Global Investing

CHAPTER 13Financials

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The global financial sector serves as the engine that drives the world economy. From everyday banking transactions to financing the ongoing operations of businesses and world trade, these businesses serve a crucial role in the global economy. While basic financial services like banking and wealth management are a key part of our everyday lives, some of the services these companies provide are dependent on economic conditions, and demand for them can fluctuate significantly. Although relatively predictable, earnings for many businesses in the financial sector are cyclical in nature and vary significantly in different stages of the economic cycle.

Data source: Bloomberg, as of March 18, 2022.

Despite below-average sales growth over the past several years, the financial sector has generated strong profitability, profit growth, and dividend growth. Many of the companies in the sector are interest rate–sensitive, which means that their business prospects can be heavily affected by changes in the level of interest rates. The relationship between interest rates and financial sector earnings is complex, due to crosscurrents that affect industries differently within the sector. For banks, higher interest rates reduce demand for loans, but serve to disproportionally increase lending rates, thus boosting net interest margin (profitability). Conversely, ...