ETF WEEKLY REPORT
February 12 2022
I – Global information and fundamental analysis about financial sector
An exchange traded fund (ETF) is a type of security that involves a collection of securities—such as stocks—that often tracks an underlying index. In this report, we’ll focus on financial sector.
Since the subprimes crisis, investors don’t appreciate so much the financial sector. The trust of the banks is less than in past years. However, this sector is so much important because it built the economy and the future : banks lending money, create also so it is very important, especially during crisis time. Since the arrival of new technologies, the sector is in a big transformation. We’ll try to explain why it could be a good opportunity to be exposed on this sector.
Chart 1 : S&P500 Sectors performance of 2020
Source : S&P 500
Banks, credit companies, insurance companies, asset managers, stock brokers: the financial sector includes all the companies that provide financial and banking services to consumers. Every day, we are confronted with this sector, whether we invest in the stock market or want to consult our bank account on our smartphone. Financial companies are at the root of the economy, and this economy is a pillar of our modern societies. As such, the financial sector and the economy are intimately linked. The stronger the sector, the stronger the economy. But if the economy weakens, the sector suffers significantly.
Let’s now focus on performance. If we compare to other sectors, it looks bad because it’s negative. Looking at the sector’s annual low, the performance is relatively good. The year 2020 has been plagued by the coronavirus crisis and the global economic downturn. Banks are cyclical, when the economy is bad, banks outperform, so the return is logical. We now have to understand where revenu comes from for banks.
Chart 2 : Major banks revenue in 2017
Grey : Debt capital markets & loans
Black : Equity Capital Market
Blue : Mergers and acquisitions
Source : Statista
In general, the majority of the revenues generated by the financial sector come from mortgages and loans, which change as interest rates rise or fall. Indeed, historically, the performance of financial companies is mainly linked to the evolution of these interest rates, as well as to some other macroeconomic indicators. But, overall, few other factors will have a real influence on the sector. It is therefore relatively easy to understand its evolution in recent years.
We now live in a world of debt. States and companies are over-indebted because the goal is economic growth. In this type of context, it seems difficult for central banks, which decide on rates, to increase them. This could lead to a solvency crisis, which would certainly be a catastrophe at the global level.
Chart 3 : Countries Debt, in 2007 et 2017
Source : Statista
Chart 4 : Debt by entities
Source : IIF, BIS, IMF, Haver
The banking sector is the one that is paying the highest price for the mistakes that led to the 2007/2008 financial crisis. Finally, Europe is a special case, as its economy, which has been shaken several times since then, and its monetary policy have greatly weakened the banks, which are major contributors to the financial sector. Nevertheless, interest rates cannot remain so low for so long. Since the beginning of the year there has been a rise in interest rates, which could benefit the banks and thus increase their income.
Banks are no longer attractive to market participants, as share prices have fallen, as can be seen below with BNP Paribas. A well-priced investment can be a good thing for those who believe in a rise in interest rates.
Chart 5 : BNP Paribas Price since IPO
Source : Yahoo Finance
The traditional side of the financial sector does not or no longer interests investors. Nevertheless, the fintech sector is coveted. The latter uses technology to improve financial activities in order to advance the digitalisation of finance. We’ll now see with the ETF analysis, that the financial sector is not finish yet.
II – ETF Analysis
We are interested in ARK ETF, which we have already discussed in a previous report. This one will focus on the Biotech sector and emphasize on :
- Transaction Innovations
- Blockchain Technology
- Risk Transformation
- Frictionless Funding Platforms
- Customer Facing Platforms
- New Intermediaries
Chart 6 : Characteristics of the fund
Source : ARK
Chart 7 : Performance of the fund
Source : ARK
Chart 8 : Top 10 Holdings
Source : ARK
In conclusion, the traditional financial sector is no longer interesting from an investment point of view, interest rates will increase but the economic situation will not change at all. As for the Fintech sector, it is very interesting in the medium and long term because technologies are the future and the digitalisation of banking will happen faster than we think.
DISCLAIMER :
« Les présentes analyses réalisées au nom de l’association Financial Shared Brains reste son entière propriété au visa de l’article L. 111-1 du Code de la propriété intellectuelle (CPI). Toute reproduction est soumise à l’autorisation préalable de l’association, sans quoi l’association se réserve le droit de porter plainte. La contrefaçon est un délit civil puni par l’octroi de dommages intérêts, mais c’est également une infraction pénale (article L335-2 du CPI) qui peut entraîner jusqu’à trois ans de prison et 300 000 euros d’amende. »
