Finance & Banking
The future of the financial sector: The analyst view
William Pang
Investment Analyst
Andy Budden
Investment Director
  • Regulatory and digital disruption have been headwinds to the financial services industry, but tech innovation offers opportunities for both new entrants and incumbents to survive and thrive.
  • The rising wealth of Asian emerging economies, the growth in derivatives and the increasing volume and value of data provide an attractive backdrop for a range of financial services companies, including life insurers, rating agencies and global exchanges.
  • We are seeing the exciting emergence of Fintech 2.0: companies using technology to offer products and services that did not exist before, such as digital wallets and robo-advice.

What’s your broad view of the financial services industry in Asia?

William Pang: Overall, I see exciting long-term investment opportunities in the Asian financial sector. The revenue pool is big – and getting bigger. Emerging Asia is experiencing the rise of the middle class. Developed Asia is witnessing increasing wealth accumulation. Both contribute to greater demand for financial products and services. However, it has been increasingly difficult for banks to generate high returns for shareholders. One reason for this is the disruption caused by financial technology companies, or fintechs.

Where are you seeing attractive opportunities?

Andy Budden: As William mentioned, there is a combination of secular growth and disruptive trends impacting the industry. Looking beyond banking stocks for a moment, there are three non-banking areas where we see some interesting market dynamics and companies that are positioned to benefit.

1. Exchanges

Exchanges sit at the confluence of powerful secular trends. These include the growth of Chinese financial markets, of derivatives and, above all, of data. This means exchanges are evolving from quite cyclical to more stable growth businesses – and even, in a couple of cases, counter-cyclical. One example is London Stock Exchange Group. In financial markets trading, human judgment has been partly replaced by machines that feed off market data. In January this year, London Stock Exchange completed the acquisition of data provider Refinitiv, which is second only to Bloomberg in terms of market data coverage. Following the acquisition, market execution now is estimated to make up only about one-third of London Stock Exchange’s revenue, with the other two-thirds coming from data.1 Furthermore, this data revenue stream is growing and recurring – as subscribers pay a regular fee to access data. With more regular and visible cash flows, London Stock Exchange is becoming a much less cyclical business.

Other examples are Hong Kong Exchanges and Clearing, which is positioned as the doorway between China’s financial markets and the rest of the world, and CME Group (previously known as the Chicago Mercantile Exchange), which is benefiting from the global growth in demand for derivatives.

Global exchanges could offer unique combination of growth, moats and counter-cyclicality

For illustrative purposes only. Past results are not a guarantee of future results. This information has been provided solely for informational purposes and is not an offer, or solicitation of an offer, or a recommendation to buy or sell any security or instrument listed herein.

*As at 30 June 2021, with data rebased from 1 January 2010. Source: Bloomberg

**As at 28 June 2021, total return in USD terms. Source: Bloomberg

ASX: Australian Securities Exchange; HKEX: Hong Kong Exchanges and Clearing Limited; ICE: Intercontinental Exchange; CME: Chicago Mercantile Exchange; Nasdaq: National Association of Securities Dealers Automated Quotations; LSE: London Stock Exchange Group

2. Ratings agencies

The two biggest ratings agencies, S&P Global and Moody's, have solid business models and strong competitive moats. Many bonds issued today have two credit ratings and these tend to be given by these two agencies. With a combined market share of just over 80%2, S&P Global and Moody’s have an effective duopoly in the market.

1. Insurance

We don’t see as many opportunities in general insurance – property & casualty – at the moment. Historically, an interesting time to invest is when the combined ratio – premiums over claims – becomes so compressed that insurers have no choice but to raise premiums. But we do not see that happening right now.

We prefer opportunities presented by life insurance companies, which are benefiting from a secular growth trend. In China, and the faster-growing Asian economies, an increasingly wealthy population wants to buy more financial products, including life insurance and savings. Several multinationals, including Hong Kong-based AIA, have good distribution networks in these economies and have shown the ability to manage their liability profile.

William Pang: AIA is actually good example of a company effectively deploying fintech. To me, it’s how I think about fintech – it is not limited to small start-ups; instead it applies to a broad set of companies using technology to deliver financial services to customers.


1. London Stock Exchange Group’s revenue mix based on Capital Group estimates, March 2021

2. Source: Corporate Finance Institute, 2021


Risk factors you should consider before investing:
  • This material is not intended to provide investment advice or be considered a personal recommendation.
  • The value of investments and income from them can go down as well as up and you may lose some or all of your initial investment.
  • Past results are not a guide to future results.
  • If the currency in which you invest strengthens against the currency in which the underlying investments of the fund are made, the value of your investment will decrease. Currency hedging seeks to limit this, but there is no guarantee that hedging will be totally successful.
  • Depending on the strategy, risks may be associated with investing in fixed income, emerging markets and/or high-yield securities; emerging markets are volatile and may suffer from liquidity problems.

William W.H. Pang is an equity investment analyst at Capital Group, responsible for equity research on global exchanges, excluding the U.S., and banks and diversified financials in Asia, excluding India. He has 14 years of investment industry experience and has been with Capital Group for five years. Prior to joining Capital, William worked as an investment analyst at Fidelity Institutional Asset Management. Before that, he was a portfolio manager and investment analyst at ING Investment Management. He holds a master’s degree in economics from Erasmus University, Rotterdam and a bachelor’s degree in economics and political science from Utrecht University. William is based in Singapore.

Andy Budden is an investment director at Capital Group. He has 29 years of investment industry experience and has been with Capital Group for 18 years. He holds both a master’s degree and a bachelor’s degree in engineering from the University of Cambridge. He is an associate member of the Institute of Actuaries. Andy is based in Singapore.

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Past results are not a guarantee of future results. The value of investments and income from them can go down as well as up and you may lose some or all of your initial investment. This information is not intended to provide investment, tax or other advice, or to be a solicitation to buy or sell any securities.

Statements attributed to an individual represent the opinions of that individual as of the date published and do not necessarily reflect the opinions of Capital Group or its affiliates. All information is as at the date indicated unless otherwise stated. Some information may have been obtained from third parties, and as such the reliability of that information is not guaranteed.