Investing in new and renewed financial businesses

The financial services industry offers interesting opportunities for investors, with much of this coming from completely new firms, or from legacy firms reinventing themselves. Andrew Lee, Investment Director at Capital Group based in Hong Kong, gave listeners to the Paperjam/Delano “Investing for the long term” podcast his thoughts on what to look out for.

Deep market trends powered by changing consumer demand and technology are impacting a range of financial services players. These trends are affecting banks, but progress here can be slow. However, interesting market dynamics are at play in the niches of the financial sector. And it’s the companies best able to harness these that are positioned to benefit.

Clients in different parts of the world are also reacting differently to these innovations, which is related to the regulatory environment. “We need to look at this company by company,” said Mr Lee. “Both secular market trends and digital disruptions can create interesting investment opportunities, including in areas such as exchanges, rating agencies, banks, consumer finance, and life insurance”.

This means players in traditional markets such as these are reinventing themselves, particularly with the new ability to mine and use data creating opportunities to offer new services. “Long term fundamentals of a company really matter when investing, requiring good selections to be made,” he said.

For many, mention of “FinTech” (financial technology) suggests start-ups, some of which are positioning themselves to replace traditional businesses. Some advocates foreseeing dramatic disruption of business models may be over stating the potential, but subtle change is coming in many areas. “We need to approach it with an open mind because this is not just about the newcomer being a disruptive force. It is also existing financial institutions championing and adopting technologies change fundamentally how they operate,” he said.

For the investment approach in this space, focus on the long-term fundamentals of each company. “Dive into the business fabric of each company and build an inside out understanding to form a long-term fundamental picture and how these companies can navigate the regulatory landscape and risk,” Mr Lee suggests.

This new episode is part of the second season of the “Investing for the long term” podcast series featuring Capital Group. These monthly podcasts, produced and hosted by Delano and Paperjam, explain some of the key challenges investors are facing and the investment opportunities related to those challenges. The first series can be accessed here

To listen to Capital Group’s podcasts, click here