1. UK Financial Sector Landscape

The financial sector has been the backbone of the UK economy which consists of banks, insurance, asset management and financial services companies. They all play a vital role in mobilization, payment, saving, credit, and availability of funds. The sector ensures the movement of money and capital in the economic cycle. The UK is a home to pioneer financial technology (FinTech) companies and attracting considerable global investments. The FinTech contributes nearly £6.6 billion to the UK economy every year, while the financial services sector gives employment to around 2.3 million people in the UK. Moreover, there are around 428 foreign companies quoted on the London Stock Exchange, making it the second-largest exchange in the world. Adjacently, the UK banking sector holds approximately USD 10.8 trillion of assets.

Key Trends in the Financial Services Sector

• Rising Aged Population - Nearly two billion people are expected to be aged over 60 by 2050, which would support a massive demand for retirement solutions.
• Technological Disruptions - The data analytics has transformed the decision-making processes. Companies need to adopt a data-driven and insight-enabled approach to measure risk, develop innovative solutions and proactively meet customer needs.
• Collaborations with FinTech – Banks and financial institutions are rapidly partnering with financial technology companies to introduce tech-enabled financial products.
• Enhance Focus on User Experience – Financial institutions are actively leveraging user-friendly interfaces and providing digital interaction at every level to improve the personalized experience.

Risk Exposures to the Financial Services Sector

• Covid-19 Pandemic – The coronavirus led disruptions brought unprecedented challenges to the UK’s financial sector; however, it also highlighted the need for a digital future.
• Macro-economic Uncertainties - The volatility arising from the prevailing COVID-19 mayhem, Brexit and US-China tension can significantly impact the market prices of assets, liabilities, equity, and credit markets.
• Housing Market Boom – There are apprehensions regarding the collapse of overvalued house prices, any significant correction in house price would negatively impact the wealth and reduce investments in the market.

Benchmark Index Performance

Based on the last six-months performance, the FTSE All-Share Financials index has outperformed the FTSE 100 index, FTSE 250 index, and FTSE All Share index. The FTSE All Share Financials index generated a return of about 27.45%; however, the FTSE 100 generated a return of around 18.04%, FTSE 250 produced a return of around 24.06% and FTSE All Share generated a return of about 19.81%.

Figure 1: Six Months Benchmark Index Performance

(Source: Refinitiv, chart created by Kalkine Group)

SWOT Analysis

Financial Services Sector Outlook

In 2019, the financial services sector had contributed 6.9% of the total economic outlook. The exports of the UK financial services were nearly worth £60 billion in 2019, while the imports were £18 billion, reflecting a surplus of £41 billion in financial services trade. The market size for global insurance providers is expected to grow to US$6,840.70 billion by 2023, growing at a CAGR of ~6% from 2021. The fundamentals of the industry remain strong with several growth drivers, such as increasing ageing population, climate change, and globalization of the asset market. Adjacently, the global asset management market was valued at approximately US$598.9 billion in 2020, and it is projected to reach US$788.8 billion by 2023. In 2019, the market size was $656.9 billion, and it declined in 2020 due to the Covid-19 outbreak and the measures to contain it. Emerging Markets are relatively less impacted than developed markets in terms of equity performance. The industry has been facing margin pressure as clients allocating towards cheaper products and seeking to renegotiate fees. Moreover, the asset management firms have been slower than other financial services sector to adopt technological advancements.

2. Investment analysis and stocks under discussion (PHNX, XPS, MANO, PLUS)

After gaining insights into the financial sector, we would look at the business model of four financial players listed on the London Stock Exchange.

A. Phoenix Group Holdings PLC (LON: PHNX)

(Recommendation: Buy, Potential Upside: 23.01%, Market Capitalization: GBP 7.39 billion)

Phoenix Group Holdings PLC (LON: PHNX) is an FTSE 100 listed Company, which is the largest life and pensions consolidator in Europe.  The Company operated across three broader business segments – UK Heritage, UK Open and Europe.

                                                                                                             

Valuation Methodology

Our illustrative valuation model suggests that the stock has an upside potential of 23.01% over the closing price of GBX 739.80 (as of 13 April 2021).

B. XPS Pensions Group PLC (LON: XPS)

(Recommendation: Speculative Buy, Potential Upside: 13.65%, Market Capitalization: GBP 252.29 million)

XPS Pensions Group PLC (LON: XPS) is an FTSE All Share-listed holding company which is involved in pension actuarial, consulting and administration business.

Valuation Methodology

Our illustrative valuation model suggests that the stock has an upside potential of 13.65% over the closing price of GBX 123.00 (as on 13 April 2021).

C. Manolete Partners PLC (LON: MANO)

(Recommendation: Speculative Buy, Potential Upside: 17.25%, Market Capitalization: GBP 112.41 million)

Manolete Partners PLC (LON: MANO) is an FTSE AIM All Share Index listed Insolvency Litigation Financing Company, which works with insolvency practitioners and their lawyers to maximise returns to creditors.

Valuation Methodology

Our illustrative valuation model suggests that the stock has an upside potential of 17.25% over the closing price of GBX 258.00 (as on 13 April 2021).

D. Plus500 Ltd (LON: PLUS)

(Recommendation: Expensive, Potential Downside: 13.89%, Market Capitalization: GBP 1.54 billion)

Plus500 Ltd is the FTSE 250–listed provider of the online technology platform for trading CFDs (“Contracts for Difference”). Moreover, the Company offers more than 2,500 global financial instruments comprising equities, indices, commodities, currencies, options, and cryptocurrencies.

Valuation Methodology

Our illustrative valuation model suggests that the stock has a downside potential of 13.89% over the closing price of GBX 1,512.00 (as on 13 April 2021).

*All forecasted data and peer information have been taken from Refinitiv, Thomson Reuters.

*The "Buy/Speculative Buy” recommendation is also valid for the current price as covered in the report as on 14 April 2021.

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