Financial stocks have been the worst-performing sector in 2016. It could be targeted by investors seeking value.
However, market experts are cautioning against purchasing the group. It is only one of two S&P 500 sectors achieving negative returns year to date.
According to Nick Colas, chief market strategist at Convergex (an international brokerage and trading services provider), “not only have financials lagged the broader market in 2016, but they also remain the worst performer of the S&P’s 10 sectors over the last 10 years, declining 29 percent during the period. Excluding real estate investment trusts, which have gained 28 percent on a price basis, the industry would be down 33 percent.”
Global investors must look for six signs before investing in the sector
The Financial Stocks Have Been Bad Investments
Though outcomes in the past don’t always forecast the future, if an investor follows the trend, then financial stock investors could lose money.
There is generally a hostility from global financial stakeholders on the big banks. Post the financial crisis in 2008, several regulations, including the Dodd-Frank regulations have been passed to monitor and regulate the activities of the financial institutions.
The Fed is expected to release the stress tests outcomes on June 23rd, 2006 and going by the recent trends, at least one financial institution has not received the approval. The 2016 outcomes could not be any different.
Low Expected Returns On Capital
The normal return on equity for big banks is around 9%, but the price-to-book level averages 1.1 times. This indicates that investors have low growth expectations.
Cost of Capital
The financial stocks on average are 20% more unstable than the S&P 500 largely (observing how the sector has traded against the index). Investors believe that banks have an extremely high cost of capital in comparison to their current returns.
Those expecting banks to recover as oil prices move out of a bear market are likely to be disappointed. According to analysts, there is no evidence of any correlation and believe financials are poor substitutes for moves in the oil sector.
Financials would be a hard place to make significant returns, particularly due to regulatory burdens. The recent signs indicate that the Fed is not going to increase rates in the near future, thereby keeping bank returns under control.
Eventually, the revival of this sector would have to come from one place alone: all the efficient leaders who manage the firms. A tech-savvy group of professionals who understand the market pulse would be required to turn around the performance of financials.