When we surveyed the outlook for the FTSE 350’s financial services constituents at the start of the year, we noted the disparate nature of the sector grouping. The months since have at least reflected one unifying theme: steep, often brutal share price declines.
That is understandable. Financial services stocks tend to have an above-average beta score, which means their price moves are more volatile than the broader market. When the broader index direction is heading down, you can expect higher-beta stocks such as asset managers or high-cost credit providers to head down further. Active fund managers whose profit margins were already struggling under tepid client flows and steep competition – Jupiter Fund Management (JUP) and Standard Life Aberdeen (SLA) among them – have been among the worst hit. And while it’s hard to know what Brewin Dolphin (BRW) and St James’s Place (SJP) might say in a trading update, wealth managers’ silence to date highlights the sector’s limited capacity for self-help or remedial action in a crisis.
Notable exceptions to this bleak outlook include Plus500 (PLUS) and IG Group (IGG), whose derivatives trading platforms have been inundated by retail clients hoping to make fast money in a supremely volatile trading environment. How long this elevated activity can last is unclear.
There are, however, a couple of safer ports in the storm. As we pointed out in last week’s recovery watch list feature, London Stock Exchange (LSE) will continue to benefit from its role as the owner-operator of the City’s financial infrastructure, with heightened trading activity and demand for price data likely to offset declining fees from listing activity. LSE, like inter-dealer broker TP ICAP (TCAP), is far less exposed to (and reliant on) bullish investor sentiment and ever-rising asset prices.
Of course, the sector’s high beta rating means that when a recovery eventually does materialise, some stocks could be outsized beneficiaries of the unprecedented stimulus that governments and central banks have already committed themselves to. According to analysis by Canaccord Genuity, a basket of wealth managers including Brewin Dolphin (BRW), Hargreaves Lansdown (HL.) and Rathbone Brothers (RAT) delivered “solid outperformance versus the market after quantitative easing injections” since the financial crisis, while exhibiting lower volatility than asset managers.
Whether this history will repeat itself depends in large part on a recovery in clients’ risk appetite. Of that, there is no guarantee.
See below for our entire FTSE350 review:
FTSE350 profitability: the direction is clear but not the severity
FTSE350 Review: Coronavirus and the dividend dilemma
FTSE350 groups scramble for cash
Aerospace on the descent as defence stays on course
Construction hits the brakes once again
Coronavirus threatens electronics and technology
Engineering and industrials braced for a downturn
Few guarantees for financial services
Coronavirus slams high street doors shut
Insurers stuck between policies and politics
Miners hold on to their hats in Covid rout
Supermarkets thrive but coronavirus harms other personal goods
Oil companies suffer Covid-19 crunch
Pharma giants entering the testing fray
Property income prospects dimmed by Covid-19
Subscription-based models make for sturdy businesses
Downturn threat obscures outlook for outsourcers
Are telcos still a defensive play?
