Ten years on from the initial stages of the credit crisis, the share prices of well recognisable banks and other financial intermediaries have continued to cause problems for investors. With many institutions suffering from drastically reduced valuations, only the fittest survived the largest recession of a generation.
Tighter regulation set to put an end to risky operations and forced companies to conform to less risky practices with higher capital adequacy ratios. They needed more money in the pot prior to resuming normal business activities. The aim – to maintain cash-flow and reduce the risk of future bailouts ever being an option.
Household banks have delivered strong performance on occasion with shares in Lloyds climbing from 25p in May 2012 and reaching a recent high of almost 89p a year later, however these values involved precision of buying at the ‘lowest low’ and selling at the ‘highest high’ over the period, whilst ‘catching the falling knife’. Our founder, Christian Evans says ‘Annualised returns over the decade have been far less appealing that expected. Share price appreciation has been insignificant in line with the fall seen for these specific companies, during the unravelling of the credit crisis’. Proposed changes have indicated a slight move back towards the pre-crunch era could be on the cards.
It is true to say that for any business today, the cost of ‘red tape’ results in more businesses requiring in-house teams of legal experts. Donald Trump has pointed to a reduction in both red tape and bureaucracy. This proposed change is suggested to lead to a large impact on the banking sector worldwide. Major banks will be able to benefit from reduced regulation and take higher risks with less capital, and could prop up the share prices of banks concerned.
Aside from reduced regulation which the Motley Fool refers to as a ‘potential catalyst’, growth opportunities for banks appear to remain in Asia long-term. Major banks have sought to position themselves within the Asian economy with wealth across the region forecast to rise sharply. With China becoming more consumer-focused as an economy, lending opportunities should present themselves in their drones.
Since GDP in emerging market economies remain high, growth potential in the banking sector remains attractive to global investors.
With any forecast, risks are involved due to the uncertainty time brings. Concerns over Brexit still remain at the forefront of both consumers and producers with Theresa May’s nine month timeline shortly coming to expiry. Medium-term growth forecasts could be trimmed in-line with developments in Brexit negotiations along with other global concerns, such as the decisions made by OPEC.
With less regulation for overseas banks, particularly in the US, rising inflation alongside a higher fiscal budget deficit could lead to issues later on. Will we see a repeat of 2007 in some form in the future? Although the risk of occurrence is deemed reasonably low, it is important to remember that those who do not study the past, are condemned to repeat its mistakes. The psychology of decision makers will play an important part in how the future plays out with too much regulation stifling business opportunities with too little causing a future epidemic of mass mis-selling.