Article08 Apr 2025

Valuations, rates and reform - March Trust Update

Nick Brind

Fund Manager

George Barrow

Fund Manager

Tom Dorner

Fund Manager

Market review

Markets saw a further rotation out of the US in March on the back of mixed economic data, while uncertainty around the US administration’s trade policy has led investors to question the notion of US exceptionalism. This has combined with a shift in fiscal stance by European governments which has improved sentiment towards the region, leading to a reallocation out of the US. History suggests it may be premature to view this as a reordering of global financial markets but, given the valuation premium that many US companies trade on, there was scope for a pullback following the post-election rally in the US.

While the sector gave back some of the previous months’ gains, global financials outperformed in March, continuing a trend seen over one, three and five years. Against this backdrop, which included the headwind of a 2.5% depreciation of the US dollar versus sterling, the Trust’s net asset value (NAV) fell 4%, in line with its benchmark, the MSCI All Country World Financials Net Total Return Index.

European financials

Despite weakness towards the end of the month on tariff concerns, European financials (an overweight position for the Trust) continued to outperform in March with our holdings in the region’s banks, non-life insurers and diversified financials subsectors representing the largest positive contributors. A combination of factors has supported European financials, leading to a reassessment of the outlook for the sector. The recent fiscal policy shift in the EU (including the €800bn rearmament plan) is significant and supportive for the economic outlook, with higher interest rate expectations and a steeper yield curve (that shows the yield on bonds over different terms to maturity) feeding through into earnings upgrades. This has combined with positive operating trends and supportive commentary from governments and central banks around regulatory easing for European banks (in part, a response to comments from US regulators). While the discount to US peers has narrowed, European banks continue to trade at attractive valuations (8x12m forward earnings per share (EPS¹) and a wide discount to the broader market (41%).

FlatexDEGIRO and Deutsche Boersewere among the largest relative contributors to performance during the month, reflecting the positive shift in sentiment in Germany.

The recent fiscal policy shift in the EU is significant and supportive for the economic outlook, with higher interest rate expectations and a steeper yield curve feeding through into earnings upgrades.

FlatexDEGIRO is a leading online broker with a dominant position in its German domestic market. The business is well placed to capture the upswing in trading activity (February data showed an acceleration in daily average revenue trades to 22% year-on-year (y/y) with customers up 14% y/y to 3.2 million) while new product launches support the company’s medium-term growth ambitions (implying 21% net income compound annual growth rate (CAGR²) to 2027). On a longer-term basis, the potential for legislation to encourage private pension planning as part of German pension reform would provide a material support to growth that is not currently captured in management targets or consensus estimates.

European banks were broadly flat during March (in local foreign exchange rates) with PKO Bank, a Polish bank, a relatively strong performer. PKO Bank reported positive Q4 results (underlying returns on equity³ of 27.6%) during the month which led to upgrades to consensus earnings on stronger core revenues. A higher-for-longer interest rate environment is supportive of earnings while a pickup in investment activity is expected to feed through into stronger loan demand suggesting current guidance (+6% y/y loan growth in 2025) is conservative. An expected fade in litigation costs also supports the earnings outlook with a strong balance sheet that should translate into attractive capital returns (8-9% yield per annum for the next two years).

Investment banking

Optimism on the potential for a pickup in merger and acquisition (M&A) activity after the US election has faded as economic uncertainty linked to US trade policy has led to delays in decision-making until clarity emerges. A weaker-than-expected start to the year weighed on our investment bank holdings during the month while the associated delay in realisations also led to underperformance by alternative asset managers. Jefferies* saw selling pressure following its results, which missed expectations, albeit commentary highlighted a strong pipeline with deals postponed rather than cancelled. As Jefferies’ CEO Richard Handler noted: “There remains strong dialogue around potential investment banking transactions (capital raising and advisory) and our high-quality backlog continues to build. Its realisation depends on confidence and visibility reemerging, which may be beginning”.

Outlook

We have been encouraged by our holdings’ resilient operating trends as highlighted during Q4 results and management commentary at recent conferences. The combination of a higher-for-longer interest rate environment, the increased likelihood of regulatory easing and a shift in Europe’s fiscal framework (including an amendment to the rules on Germany’s constitutional debt brake) represent a marked change in the underlying investment environment within which the Financials sector looks relatively well placed.

However, events after month-end, with the reciprocal tariffs announced by President Trump on ‘Liberation Day’, have overshadowed any positive underlying operating trends for the sector, leading to a sharp fall in equity markets. The potential permutations are significant and unknowable in the short term but range from hope that common sense will prevent further self-harm and that a relatively quick conclusion to trade negotiations will occur, to a sharper slowdown and recession as other countries respond and corporates and consumers cut back materially on spending.

If the latter, then as we have highlighted previously, the financial sector remains well positioned, especially as we have not seen the excesses we saw in the build up to the global financial crisis. Arguably we have the opposite, with household and corporate balance sheets being very strong. It is against this background that the sector has outperformed wider equity markets since the end of 2019, despite a global pandemic which led to a massive spike in unemployment, huge increases in inflation and interest rates and a war in Europe for the past three years.

* not held

1. Earnings per share; measures a company’s value by assessing how much money a company makes for each of its shares; earnings growth is not a measure of future performance

2. Compound annual growth rate shows the average rate at which an investment has grown over a specified period

3. A measure of financial performance calculated by dividing a company’s net income by the value of shareholders' equity

See our glossary

Nick Brind
Nick joined Polar Capital following the acquisition of HIM Capital in September 2010, and is co-manager of Polar Capital Global Financial Trust and lead manager of the Polar Capital Financial Credit Fund. He has investment experience across a wide range of asset classes but since 2003 has focused on global financials.
Before joining HIM Capital, Nick worked at New Star Asset Management. While there, he managed the New Star Financial Opportunities Fund, a high-income financials fund investing in the equity and fixed-income securities of European financials companies. Previous to that, he worked at Exeter Asset Management and Capel-Cure Myers.
George Barrow
George joined Polar Capital in September 2010 as an analyst on the Financials Team. He is a co-manager on the Polar Capital Global Financials Trust, with Nick Brind and Tom Dorner.
He has over 10 years’ experience analysing Europe, Asia and emerging markets. Prior to joining Polar Capital, he was an analyst at HIM Capital from 2008 where he completed his IMC.
Tom Dorner
Tom joined Polar Capital as a Fund Manager in the Financials team in December 2023. He is a co-manager on the Polar Capital Global Financials Trust, with Nick Brind and George Barrow.
He joined from Aberdeen where he was a Senior Investment Director in the Developed Markets team and managed the Aberdeen Europe ex UK Income Equity Fund. He was responsible for analytical coverage of European financials and managed a number of other European investment funds during his nine years there. Prior to this, he was an analyst specialising in the European Insurance sector at Citi and Lehman Brothers in London.