Financial stock market predictions for 2020 and beyond
Financial stocks are delivering a mixed picture for 2020, with the US election and ultra-low interest rates weighing on investors
Financial stocks have performed well recently, but they have struggled to keep up with the pace of growth in the S&P 500.
According to figures from Fidelity, this stock market sector has grown by 16.3 per cent over the past 12 months – lagging behind the broader index on 23 per cent. Over three years, this gap widens even further, with a 27.9 per cent rise for financials versus 42.8 per cent for the S&P 500. Over five years, the disparity is less pronounced, as this $7.3tn (£5.6tn, €6.6tn) sector is just four percentage points behind the 61.4 per cent appreciation recorded by the biggest 500 listed companies in the US.
Here, we’ll provide financial market analysis and top tips on what you should bear in mind when investing in financial markets. Plus, we’ll look at a couple of the stocks that analysts are favouring as 2020 gets into full swing.
Financial market overview
The financial stock market sector has a 12.5 per cent weighting on the S&P 500 at present and can be broken down into five main categories. Let’s go through them:
- Banks: Unsurprisingly, these are at the top of the list. They provide services to consumers and corporations alike.
- Consumer finance: Credit card providers fall into this category, along with pawn shops and other forms of borrowing.
- Capital markets: From asset management to investment banking, these businesses often enable financial assets like securities to be bought and sold.
- Insurance: Companies in this sector offer policies that cover everything from cars and property to pets and healthcare costs.
- Diversified financial services: This snappily named sub-section rounds up the list. Usually, these companies offer a multitude of services that fall across several categories, such as banking and insurance.
Financial market analysis
Now we’ve recapped the type of financial stocks out there, let’s look at how the industry as a whole is performing.
It’s fair to say that we have a mixed picture. Some analysts predict these stocks will be “grinding higher” throughout 2020 as earnings per share grow, delivering yields of about 3 per cent. Tipping the likes of JPMorgan Chase, Morgan Stanley and Bank of America (more on BOA later), Evercore ISI’s Glenn Schorr wrote: “Market returns in 2020 could be pretty good as 17 of the past 20 election years (since 1940) have been up solid.” Clearly, in his eyes, November’s presidential election in the US shouldn’t dissuade investors.
However, there are other economic factors that could prove to be a headache – especially for lenders. The US Federal Reserve has left interest rates untouched, with its policymakers unanimously agreeing that they should stay between 1.5 and 1.75 per cent. Although this is good news for borrowers, it’s disappointing for lenders, who will inevitably see their margins squeezed. This is because of how the gap between the interest rates charged to borrowers and the interest paid to savers narrows, diminishing profitability as a result.
Not everyone believes that an interest rate rise is necessary for financial stocks to continue appreciating this year. Bank of America’s Savita Subramanian told Bloomberg that she believes the sector often trades incorrectly. She says investors often ignore how bank stocks deliver cheap yields, with many companies now boasting healthy loan books because of how riskier lending takes place elsewhere. S&P Global cautions that low rates could help stave off a recession in 2020, but could put the business models of financial corporations to the test.
Another issue lies in how the financial sector is facing an unprecedented period of disruption. In countries such as the UK, digitally focused, online-only challenger banks such as Monzo are drawing customers away from legacy institutions such as Lloyds and RBS. At the same time, established banks are racing to update creaking infrastructure that wasn’t necessarily designed for the online age. Payment methods are also changing, with many younger consumers moving away from cash and cards to complete transactions on their mobiles. To compound the problem, corporations are continuing to plough substantial sums of money into protecting their systems against cyber attacks, which are an ever-increasing threat.
Top financial stocks
So: if you are considering investing in financial markets, where should you be investing your money?
Jason Goldberg, an analyst at Barclays, recently said that he believes large-cap banks in the US “continue to have the ability to rise and outperform the market”. He singled out Bank of America, which was recently upgraded to an overweight rating, because of how the company has made noticeable improvements to its consumer-facing services, where it generates most of its revenue. Goldberg believes that shares could hit $43, some way off their current level of $33. Number-crunching of forecasts from 24 analysts by CNN Business show he is more optimistic than others – the highest projection for 12 months from now stands at $48, the lowest at $30, with a median estimate of $37.50.
Other financial stocks that have been given an honourable mention include Visa, despite those gloomy warnings about low interest rates. Analysts such as Compass Point’s Michael Del Grosso believe the credit card giant’s “unmatched” scale and diversified range of products means it will be able to weather the storm and see off competition. Visa’s share price currently stands just below $205, but he believes that $215 is achievable by the end of the year. His estimate is rather conservative when set against what others are predicting. Higher-end forecasts for 2020 suggest Visa could hit $251, which would be a 22.7 per cent upside on the current level.
When all is said and done, the outlook for the financial stock market is a little murky. Although there are experts who maintain that many shares are underpriced, meaning they could prove to be an attractive proposition for investors, whether market sentiment will change is anyone’s guess.
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