FinnCap says in its latest study that the wider financial services sector is in a “strong position” to recover despite share price losses as the market plummeted.
The firm says wealth managers are set to outperform in the post-Covid market although other financial firms, such as lenders, may struggle.
The report backs fund managers, in particular, because they benefit from high recurring revenues, economies of scale and will see an increasing interest in active fund management.
Quoted companies mentioned by FinnCap which could recover quicker than others include Hargreaves Lansdown, Liontrust, Nucleus, Premier Miton and Schroders.
FinnCap cites share performance this year as an indicator that investors are still backing financial services. The FTSE All-Share fell 26.6% in the first three months of the year but in financial services wealth managers ‘outperformed’ the market (falling 24.9%).
It was also fund managers that experienced the most robust bounce backs in the recovery that followed the crash, gaining 41%, said FinnCap.
The firm tips Impax Asset Management, Liontrust, Premier Miton, Mortgage Advice Bureau, K3 Capital, Tatton Asset Management, Manolete Partners and Nucleus to do well in terms of share price performance.
FinnCap’s analysis showed that the market is applying a premium to companies with stronger balance sheets. The seven companies with 12 months or more of expenses covered by cash are Alpha FX, Plus 500, London Stock Exchange, Schroders, IG Holdings, Tatton Asset Management and Hargreaves Lansdown.
The report screened a broad range of financial services companies with a Return on Capital Employed of 20% or higher. Almost half were fund managers.
It said while sharing similar characteristics with wealth managers, fund managers are more scalable than wealth managers due to wealth managers’ higher requirement for face-to-face meetings and advice relationships, meaning a “slight drag” on scale benefits due to increased headcount costs.
Overall, FinnCap says the outlook is “promising” for the broad financial services sector. Although the crisis has hit demand, technology is well embedded and face-to-face services can be offered electronically enabling the sector to adjust.
FinnCap believes that assuming the initial shock is ‘contained’ and the recovery is sharp financial services may be able to escape some of the worst ravages of redundancy likely to hit other sectors such as retail and manufacturing.
Nik Lysiuk of FinnCap Group, said: “Although we do not yet know the full economic impact Covid-19 will have, this report indicates that fund managers and exchanges will be the relative winners within financial services with the sector also well-positioned to bounce back. ”