Recovery and income potential make Polar Financials stand out This investment trust is a good way to play brighter prospects for the financials sector
T
here is a growing consensus that as the global economy recovers from the pandemic and longterm interest rates – such as the US 10-year Treasury yield and the UK 10-year gilt yield – start to move upward, investors need to increase their exposure to banking stocks. The thinking goes that as banks are large, geared, cyclical plays they should benefit as the economy improves. They can lend more money to businesses and consumers at attractive rates while provisioning less against potential credit losses as the risk of default decreases. Our preferred way to get exposure to the financial sector as a whole, not just banks, is through Polar Capital Global Financials Trust (PCFT). WELL CAPITALISED The big difference between the current pandemic and the global financial crisis of 2007 to 2009 is the health of the global banking system. After the financial crisis, regulators worldwide forced banks to provision early for potential bad loans and to carry enough surplus capital to be able to withstand another severe drop both in stock markets and
POLAR CAPITAL GLOBAL FINANCIALS TRUST
BUY
(PCFT) 155p Net assets: £220 million
economic demand. As a result, the banking system today is far better placed to help speed the recovery than it was over a decade ago. If short-term interest rates rise along with long-term rates – which isn’t a given at the moment but seems likely if inflation overshoots the
Polar Global Financials geographic split Region
Weight
North America
44.9%
Asia ex-Japan
25.6%
Europe
15.2%
UK
7.0%
Fixed Income
5.4%
Latin America
2.0%
Japan
1.1%
Cash
-1.2%
As at end of January, source Polar Capital
central banks’ targets – then banks would be a big winner as they would be able to expand their net interest margins for the first time in many years. Net interest margin is a crucial figure to monitor with banks, being the difference between income received from loans and money paid out as interest to depositors. As a rule of thumb, a 1% rise in US short-term interest rates would add 7% to bank earnings in the first year and 10% to 12% the following year. Earnings for European and Asian banks are even more sensitive to shortterm rates so the uplift to profits would be significantly higher. RISING INCOME STREAM Shonil Chande, an equity analyst at investment trust research group Quoted Data, highlights 11 March 2021 | SHARES |
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