Fisher Investments UK

Fisher Investments UK on the Financials Sector

Investments in the Financials sector have performed better than the broader equity market in 2022, but some equities in the space remain below price levels leading into the Great Financial Crisis from 2007-2009.[i] Over a decade of lacklustre performance has some investors wondering how to invest in the sector and whether its recent outperformance can continue. In this article, Fisher Investments UK discusses the basics of the Financials sector, what’s impacted its performance in recent years and factors to consider if you are thinking of making a change in your portfolio.

The Financial Sector’s Decline

The Financial sector has long been a sizeable part of the equity market, but its prominence has waned following the Great Financial Crisis. Figure 1 shows how the sector composition of the MSCI World Index – a widely used representation of the global developed equity market – has evolved since late 2007. The Financials sector went from being the largest part of the market to the third largest. In order to understand how to approach the Financials sector today, Fisher Investments UK knows it’s important to understand the role financial institutions played in the market’s downturn during the Great Financial Crisis and how investors have treated the space since.

Figure 1: Relative size of the Financials sector shrank from 2007 to present

Source: FactSet. MSCI World Index Weights as of 31/10/2007 and 4/11/2022. Communications Services and Financials sectors, which didn’t exist in 2007, are the result of back-dated calculations by FactSet.

Whole books have been written on the Great Financial Crisis. Many think its cause was a global housing bubble stemming from an increase of subprime mortgages. Housing certainly played a part, but Fisher Investments UK believes a little discussed accounting rule (FASB 157) – otherwise known as “Mark-to Market” accounting – contributed greatly to the financial distress of the time.

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