cyclical value” investment opportunities, finding the most value in more traditional financial sectors, especially banks, as well as having some exposure to insurance companies that are benefitting from a favourable rate market. We have been particularly interested in identifying banks that are not only benefitting the most from a higher interest rate environment, but that also have decent exposure to fee income as the rate rise narrative slows down.
Several European banks are redistributing a significant proportion of their excess capital back to shareholders – many are offering total yields (i.e. dividends and buybacks) north of 10%. At the same time, these banks are generally trading at historically low multiples, with several names currently trading at around half the price-to-earnings multiples they were trading at around a decade ago. If we were to see a soft landing in Europe rather than a recession, concerns around asset quality deterioration would likely be short lived, which could be very beneficial for European banks’ shares too – and arguably, we are starting to see some of this being priced in.
Outside of Europe, we have some limited exposure to emerging market banks (e.g. in Georgia and Brazil), where we are also able to find attractive yields. Our positions in emerging market banks are trading on even lower multiples than many European banks, but with a significantly higher return on equity.
In the US, a fall in yields would bring down the unrealised losses of banks’ bond portfolios, which could bring significant relief to a sector that has been negatively impacted by the fallout of the collapse of Silicon Valley Bank in early 2023 and a recent tightening in regulation. If we add to this the possibility of a soft landing, we could see a vastly improved environment for US banks in 2024.
The higher interest rate environment has been challenging for financial technology names, but we believe that the backdrop will become more positive for these companies as 2024 progresses and inflation comes down further – i.e. as we move towards a focus on “cyclical growth”, with stronger economic growth and falling inflation expectations. As the cost of debt starts to come down significantly, high growth fintech companies should benefit. As such, we anticipate increasing our exposure to these longer duration names as we look forward to the second half of the year. In particular, we expect to add to higher growth compounders in subsectors like payments, digital banking and insurance.
While we think inflation levels will fall significantly over 2024, especially in Europe, we don’t think we will see a return to zero rates and quantitative easing in the medium term. We believe there is a chance that we could see a “Goldilocks” scenario materialise as 2024 progresses – i.e. “not too hot, not too cold” – which would be supportive for global equity markets, including financials.
Nevertheless, regardless of what happens in 2024, over the longer term, we continue to look beyond the noise, to focus primarily on identifying innovative and dynamic companies that should benefit from continued long-term structural trends and drive change in the financial services sector. We focus on companies that we believe can successfully harness technology to cut costs, improve customer experience and tap into new markets, to ultimately gain ground over competitors that are too slow to adapt.
Within our strategy, we can invest across geographies and subsectors, through three key categories – growth, yield and special situations. By taking an active, dynamic approach to capital allocation, we are able to adjust our weightings in each of these categories, to suit the current macro environment.
The value of active minds: independent thinking
A key feature of Jupiter’s investment approach is that we eschew the adoption of a house view, instead preferring to allow our specialist fund managers to formulate their own opinions on their asset class. As a result, it should be noted that any views expressed – including on matters relating to environmental, social and governance considerations – are those of the author(s), and may differ from views held by other Jupiter investment professionals.
Important information
This document is intended for investment professionals and is not for the use or benefit of other persons. This document is for informational purposes only and is not investment advice. Market and exchange rate movements can cause the value of an investment to fall as well as rise, and you may get back less than originally invested. The views expressed are those of the individuals mentioned at the time of writing, are not necessarily those of Jupiter as a whole, and may be subject to change. This is particularly true during periods of rapidly changing market circumstances. Every effort is made to ensure the accuracy of the information, but no assurance or warranties are given. Holding examples are for illustrative purposes only and are not a recommendation to buy or sell. Issued in the UK by Jupiter Asset Management Limited (JAM), registered address: The Zig Zag Building, 70 Victoria Street, London, SW1E 6SQ is authorised and regulated by the Financial Conduct Authority. Issued in the EU by Jupiter Asset Management International S.A. (JAMI), registered address: 5, Rue Heienhaff, Senningerberg L-1736, Luxembourg which is authorised and regulated by the Commission de Surveillance du Secteur Financier.
No part of this commentary may be reproduced in any manner without the prior permission of JAM, JAMI or JAM HK. 29664
