An 11-year high in consumer optimism could be the catalyst for rising returns from the US financial services sector, according to The Boston Company Asset Management, (TBCAM), a BNY Mellon company
In a recent Gallup poll, 52% of Americans said their financial situation is "getting better", the highest percentage to say this since 2004. It is also the first time since the recession that this sentiment has reached the majority level.
For Michael Arends, portfolio strategist at TBCAM, the sentiment could spell opportunity, particularly in the US financial services sector.
One area of interest, he says, is the US housing market, which is now experiencing a cyclical recovery. Arends notes how fund managers often invest in home builders as a way of capitalising on this kind of recovery. However, TBCAM has found hidden value in the cluster of financial services companies surrounding the buying and selling of a property, including real-estate brokers, title insurance companies, credit appraisal companies and mortgage lenders.
Says Arends: "There's a whole food chain involved in buying a home. As the market recovers, we believe these companies have potential to provide sustained revenues for years to come."
The impetus behind the recovery comes from a range of factors, not least the greater availability of credit. But demographics also play a part, says Arends. "There's a bulge of people in the 22-40 age bracket who've always lived in their parents' house," he says. "To use a nineties movie analogy, Macaulay Culkin is still at home but now his parents want him to move out."
As employment, wages, and confidence all begin to improve, these ‘millennials' finally appear to be leaving the nest, says Arends, leading to rising levels of new household formation and providing a tailwind for companies servicing that growth.
The same theme - of pent-up consumer demand - is at play in the banking sector, where, Arends believes, US regional banks are well placed, now that relaxed capital requirements allow them to compete more evenly with their larger domestic counterparts.
He says: "The best regionals have come through the financial crisis relatively unscathed. They generate excess capital and so are now in a position to build scale by cherry picking the best acquisition targets in the overbanked US regional banking space."
Another area of interest is retail brokerage firms - especially the select few with multi-billion dollar customer cash deposits on their books. Arends notes these companies should experience a significant and rising contribution from these deposits if, as expected, US interest rates are higher toward year-end.
At the same time, they should also benefit from the ongoing rotation of retail investors out of bonds and into equities. Says Arends: "Since the global financial crisis, the retail investor has been largely absent from the US equity market place. As the economy continues to recover and as equities begin to outperform bonds, we believe we'll see a tipping point and companies catering to retail demand will benefit accordingly."
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