While the financial services sector can be severely dented during sagging economic times, I believe this doesn’t have to be a deterrent for savvy long-term investors from buying shares of quality companies. To this extent, I have earlier argued in favour of other cyclical sectors, like mining, since companies like Rio Tinto and Glencore remain compelling buys despite their sectoral issues.
Big changes and high growth
There are major structural changes in the works for insurance giant Prudential. For one, it’s in the process of de-merging M&GPrudential, its UK and Europe business, to focus on its Asia, US and Africa operations. It could also hive off its investment management arm, Eastspring, which has recently been in the news for lay-offs after a difficult past year. On the other hand, it’s also making acquisitions, like a majority stake in African life insurance company Group Beneficial, which is in line with its strategy of targeted geographical focus.
Despite the changes, its share price is trending upwards. I like this, because major change can often create uncertainty in investors’ minds, causing at least temporary sell-offs. But not in this case. The price has risen by over 9% in April compared to March. And there is potential for the share price to rise further as it is trading below its 12-month high.
Fundamentals for the sector and the company also indicate potential for further price rises. The insurance business is poised to grow over time, with ageing populations in the west and rapid population growth in emerging economies. And I also like its healthy financials and promising 2019 outlook. As per the company’s guidance, it will continue to produce “attractive returns” going forward.
Optimism and stability
Another financial services company I am inclined towards is Lloyds Bank. This could be seen as a contrarian call and it was my choice as share of the month for April. But given the recent run-up in its price, I would like to reiterate its potential as a good investment. Of course, some gains will not be available for those buying now after a price increase of 5% in just one month. But even if it’s not an immediate purchase, it remains on my radar to invest in come the next dip.
The bank is expanding its wealth business, showing good results, and there seems to be little reason to doubt its long-term durability. Of course with Brexit around the corner, some hard times are likely, but I am optimistic that the exit deal may well turn out to be a good one. Also, as the IMF forecasts no sharp slippage in UK growth in the coming years, on balance, I think there is more good than bad possible for Lloyds going forward.
I would not think of putting all my eggs in the financial basket, but with £2,000 to invest, I would be tempted to put £1,000 into each of these shares for the long term.
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Manika Premsingh has no position in any of the shares mentioned. The Motley Fool UK has recommended Lloyds Banking Group and Prudential. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.