We all know that 2021 gave certain sectors a water hammer (not to mention what happened in 2020). However, financial stocks posted a strong performance in 2021 – the 33% gain in the sector made it the fourth best performing sector in the S&P 500. In fact, the largest US banks showed strong merger activity and purchases. In addition, trust banks, brokerage firms and others bolstered retail trading volumes.
The Federal Reserve’s impending rate hikes and tapering of its bond-buying program this year are trying to intimidate high inflation. In general, this will make for a decidedly strong year for finances in 2022.
Let’s go over what you can expect and some potential investments you might want to add to your portfolio.
What to expect in the financial sector in 2022
Focusing on large US banks, consumer finance companies, mortgage-related businesses and securities-focused companies may be key for 2022, especially as the financial sector has historically been among the most sensitive to changes in interest rates. Many companies are faring badly in the wake of rising interest rates, but some companies in the financial sector advantage higher interest rates. The Federal Reserve could be doing these companies (and you) a favor.
Check out a quick breakdown of how some companies might fare this year and a few stocks and ETFs you might want to take a second look at.
Banks, which make up the bulk of the financial sector, include commercial banks, investment banks, and universal banks. Bank stocks are expected to rise on higher loan yields due to the Fed’s upcoming policies. In a healthier economy, borrowers generally find it easier to repay their loans, which can also be a boon for bank stocks.
Comerica (NYSE: CMA)
Dallas-based Comerica has over $90 billion in assets and manages commercial loans and lines of credit, deposits, cash management, capital market products, international trade finance, letters credit services, foreign exchange management services and loan syndication services. It also offers trust services, private banking services, pension services, investment management and advisory services, investment banking and brokerage services.
Comerica would realize over $100 million in net interest income over the next year. If the Fed raises the fed funds rate above 1% in the next few years, earnings could rise, which bodes well for adding Comerica to your portfolio.
Insurance is the second largest unit of the financial sector and includes a wide range of different types of insurance companies: property and casualty, life and health, specialty as well as insurance brokers. The Insurance Revenue Landscape Report predicts global insurance industry revenue to reach $7.5 trillion by the end of 2025, signifying strong upward mobility in 2022 for insurance .
Prudential Financial Inc. (NYSE: PRU)
Prudential provides financial products and services, including life insurance, annuities, mutual funds and investment management to individual and institutional clients.
Prudential’s international insurance unit sets it apart from its peers, a point of interest for investors. Prudential reported $1.49 billion in non-GAAP (adjusted) during the third quarter, or $3.78 in adjusted earnings per share (EPS). Prudential posted 22.7% year-on-year growth last year.
Some companies are not considered banks or insurers and instead fall under the category of “financial services“, assisting with investment and public procurement services. This division should benefit from higher retail trading volumes and generally rising markets.
While you could relegate mortgage REITs to just the real estate industry, they also belong firmly to the financial industry as they focus on real estate financial instruments. In a rising rate environment, you might want to take a second look at mortgage REITs for their high dividend yields (despite REITs’ traditionally high management fees).
Special Purpose Acquisition Companies (SAVS)
Special Purpose Acquisition Companies (SPACs), also known as Blank Check Companies, are non-trading companies that choose an alternative route to an initial public offering (IPO). They are created to raise capital through an IPO to acquire an existing business, raise funds and trade on the stock exchange.
Unfortunately, when an array of 25 companies went public following a combination with a SPAC, they underperformed the S&P 500 Index by more than 50 percentage points in 2021, according to Bloomberg.
You’ll want to be careful investing in it, though some companies might be worth a look in 2022. You might want to consider an ETF like the Defiance Next Gen SPAC Derived ETF (NYSEARCA: SPAK), which covers SPACs ahead of the transaction and post-merger companies to give you access to great growth potential.
Financial technology companies (Fintech)
Financial technology (fintech) stocks fell in 2021, a disappointment compared to the S&P’s top 20 percentage point rise. Fintech is technology and innovation that aims to compete with traditional financial methods in the delivery of financial services. However, fintech has opportunities at its disposal, with traditional financial services giants with large branches, huge staffing requirements and gigantic regulatory overheads, fintech players can operate much more lightly, with less players needed in the game.
Blockchain and cryptocurrencies
Blockchain is a shared and distributed peer-to-peer ledger that records and tracks assets in a corporate network. Blocks record and confirm the time and sequence of transactions recorded in the blockchain. Cryptocurrencies, which run on the blockchain, generated a lot of buzz in 2021. Bitcoin is trading for $50,000 and is up 60% in 2021. Ethereum is up 400% and Dogecoin is up 3,400%. If you’re unsure about investing in digital currencies, consider an ETF for broad diversification.
Amplify Transformational Data Sharing ETF (NYSEARCA: BLOK)
BLOK, managed by Toroso Investments, LLC, is an actively managed ETF that invests at least 80% of its net assets in equity securities of companies actively involved in the development of blockchain technologies. Because of blockchain potential and good buying opportunity.
Add financial data to your holdings
Rising rates tend to signal a strengthening economy and many players in the financial sector stand to benefit. Will you also benefit?
Should you invest $1,000 in Comerica right now?
Before you consider Comerica, you’ll want to hear this.
MarketBeat tracks daily the highest rated and most successful research analysts on Wall Street and the stocks they recommend to their clients. MarketBeat has identified the five stocks that top analysts are quietly whispering to their clients to buy now before the market takes off…and Comerica wasn’t on the list.
Although Comerica currently has a “Hold” rating among analysts, top-rated analysts believe these five stocks are better buys.
See the 5 actions here
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