Financials fell in November as concerns related to the new COVID-19 variant led to a correction in equity markets towards the end of the month, slightly offset by US dollar strength. Consequently, the potential impact from renewed lockdowns and travel disruption hit sentiment, leading to a sharp reversal in the reopening trade. The Trust’s net asset value fell by 3.3% against our benchmark index, the MSCI ACWI Financials Index, fall of 2.8%.

The recent trend of high inflation prints and hawkish central bank actions continued into November. In the US, for example, we not only saw the initiation of bond tapering by the Fed, but also the suggestion by Fed Chair Jerome Powell that this pace may have to be accelerated, given “elevated inflation pressure” and “very strong labour market data”. Powell even doubled down on Raphael Bostic’s (President and CEO of Federal Reserve Bank of Atlanta) recent comments about “transitory” inflation, declaring that now “was probably a good time to retire that word”.

Against this background, US financials fell 2.6% in the month led by US bank stocks although both insurance and diversified financials were also weak. US 10-year yields ended the month at 1.4% having hit 1.7% in October. The re-nomination of Powell as Fed Chair and Brainard as Vice-Chair was received positively by financial markets who had seen Powell as more hawkish, but also had some concern around Brainard’s views on bank regulation.

The recent trend of high inflation prints and hawkish central bank actions continued into November.

Payment companies were weak in November, with PayPal falling sharply on concerns on competition (from account-to-account transfer and Buy Now Pay Later providers), pricing (following Amazon’s decision to stop accepting UK Visa credit cards), the delay in rebound in cross-border travel and strategic positioning with PayPal’s potential takeover of Pinterest unnerving investors. We see the concerns as overdone but retain a preference for Mastercard over Visa given their strategic acquisition history, first mover advantage with fintechs and faster growth profile.

Asian ex-Japan financials saw broad-based weakness in the month, falling 2.1%, but were slightly more resilient than the US supported by the relative strength in China, Taiwan and the Philippines. A slower vaccine rollout earlier in the year had resulted in tighter restrictions and weighed on economic activity in the region. However, vaccination rates in Asia have accelerated meaningfully in recent months (eight Asian countries have full vaccination rates in excess of 70%) which should reduce the requirement for widespread lockdowns and help contain any further economic impact from the pandemic.

In India, where the full vaccination rate is relatively low at 33%, there is some hope that the acquired immunity from previous strains will also reduce the impact. A serological survey in July found two thirds of India’s population had antibodies while a more recent study showed the equivalent figure was 97% in Delhi and 85-90% in Mumbai. India’s economy has shown a strong rebound from the second wave of COVID-19 led by a reopening of the services economy, although it remains unclear to what extent Omicron could hinder continued growth momentum.

On 5 December 2006, 15 years ago, HSBC Holdings gave the first hint of trouble to the market on its US mortgage business in what would morph into the biggest financial crisis since the 1930s.

European financials fell 4.6% in November, exacerbated by euro weakness, as a rise in COVID-19 cases in a number of countries in the region led to more restrictions being put in place although to date they remain more targeted with only Austria implementing a full national lockdown. While the near-term visibility on the outlook has reduced, given progress on vaccination programmes combined with the sector’s resilience during last year’s downturn, we would not expect a significant impact. Importantly, the banking sector has only released 31% of provisions set aside for COVID-19.

On 5 December 2006, 15 years ago, HSBC Holdings gave the first hint of trouble to the market on its US mortgage business in what would morph into the biggest financial crisis since the 1930s. Two months later, the bank warned on profits, raising provisions by $2bn, as sub-prime borrowers in the US were hit by much higher interest costs on their adjustable-rate mortgages as initial teaser rates fell away. The seriousness of the situation was not appreciated, with the bank’s shares falling by around a mere 1.5% that day in December and by even less on the February announcement.

HSBC was widely criticised, at the time in 2002, for its acquisition of Household Finance, a US sub-prime lender that was the driver of its woes. However, the strength of its balance sheet meant the bank weathered the global financial crisis well, so well in fact that anyone who had bought its shares on that day in 2006, after taking into account dividends, would not have lost any money, assuming the shares had been held to the end of 2009. By comparison, the average US or European bank’s share price was still down by over 50%, with many much worse.

Moving on to today, the resilience of the banking sector during the pandemic highlights the steps regulators have taken since the global financial crisis that have made a significant difference. Today, banks have strong balance sheets, plenty of liquidity and are more cautious in their lending appetite. Consequently, in 2020 they were able to facilitate government-guaranteed lending programs such as CBILs in the UK and PPP loans in the US and are well positioned to benefit from the continuing recovery of economies, notwithstanding any short-term impact from COVID-19 variants.

As at 07 December 2021