Buy-Side Analysts Favor US Financial Sector: Morgan Stanley

Investors are bullish on the US financial sector, with 28% predicting it will be the best performing sector this year (more than any other sector) in a recent Morgan Stanley survey, despite the fact that banks and life insurance firms are already at the top of their historical range for price-to-book valuations and MS predicts only gradual return on equity (ROE) improvements this year.

Financial sector valuations tied to ROE

“Within Financials, Price/Book multiples are closely tied to the ROE performance of the business. A higher ROE equals a higher valuation and vice versa. Stocks where ROEs are improving thus become fertile ground for investment outperformance,” writes Morgan Stanley analyst Betsy Graseck.