11 Jul 2025
We’re feeling optimistic about the prospects for global financial equities over the next 12 months due to the supportive inflation and interest rate environment and the modest-but-steady pace of economic growth.
Financial shares have been on a strong run, with the MSCI ACWI Financials Index advancing in the year through April by 26% versus 12% for the MSCI ACWI index1. Returns for financials also outpaced those of the broad MSCI ACWI over three and five years.
First-quarter earnings reports for financials were positive, with around 90% of lenders beating estimates at a pretax profit level, helped by better net interest income (profit from lending) and, importantly, by banks producing more non-NII revenue than expected. The relative stickiness in inflation, interest rate trends and a steepening of the yield curve have been beneficial for lending margins. Impairment charges remain low and forward-looking credit risk indicators are good, according to the companies.
Insurance companies have benefited from higher premiums, while asset management and global investment banking activity has been mixed.
Global fintech is on track for a rebound this year, with investment and M&A activity increasing after a challenging period. Rapid advancements in AI, automation and digital payments are transforming the financial industry – and others. Banks and insurers are increasingly adopting AI to help reduce costs including headcount and to improve customer service.
Over the longer term, we would expect the global financial services market to expand due to increasing wealth trends and investment activity and demand for alternative assets. One forecaster has estimated that the global financial services market will grow 7% annually through 2029, to around $47 trillion.2
To be sure, there is an elevated level of uncertainty about the direction of markets given the Trump administration’s trade and economic policies and ongoing geopolitical risks. US tariffs could dampen investment and household spending, which would be negative for banks and other financials.
Nevertheless, the US bank management teams we have met with recently have been relatively upbeat about 2025, anticipating dividend increases, stock buybacks, and moderate earnings growth.
After some initial confusion, US trade policy appears to have become more pragmatic. The Trump administration’s policies initially unsettled markets, but a ``muddle-through’’ scenario remains on track. We believe that the US economy will avoid recession. The White House’s support for financial industry de-regulation, if realised, could be positive for credit conditions and the sector.
Market guardrails to constrain US policy uncertainty have held firm so far but may be tested further in coming months and trigger more volatility. We also think that that Covid-19 ushered in a secular bear market in bonds, which is ultimately supportive for financials.
Until recently, investors were too optimistic about US economic prospects and too bearish about the rest of the world, in our view. We expect a degree of economic convergence, especially as the assertiveness of President Trump’s second term forces additional policy stimulus from China and Europe. We could end up with a stronger, more balanced global economy in 2026.
In our view, non-US stocks offer more from a risk-reward perspective than their American counterparts. Currently, we see the best investment opportunities in Europe, including Switzerland, and in the UK, due to valuations, policy support, improved balance sheets and the benign economic outlook.
European bank valuations are less demanding than the wider market, and these businesses have shown a greater willingness to share returns with investors via dividends and buybacks. The outlook for increased infrastructure and defence spending in the region also is beneficial for the sector as is ongoing merger and acquisition activity.
We prefer banks with sound balance sheets and generous capital return policies supported by sustainable double-digit returns. For example, UniCredit is a geographically diversified commercial bank with business in Italy, Germany, and Central and Eastern Europe. We like its healthy capital structure, resilient net interest income and improving fee income which should support group revenues going forward.
UBS has one of largest and most geographically diversified wealth management businesses, with operations in the US, Europe and China, and this unit is complemented by a large investment bank. We expect restructuring charges related to the integration of Credit Suisse to ease, bringing improved profitability over the longer term.
There are some interesting pockets of economic strength in Europe. Greek banks are seeing strong loan demand supporting good economic growth. In fact, Greece has the highest annual growth rate in corporate lending in the euro area, +18% in Greece in April vs +3% average in the region, according to European Central Bank and the Bank of Greece.
Putting all these factors together, we are positive about the outlook for global financial equities. We believe that macro-economic backdrop, including inflation, growth and interest rates, is supportive for the sector and for further gains in profitability.
Footnotes
1MSCI as at April 30, 2025. Past performance does not guarantee future returns.
2Business Research Co. Financial Services Global Market Report, January 2025
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