Investors worldwide have been witnessing an extremely positive phase in the global equity market, where major indices are steadily marching upwards. This tremendous growth trajectory is majorly attributable to the strong surge noticed in the financial sector. The equities market, particularly financial stocks, remains in a robust go trend, and this article takes a deep dive into the reasons behind this favorable position.
The financial sector comprises banks, insurance companies, investment funds, and real estate. Significantly, these businesses have played a pivotal role in underpinning the upward trajectory of equity markets across the globe.
Firstly, the current low-interest-rate environment worldwide supports financial companies. This is because most financial institutions rely on borrowing short-term and lending long-term – this spread increases as interest rates fall. For instance, if a bank can borrow for 1% and lend for 3%, it makes a 2% margin. However, if it can borrow for 0.25% and lend for 2%, the spread increases to 1.75%, increasing the bank’s profitability.
Secondly, the latest wave of mergers and acquisitions has significantly boosted financial stocks. As businesses try to recover from the detrimental effects of the COVID-19 pandemic, they are merging or acquiring to consolidate their market positions. This consolidation trend has increased the value of financial advisory firms and, in turn, their stock price.
Thirdly, an optimistic economic outlook, buoyed by successful vaccination rollouts and the easing of lockdown restrictions in major economies, has spurred consumer spending and business investments. As a result, demand for borrowing and banking services has increased, enhancing the earnings potential for financial firms.
While these factors power the go trend for equities, it is crucial to consider the dynamic nature of markets and the volatility inherent in stock prices. For instance, economic uncertainty or policy changes can quickly destabilize the aforementioned beneficial conditions.
On the risk side, the financial sector is susceptible to regulatory changes. Global policymakers have hinted at introducing new regulations following the 2008 financial crisis and recent COVID-induced market disruptions. If such regulations are enforced, financial sector companies might face hurdles, impacting their buoyancy and profitability.
In the same vein, technological disruption in the form of FinTech startups poses a significant threat to traditional financial institutions. While this may lead to innovative collaborations in some instances, it could also result in substantial market share losses for established companies, thereby affecting their equities.
However, given the current state of economic recovery, the financial sector’s normative role in the growth and stability of the global economy, and the financial resilience exhibited by the industry so far, the equity market, particularly financial stocks, is expected to maintain this ongoing trend.
In summary, equities remain in a strong go trend, heavily powered by the performance of financials. The low-interest-rate environment, growing merger and acquisition activities, and positive economic outlook contribute significantly to this robust trend. Nevertheless, challenges such as regulatory changes and technological disruptions also lay on the horizon and need to be effectively navigated for the financial sector to sustain its upward journey in the equities market.
