Structural tailwinds are supporting outperformance - November Trust Update

Market and Trust review

Global financials outperformed broader markets in a month characterised by shifting expectations on central bank easing, along with a pullback in areas most exposed to the AI theme. A resumption of economic data following the reopening of the US government after a shutdown added to market uncertainty.

The MSCI All Country World Financials Index rose 1.2% in November relative to a 0.8% fall in the MSCI All Country World Index. The Trust’s NAV rose 2.3% (all figures in sterling terms) with the relative performance supported by an overweight to European banks, continued strength in Asian life insurers (the Trust holds both AIA Group and Prudential) and an underweight in Australia. This was partially offset by weakness in P&C insurance holdings (primarily Beazley following its results), London Stock Exchange Group (LSEG) and the underweight in Berkshire Hathaway.

European banks

European banks continued their outperformance during November with sentiment supported by a positive Q3 results season which led to modest upgrades to earnings forecasts. Along with an improvement in underlying profitability reflecting more normalised interest rates along with solid asset quality, there is evidence of a pickup in loan growth (particularly in Central and Eastern Europe and the periphery). The extent to which loan growth accelerates is set to become a key differentiator as we move into 2026. While some enthusiasm around the theme of German fiscal stimulus has cooled as longer-term ambitions collide with political reality, we are seeing signs of regulatory easing which should continue to support attractive capital distributions (the sector has a total yield of 9% on average including buybacks).

The Bank of England’s Financial Policy Committee has lowered the banking sector’s minimum capital requirements at a system level by 100bps with an emphasis on introducing reforms to promote growth. This is a material shift in tone towards the sector and we expect similar changes as part of the upcoming ECB High-Level Task Force on simplification, due to be published before the year-end. While the sector has rerated (to 9.6x 2026 EPS), the 34% discount to the broader market remains wider than the historical average despite the improved underlying environment.

We are likely in the early innings of a ‘democratisation of trading and investing’ and expect to see more legislation passed, which will provide a tailwind.Asia

Asian financials outperformed during the month, led by Japan and China. Japanese financials rose 3.6% in November, with the cabinet’s approval of a ¥21trn fiscal package providing some clarity on the outlook while the Bank of Japan’s comments, particularly in relation to a weaker yen, raised expectations regarding an interest rate increase in December, which would provide additional support to banks’ core revenues.

Despite mixed economic trends in China, with weakness in consumption and the real estate sector remaining a drag on growth, the stock market has outperformed this year. Along with a reduction in concerns surrounding geopolitical tensions with the US and enthusiasm around Chinese innovation sectors, the role of government policy and liquidity has been a critical factor (driven by the increased allocation of state insurers to invest in domestic stocks as well as rising retail investor participation). The Trust’s exposure to China is primarily through AIA Group and Prudential where results have been supported by strong momentum in new business growth in both mainland China and Hong Kong. Consequently, we see fundamental support to both companies from robust growth drivers along with strong governance, rather than pure participation in a liquidity driven rally.

Stablecoin

We see the rapid growth of stablecoins as a material development for the sector with implications across the payments sector, banks and central banks. Crucially, there has been a shift in the regulatory landscape with the GENIUS Act (passed in July) providing a legislative framework for the issuance and exchange of stablecoins in the US.

For the payments industry, there is potential disruption linked to stablecoin’s ability to offer real-time settlement and programmability with B2B payment flows and cross-border likely most affected. However, stablecoin also offers incremental flows to the networks, providing on/off ramps and stablecoin-linked cards.

The banking sector’s response to stablecoins, through the issuance of tokenised deposits, offers significant opportunities (the ability to pay interest a crucial distinction from stablecoin) but there are questions around interoperability and it will require broader take-up by banks to create common standards. While it remains too early to assess the ultimate winners and losers, we view the conditions in place for the growing adoption of stablecoin supported by additional legislation (the CLARITY Act is expected to be passed in early 2026). The Trust has started a small position in Coinbase Global, one of the largest crypto exchanges, which, through its partnership with Circle, is positioned to benefit from what in our view is a secular theme.

Outlook

We have been encouraged by recent operating trends which have underpinned the sector’s strong relative performance and while there has been some rerating, principally within the banking sector, valuations are not expensive relative to history or the broader market.

Looking into next year, we see continued support from the key themes the Trust has invested in. Within the banking sector, we expect regulatory easing to be supportive for an acceleration in lending, capital return and consolidation. We are likely in the early innings of a ‘democratisation of trading and investing’ and expect to see more legislation passed, including the EU’s Savings & Investment Union, which will provide a tailwind.

Within emerging markets, an easing liquidity environment creates a supportive backdrop while corporate governance reforms, particularly in South Korea, if sustained, provide opportunities for further rerating.

Within diversified financials, we expect to see greater clarity on the issue of data monetisation while the AI debate has opened up attractive valuation opportunities in long-term compounders – the Trust has positions in both S&P Global and LSEG.