Article03 Jul 2025

Valuations remain attractive despite strong performance - June Trust Update

Nick Brind

Fund Manager

George Barrow

Fund Manager

Tom Dorner

Fund Manager

Fund and market review

Market sentiment in June was positively supported by reduced concerns on the potential impact of US tariffs, along with initial signs that the ceasefire between Iran and Israel would hold. Despite the July 9^th deadline, subsequently pushed back to August, to secure trade deals, equity markets have been surprisingly sanguine about the associated risks, expecting deals to be struck to avoid punitive tariff rates.

Against that background, the Trust’s net asset value rose 1.4% versus a 2.0% rise in its benchmark, the MSCI All Country World Financials Index. The relative performance was affected by the Trust’s underweight position in China, overweight in the UK and the more defensive positioning in the US particularly in relation to the payments subsector.

Bank regulation

The results of the annual capital stress tests for US banks (DFAST) were a positive indicator and should support a higher level of capital return. The sector’s Common Equity Tier 1 capital¹ in a severely adverse scenario fell to 11.6%, a more modest 180bps decline versus the 280bps decline seen last year, with the improvement in excess capital reflecting both a less severe economic downturn and stronger pre-provision earnings.

The DFAST results follow proposals from the Federal Reserve to ease capital requirements associated with the Supplementary Leverage Ratio (SLR)² and highlights the shift towards a more balanced regulatory landscape for the banking sector following 15 years of tightening following the global financial crisis. Along with support to capital return, we expect the shift in tone on regulation, in both US and in Europe, to feed through into higher M&A activity with Michelle Bowman, Vice Chair for Supervision of the Fed, indicating a focus on streamlining the approval process.

Stablecoins

June saw numerous headlines on stablecoins³ highlighting that retailers, including Walmart and Amazon, were exploring the possibility of issuing their own stablecoins to reduce transaction costs. The disruption risks associated with retailers circumventing traditional payment rails led to pressure on the card networks while legislation supportive of digital assets currently making its way through Congress (Genius⁴ Act; STABLE⁵ Act; Clarity Act) provided additional support to crypto payment companies – Robinhood and Coinbase have materially outperformed in 2025. We see interesting use cases for stablecoins, particularly cross-border B2B payments which could provide a faster and cheaper alternative to current SWIFT⁶ payments and with the potential to utilise ‘smart contracts’.

We see interesting use cases for stablecoins, particularly cross-border B2B payments which could provide a faster and cheaper alternative to current SWIFT payments

However, we are sceptical as to stablecoins’ ability to replace the networks for consumer payments as there would be limited incremental value to the consumer (would consumers want to hold multiple stablecoins for each retailer?) while the card networks offer consumers a ubiquitous and trusted means to pay (which includes fraud protection and dispute resolution) along with incentives (card rewards as the credit card interchange is shared with consumers). Ultimately, we expect the networks to be a part of increased stablecoin adoption – with stablecoin providers issuing debit cards with Visa/Mastercard to enable stablecoin spending – and have seen innovation and partnerships (Visa with Stripe-owned Bridge; Mastercard with MoonPay) in this area.

Savings & Investment Union

During the month, the European Commission published its proposals for developing the securitisation market which forms a component part of the wider Savings & Investment Union (SIU) strategy. Ultimately, the SIU is planned to facilitate the additional €800bn in annual investment that Mario Draghi estimated will be required for digital, green and defence investments with the intention to deepen capital markets, promote growth and encourage households to invest more into targeted investments, thereby unlocking €10trn in low-yielding deposit accounts.

The SIU is at an early stage, but we see this policy initiative as significant for the region and several of our European investments given the potential long-term consequences for the banking sector, trading platforms and asset managers. While there is understandable scepticism on the reform process in Europe given its track record, there is greater political momentum than in previous periods with renewed urgency for European strategic autonomy, as evident in Germany’s push for more expansionary fiscal policy.

Outlook

In the context of an uncertain environment, the absolute and relative performance of the sector in 1H25 (up 6.9% year to date, in sterling terms, with 6.4% outperformance compared to the MSCI All Country World Index) is an important indicator that reflects both supportive operating trends (FY26 estimates for the financials sector have continued to be upgraded year to date) but also longer-term themes related to regulatory easing and policy reform which could provide material tailwinds over the coming years.

While we expect some near-term volatility as trade negotiations continue, we are constructive on the outlook for the sector as, despite strong performance, relative valuations do not reflect the positive shift in the underlying environment.

1. Common Equity Tier 1 (CET1) is a component of Tier 1 capital that comprises mostly common stock held by a bank or other financial institution

2. Supplementary Leverage Ratio (SLR)measures a bank's against its total leverage exposure, including certain off-balance sheet exposures

3. A type of cryptocurrency with a value pegged to another asset (fiat currency; gold; precious metal etc)

4. Guiding and Establishing National Innovation for US Stablecoins

5. Stablecoin Transparency and Accountability for a Better Ledger Economy

6. Society for Worldwide Interbank Financial Telecommunication

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.