To anyone who has held an investment portfolio over the past decade, the suggestion that financial services providers like insurers and banks are a good option in gloomy economies might sound absurd.
In 2007-08 it was the financial sector that precipitated the global recession via the sub-prime mortgage lending crisis and the credit crunch that followed, and confidence in the sector has not been helped by scandals like endowment mortgage mis-selling and PPI.
Bank bailouts by the UK and US governments at that time throw further negative light on the financial services sector in troubled times – so with some economists now expecting a return to recession in the UK, should you be investing in banks?
Identifying evergreen investments
One way to reduce your exposure to the impact of a recession on the financial services sector is to invest in the companies that are likely to thrive no matter which direction the economy turns over the next decade.
That doesn’t necessarily mean firms that bet against the economy, but can also include those that form part of the inevitable underlying trends in the banking and insurance sectors.
For example, some of the emerging trends in financial services in recent years include:
- Greater use of artificial intelligence.
- Increased digitisation of banking services.
- Security and especially cybersecurity.
- Steady progression away from cash.
Some of these clearly overlap, for example, the use of smartphones for contactless cashless payments has implications for digitisation, cybersecurity, and cashless transactions, and may even have relevance for the use of artificial intelligence in providing that service.
Steer clear of the mainstream
The best prospects in the sector, especially if another recession hits, are unlikely to be the major UK high street banking brands.
Long-term historic low-interest rates are not good news for investing in traditional British banks, and an impending recession would likely subdue their value even further.
Instead, alternatives like pure online banks and mobile-focused banking apps could be the way to go, as they are better placed to adapt to developments in new technology and AI, as well as responding to cybersecurity concerns.
Huge multinational banking corporations tend to suffer from inertia in the services they offer and the technology they use; smaller, more agile challenger brands can more easily embrace the pace of change and even introduce additional disruption into the market.
With interest rates still unlikely to skyrocket in the foreseeable future, these challenger brands and tech-focused finance firms may still find ways to add value and reap returns for ambitious investors.
Burning the banking tech candle from both ends
Between the banks that are net customers of emerging financial services technologies and the firms that are net developers and suppliers of it, the sector represents a double growth opportunity for investors.
The large banking groups are increasingly recognising the growth potential that comes from technology, along with the cost-cutting opportunities, increasing demand for AI and other advanced financial software.
Meanwhile, developers are continually working on the next innovation in banking tech, ensuring that this momentum is maintained and newly disrupting the market so it cannot become stale.
Relatively well-established technologies include electronic payments processing and as we continue to move away from cash as the default method of buying goods, brands like Mastercard and Visa could be among the lowest-risk investment options.
Meanwhile, in the insurance sector, newly developed AI technologies are allowing a growing proportion of insurance claims to be processed automatically, cutting costs and increasing business volumes.
This ability to reduce operating costs while simultaneously improving service delivery is again a double bonus for insurers, and AI software is doing for the services sector what mechanisation previously did for manufacturers.
While that may hold negative implications for those who work in the financial services sector, it’s positive news for investors, and these innovative, adaptable brands are likely to thrive whatever happens in the wider global economy during the 2020s.
Disclaimer: The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.