The Case for Investing in Financials
Entire tomes have been devoted to investing in the financial services sector – hardly surprising when you consider its size, and therefore its significance to the world’s capital markets. To say the financial sector is large doesn’t do it justice. Of the total market capitalisation of the S&P 500, the world’s largest stock market index, financials account for just under 10% of the $28.5 trillion valuation.1 Turning our attention to the UK market, the sector’s dominance is more pronounced still, representing over 25% of the entire market capitalisation of the FTSE All-Share Index.2
It is not merely its size, however, that has led the financial services sector to be referred to as the ‘nervous system of capitalism’, it’s the fact that it permeates almost every aspect of corporate and personal daily life, forming a critical component of the world’s economic engine. Make no mistake – a modern economy simply cannot exist without a well-developed financial system given its breadth and depth, the sector comprising a diverse range of industries including banks, investment managers, insurance companies, mortgage lenders and real estate firms amongst others, all of which provide the services required to help keep ‘Main Street’ functioning on a daily basis. It includes some of the largest organisations on the planet – from insurer Allianz, to asset manager Berkshire Hathaway to retail and commercial bank Citibank – together with many thousands of smaller players in every region of the globe.
A new-found resilience
Over recent years, the financial sector has not been without its detractors, and understandably so. The blatant self-interest which permeated its ranks at the turn of the century culminated in the financial crisis of 2007–2008, also known as the global financial crisis (GFC). Patently imprudent loan underwriting by banks led to the collapse of the US sub-prime mortgage market and caused the value of sub-prime lending to go into freefall, damaging financial institutions globally and precipitating the bankruptcy of Lehman Brothers on 15th September 2008, an international banking crisis and the most severe global recession since the Great Depression of the 1930s. Europe was not insulated from its effects, with bank bailouts widespread across the region, totalling £500 bn in the UK alone. All three of Iceland’s major banks failed – relative to the size of its economy, it was the largest economic collapse suffered by any country in history.