With 2015 having been such a disappointing year for the financial services sector, investors could be forgiven for avoiding the industry in 2016. After all, a number of other sectors experienced markedly better performance in recent years and, therefore, could be viewed as hugely more attractive.
However, companies such as Barclays (LSE: BARC) could have a significantly better 2016 due to an improving economic outlook and highly appealing valuations. For example, the UK and global economies continue to show signs of long-term growth potential, with the recent US interest rate hike providing evidence that the world’s largest economy is returning to full health. And, while doubts surrounding the Chinese growth story are likely to provide continued shocks to the FTSE 100 and its constituents in 2016, the valuation of the financial services sector indicates upward rerating potential.
For example, Barclays trades on a price-to-earnings (P/E) ratio of just 8.2, which highlights the huge scope for an upward rerating. And with Barclays forecast to increase its bottom line by 21% in the current year, its financial performance is not only expected to be healthy but could also act as a positive catalyst on investor sentiment and push its shares upwards. Clearly, a period of uncertainty is likely as a result of Barclays’ new management team and the almost inevitable strategy shift. But with an improving asset base and rising profitability, Barclays seems to be a strong buy at the present time.
Similarly, Investec (LSE: INVP) also offers excellent value for money with the South Africa-focused bank trading on a P/E ratio of just 10.6. As with Barclays, Investec is expected to post strong earnings growth in the current financial year with its bottom line forecast to rise by 13%. This is likely to enable a significant rise in the company’s dividend, with shareholder payouts due to increase by as much as 12% next year. This puts Investec on a forward yield of 5.6%.
Of course, the South African economy is undergoing a challenging period at the present time. This was a major reason for the high level of volatility in Investec’s share price that has been witnessed in recent months. While this could continue in the short-to-medium term, for long-term investors now appears to be an excellent time to buy a slice of the bank due to its compelling mix of growth, income and value prospects.
Meanwhile, financial services peer Rathbone Brothers (LSE: RAT) also has impressive earnings growth potential. Its bottom line is expected to have risen by 14% in 2015 and is then due to increase by a further 9% in 2016. While both of these figures are highly impressive, Rathbone’s valuation appears to price them in since the company trades on a P/E ratio of 17.3. This equates to a price-to-earnings growth (PEG) ratio of around 1.9, which indicates that while the company’s financial performance may be on the up, Barclays and Investec appear to be more appealing investments.
Peter Stephens owns shares of Barclays. The Motley Fool UK has recommended Barclays. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.