Financials outperformed wider equity markets in 2025 thanks to stronger financial markets on the back of moderating inflation, lower interest rates and steady economic growth leading to positive earnings revisions. As a result, the financial sector has now outperformed wider equity markets in four of the past five years.
Looking forward, we expect a positive outturn for the sector into 2026. With inflation forecast to moderate further, in part due to the increased slack in labour markets and weaker commodity prices, and the positive lag effect of previous interest rate cuts as well as fiscal stimulus, economic growth should continue to be supportive for financial markets.
We expect the sector to see further M&A activity and buybacks reflecting strong profitability, supported by a reduction in regulation that will allow banks in the US and Europe to return excess capital to shareholders. With post-global financial crisis guardrails in place – especially those for bank capital – overengineered and overly complex, this will be positive for the sector.
We expect the sector to see further M&A activity and buybacks reflecting strong profitability, supported by a reduction in regulation.
We are overweight Europe where we believe the risk/reward continues to look more favourable, reflecting sentiment having recovered from a very low base, but marginally underweight the US to reflect valuations are high historically. We are also underweight Asia, in particular Australia, for the same reasons.
At a sector level, we are overweight US and European banks albeit underweight banks globally. We are selectively constructive on asset managers and life assurance companies, the latter within a more cautious positioning on insurance companies as pricing headwinds have led to the subsector underperforming despite very good profitability.
Financial credit has had another year of strong returns and we expect another good year for credit against the background of lower inflation and interest rates. However, as spreads have narrowed to post-global financial crisis tights, we see better value in senior and Tier 2 bonds relative to AT1 and RT1 bonds.
