1. UK Financial Industry Landscape

The financial sector has been the backbone of the UK economy. Moreover, it comprised of a diverse range of firms such as banks, investment banks, hedge funds, asset management and financial services companies. Furthermore, they 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.  According to the recently available data, the industry has 1.1 million financial services jobs in the UK as of Q1 2020, representing 3.2% of all jobs. The European Union accounted for approximately 40% of financial services exports and 32% of financial services imports.

The financial services sector had contributed around £132 billion to the UK economy in 2019, 6.9% of total economic output. Moreover, the sector was largest in London, where half of the sector’s output was generated. The UK is considered a pioneer in financial technology (FinTech) as companies are attracting considerable global investments. The FinTech contributes nearly £6.6 billion to the UK economy every year. 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.

Growth catalysts in the Financial Sector

Risk Exposures to the Financial Sector

• Regulatory Risk: Financial sector is largely exposed to change in the government’s policy, legislation, and capital requirement. Any lack of meeting the regulatory requirement can result in additional cost and penalty.
• 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 price. Any significant correction in house price would negatively impact the wealth and reduce investments in the market.

SWOT Analysis

Benchmark Index Performance

Based on last year performance, the FTSE All-Share Financials index has outperformed the FTSE 100 index but underperformed the FTSE 250 index. Furthermore, the FTSE All-Share Financials index generated a return of about 22.86%; however, the FTSE 100 generated a return of around 13.48%, and the FTSE 250 index produced a return of about 28.59%.

Figure 1: One Year Benchmark Index Performance

 (Analysis done by Kalkine Group)

Financial Sector Outlook

The financial services sector saw a relatively small decline in economic output in 2020 due to the pandemic compared to other sectors of the economy. The UK’s growing fintech (financial technology) sector has also been cited as a particular area where the UK is marked for expansion, with nine private UK fintech companies valued at over USD 1 billion, compared with six in the rest of Europe. 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. Recently, the Federal Reserve had hinted of the first interest hike by 2023. The profitability of the banking sector would increase with interest rate hikes. Moreover, the institutions in the banking sector, such as retail banks, commercial banks, investment banks, insurance companies, and brokerages, are going to benefit from it. However, Federal Reserve Chair Jerome Powell reaffirmed on 22 June 2021 that Federal Reserve would not increase interest rates just on the basis of rising inflation.

2. Investment analysis and stocks under discussion (III, AFX, TAM)

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

A. 3i Group PLC (LON: III)

(Recommendation: Buy, Potential Upside: 16.63%, Market Capitalization: GBP 11.75 billion)

3i Group PLC (LON: III) is an FTSE 100 listed Company, which is a UK based investment company focused on two areas of business – Private Equity & Infrastructure.

The company will pay a final dividend of 21.0 pence per share on 23 July 2021, while the ex-dividend date was 17 June 2021.

                                                                                                                                                                       

Valuation Methodology

Our illustrative valuation model suggests that the stock has an upside potential of 16.63% over the closing price of GBX 1,205.50 (as of 22 June 2021).

B. Alpha FX Group PLC (LON: AFX)

(Recommendation: Speculative Buy, Potential Upside: 19.90%, Market Capitalization: GBP 624.51 million)

Alpha FX Group is a foreign exchange broker having a focus on helping clients to control the impact of currency volatility. It is a constituent of the FTSE AIM 100 index.

AFX had paid a final dividend of 8.0 pence per share on 14 May 2021, while the ex-dividend date was 15 April 2021.

 

Valuation Methodology

Our illustrative valuation model suggests that the stock has an upside potential of 19.90% over the closing price of GBX 1,515.00 (as on 22 June 2021). The next important support level on the technical chart is at GBX 1,408.79.

C. Tatton Asset Management PLC (LON: TAM)

(Recommendation: Expensive, Potential Downside: 29.40%, Market Capitalization: GBP 243.18 million)

Tatton Asset Management PLC is a UK-based Company engaged in providing a platform for fund management, compliance, and business consulting services. It is a constituent of the FTSE AIM All-Share index.

The company will pay a final dividend of 7.5 pence per share on 28 July 2021, with an ex-dividend date of 24 June 2021.

Valuation Methodology

Our illustrative valuation model suggests that the stock has a downside potential of 29.40% over the closing price of GBX 430.00 (as on 22 June 2021). 

*All forecasted data and peer information have been taken from REFINITIV.

*The reference data in this report has been partly sourced from REFINITIV.

*The "Buy/Speculative Buy” recommendation is also valid for the current price as covered in the report as on 23 June 2021.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective speculative buy stock once the estimated target price is reached or if the price closes below the support level (indicative stop-loss price).

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