After a two-year lull in the performance of financial services stocks, investors are suddenly hot on the sector again, a survey published this week shows.
Some 40 percent of investors polled by Morgan Stanley’s financials research team think these stocks will be the best performers of 2017, according to the survey, published this week. Investors are particularly bullish on large-cap banks, with three quarters of respondents expecting multiples of large-cap banks to expand. (Morgan Stanley itself is more conservative in its estimate, expecting bank multiples to remain stable at around 12 percent.)
The reason for investors’ enthusiasm? In a word, Trump. Financial services stocks got a sudden jolt on Tuesday, November 8, with the surprise election of Donald Trump as 45th President of United States and the GOP’s sweep of Congress. Investors are predicting that a Republican-controlled White House, House of Representatives, and Senate will translate to a light regulatory touch for financial services firms.
Trump has already promised to repeal the Dodd-Frank Wall Street Reform and Consumer Protection Act, the 2010 bill that increased bank oversight in response to the 2008 financial collapse. This would also dismantle the so-called Volcker Rule, the Dodd-Frank provision that prohibits proprietary trading on the part of banks. Following the election, financial stocks rallied — rising more than 20 percent in the last quarter of 2016 — and investors think they have further to run in 2017.
That’s good news for investors who specialize in the sector. Take Nick Adams. A partner with Wellington Management, the notoriously tight-lipped, privately held, $998 billion money manager, Adams runs the Bay Pond Partners hedge fund. His specialty is financial services stocks. Adams, who manages money for the New Jersey State Investment Council, among other investors, has something of a reputation for volatility. For the first six months of 2016, his fund was down 27.6 percent, making it one of the worst-performing funds in the HSBC Investment Funds Performance Review, which tracks the returns of more than 400 hedge funds. Then everything changed. By November 30, 2016, Adams’ fund reduced its decline to 10.21 percent, having gained 7.2 percent in that month alone.
As of September 30, 2016, financials were among the worst-performing sectors of the S&P, gaining only 1.51 percent. But their fourth-quarter gains led them to become the second-best-performing sector, behind only energy.
Goldman Sachs is among those expecting financials to do well. Their US Quarterly Chatbook, published January 6, recommends that investors overweight financials and information technology in 2017.
