By Geoff Miller, a fund manager at Exeter Fund Managers Is the financial services industry in th...
By Geoff Miller, a fund manager at Exeter Fund Managers
Is the financial services industry in the Western world in terminal decline, brought down by a series of scandals and collapsing markets? Will the financials sector follow the technology sectors down as margins are competed away and investors lose confidence in the system?
Apart from the obvious personal reasons for all of us to be interested in the answer, it is key to any prolonged market recovery.
For the first time in at least fifteen (and arguably 20) years, the stability of the financial system itself has been called into question. From an investment point of view this is important as the Financials sector represents about a third of the market's size. From a macroeconomic perspective, it is important as the banks and the life companies are the oil that lubricates the capitalist system. Ask the Japanese how easy it is to boost growth when your financial system is under water.
This is a relatively common situation for the world as a whole ' the West has simply got out of the habit of knowing how to cope with such issues. Companies that do business outside of the Western economies ' HSBC for example ' have often been criticised for retaining too much capital and being too conservative. However, it is a strong balance sheet that will give consumers the confidence to do business with an institution in some of the more volatile areas of the world.
In my view, the impact of the past year or so on the financial services industry will be profound and long lasting. It should affect investment strategies and will certainly affect investment returns. It will change investor perceptions and lead to great opportunities and some major pitfalls.
We may have seen some of the racier elements of the financial services industry go under already. I believe that there will be far more blood on the carpet before the worst is over. This is important because it changes the way in which investors view the products and product providers.
It will become abundantly clear that there is benefit in taking a lower return from a lower risk provider. Consumer bodies may not like it but there is a reason that, as they would put it, excess profit is built into financial services products ' it is to cushion the investor from the impacts of market volatility. At present everyone is trying to compete on price; however, I believe this will change in the new environment.
The implications for investment are profound. Bigger, boring, safe institutions will potentially have the power to price products at better margins than their smaller rivals. Big companies will promote products based on reliability rather than performance.
For smaller companies the mass market will be more and more difficult to crack. They will have to retreat to low volume, high margin niches, or sell out to larger companies.
From an investment point of view, I think the current market levels and uncertainty is more than discounted in the prices of the large life companies and banks but I would be wary of some of the second line institutions.
Larger life insurers discounting bad news.
Larger companies better positioned
Consumers will pay for quality.
Current lack of confidence in the system.
Smaller companies may struggle
Likely to be more companies going bust.
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