Solid long-term performance. Over the past 30 years, the financial sector’s earnings have grown significantly faster than the economy as a whole, allowing financial companies to pay above average dividends to their shareholders and creating solid price-to-earnings ratios. While past performance is no guarantee of future success, it can be helpful to look backward when gauging investment opportunities.
More regulated after the Great Recession. The financial crisis of 2008 exposed problems in the financial sector that governments around the world have worked to address with regulation. Today, financial firms are required to take more measures to avoid trouble, like holding higher minimum capital levels to protect against losses. This reduces their risk compared to the sector in the past.
Chance for government support in recessions. The health of the financial sector has a direct bearing on the health of the global economy. As a result, financial firms can count on special support during a recession or a financial crisis. When banks ran into financial trouble during the Great Recession, for instance, governments bailed many of them out.
Benefit from rising interest rates. Today, interest rates are near historic lows. When they go up, however, banks, credit card companies and other lenders could increase their earnings by charging higher rates. Insurance companies can also earn more from their fixed income investments as bond interest rates go up.
Innovation from fintech. Financial sector stocks have benefitted from innovations like blockchain, mobile payment apps and robo-advisors, laying the groundwork for more sector growth.
