Investors seeking financial stocks that can outperform amid the market's crosscurrents in 2019 might consider eight financial services companies in industries such as exchanges, property insurance, alternative asset management, and mortgages. They include American International Group (AIG), Apollo Global Management (APO), Blackstone Group (BX) and Essent Group (ESNT), as outlined in a recent Barron’s story. (See table below for the full list.)
While banks are currently rebounding in the latest rally, their profits are likely to be pressured by an inverted yield curve that will squeeze earnings. By contrast, non-bank financial stocks aren't affected by this trend, according to KBW director of research Frederick Cannon. While banks rely heavily on lending spreads to generate earnings, Cannon says that “reduced interest rates support economic growth and the financial services sector is diverse with many opportunities for investors beyond spread lenders.”
8 Financial Stocks To Thrive Amid Market's Upheaval
- American International Group (AIG): insurance
- Apollo Global Management (APO): private equity
- Blackstone Group (BX): asset manager
- Fidelity National Financial (FNF): mortgages, diversified services
- First American Financial (FAF): home insurance
- MGIC Investment (MTG): private mortgage insurance
- Radian Group (RDN); private mortgage insurance
- Essent Group (ESNT); insurance
An inverted yield curve occurs when long-term debt instruments have a lower yield than short-term debt instruments of the same credit quality, and is widely viewed as a predictor of an economic recession. Many investors cite as evidence the yields on 3-month Treasury debt and 10-year Treasury notes, which have been solidly inverted. But others say the trend is less clear because another other benchmarks, such as 10-year and 2-month debt, are not yet inverted.
Regardless, companies such as AIG and Blackstone Group are likely to thrive even as an inverted yield curve creates problems for big banks.
AIG, bailed out by the U.S. government during the financial crisis a decade ago, has seen its shares jump nearly 34% year-to-date, outperforming the S&P 500’s 14.8% rally over the same period.
While shares of the insurance giant are still far from their all-time highs, analysts are upbeat regarding its restructured business, which has shed its financial products division and has narrowed down to property and life insurance products, per another Barron’s report. RBC analyst Mark Dwelle is among the bulls who expect AIG to outperform, and attributes his outlook to improving insurance margins.
Shares of Blackstone Group have risen about 43% this year, its shares fueled by the leading alternative asset manager's plan to convert from a partnership to a corporation, as reported by Barron's. The move would increase its base of potential investors and would help the company take advantage of the U.S. government's massive corporate tax cuts.
To be sure, investors face their own set of risks with this group of non-bank financial companies. Despite the AIG's major stock gains this year, the company missed first-quarter earnings estimates by a long shot, according to the Wall Street Journal, as its property and casualty insurance business continued to struggle, a reminder that AIG's long turnaround effort is far from over.