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 profit forecasts. 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 should 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.
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.
