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Deep Dive: Financial sector set to benefit from a non-zero interest rate environment

Biotech trusts top performance charts in February

Eve Maddock-Jones, Investment Week, 19 May 2023:

The end of quantitative easing and the return of interest rates has been a catalyst for investing in financials, with traditional banks benefiting “almost immediately”.

Speaking to Investment Week, Sebastiano Pirro, chief investment officer, Algebris Investments, said banks had been “under construction” for the past 15 years following the Global Financial Crisis, and the focus on rebuilding balance sheets and reducing risks had been “generally good for credit investors, but not so much of the equity investor”…

But the shift from quantitative easing to quantitative tightening during the past three years has altered the investment opportunities in the financial sector for Pirro, who declared “the ‘ice age’ for European banks has finally ended”…

The biggest push for the asset becoming attractive to investors again came from the persistent increases in interest rates, and Pirro said traditional banks that had done the work post-crisis had “benefited almost immediately and most from this policy”…

David Johnson, analyst at QuotedData, did not fully agree with the CIO’s that outlook for financials was as rosy as he saw it, especially when it came to banks.

He agreed the rising interest rates and steepening yield curves were a stimulus to banks’ share prices and the financial sector as a whole, “as the market welcomed the positive impact it would have on lending and profit margins across the sector”.

But he said investor enthusiasm “has waned as the positive effects of rising interest rates have given way to recessionary concerns”, such as higher loan defaults.

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