We believe the setup for 2024 is looking increasingly constructive for the financials sector. Having underperformed in 2023, primarily due to concerns about the outlook for interest rates and growth, it should be a significant beneficiary if the anticipated slowdown is shallower than expected. If there is a soft economic landing, we would expect strong share price returns reflecting the sector’s cyclical characteristics and history of outperformance from market lows. Conversely, trading at close to historic relative lows against the wider equity market, we would argue it is already discounting a much weaker outlook for growth which should give some downside protection if the outlook deteriorates significantly.

We are overweight banks as they remain at very depressed multiples, despite the improvement in earnings, as we believe they would be the biggest beneficiary of any change in sentiment. We continue to like the outlook for the insurance sector for its defensive characteristics as well as the tailwinds it is benefiting from. In particular, the reinsurance sector is seeing one of the hardest markets for reinsurance rates as well as benefiting from higher investment income.

We see selective good value in other areas of the sector including payments and alternative asset managers. Financial bonds also continue to offer very attractive returns following the rise in bond yields over the past two years to levels last seen 10+ years ago.