The resilience of the banking sector over the past two years highlights how positively banks have reacted to the steps regulators have taken since the global financial crisis. Today, banks have strong balance sheets, plenty of liquidity and are more cautious in their lending appetite.

They are starting to pay out the excess capital built up during the pandemic to shareholders via a higher level of buybacks and dividends which should be positive for sentiment as well as earnings. Furthermore, we expect banks’ loan growth – which has been weak over the past two years – to pick up as economies continue to reopen and companies look to invest in their businesses as they take advantage of the improving outlook.

We believe financials, in particular banks, are a significant beneficiary of higher inflation leading to higher interest rates.

While we recognise the uncertainties, we also see the potential for inflation pressures to persist and against that background we believe financials, in particular banks, are a significant beneficiary of higher inflation leading to higher interest rates. For example, on average, our US bank holdings (based on company sensitivity guidance) would see a 17% uplift in earnings in year one from a 100bps rise in rates (the uplift from the same rate rise is higher in year two as more of the loan book is repriced) while our European bank holdings would see a 19% uplift in year one.

We also believe the tailwinds remain positive and future threats, in the form of a meaningful increase in defaults over the short term, should be limited by the robust financial health of both consumers and corporates. At the same time, the sector continues to trade on historically low valuations relative to broader equity markets and would be a beneficiary of any further rotation into value.

The prospect of receding COVID-19 fears, above-trend global growth and rising interest rates creates a positive setup for the sector in 2022. Within financials, the banking sector, which remains the core of the Polar Capital Global Financials Trust and the key overweight, looks particularly well placed given its earnings sensitivity to interest rates and strong correlation to bond yields while valuations remain undemanding, supported by earnings upgrades, despite the strong recovery in 2021.