Goldman Sachs on financial sector
Goldman Sachs (GS) believes the delay in policy reform might continue in the near future. David Kostin, chief US equity strategist at Goldman Sachs, believes that tax reform might not take place until next year. Many fund managers are waiting to revalue their stance, according to the impact of the proposed tax restructure. Earlier, in February, Goldman Sachs already warned that the market may face some disruption.
According to David Kostin, there are two sectors in the market that are showing better opportunities. He believes the financial sector (XLF) (VFH) and technology sector (XLK) are providing better growth prospects despite the policy uncertainty. The expectations for rising inflation and gradual interest rate hikes are increasing, which is boosting the financial sector.
When interest rates rise in the economy (SPY) (WM), the profitability of banks will likely increase as well. Banks generally earn revenue in the form of loans and other investments. When interest rates rise, these investments usually provide good returns to banks. At the same time, banks’ costs also increase. Banks have to pay higher interest to fund their investments. However, Kostin thinks that in this scenario, banks will be more profitable. He also believes that the financial sector could provide better earnings growth this quarter.
Performance of XLF
XLF is trading 3.2% below its 100-day moving average and 3.1% below its 20-day moving average. On July 22, 2016, its 20-day moving average crossed its 100-day moving average in an upward direction. When short-term moving averages cross long-term moving averages in an upward direction, then it indicates an upward trend and vice versa. Since July 22, 2016, the XLF has returned nearly 19.2% as of April 14, 2017.
In the next part of this series, we’ll analyze David Kostin’s view on the technology sector.